Green Plains Inc. Q2 FY2020 Earnings Call

Good morning and welcome to the Green Plains Inc. and Green Plains Partners Second Quarter Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. I will now turn the conference over to your host, Phil Boggs, Senior Vice President, Investor Relations and Treasurer. Mr. Boggs, please go ahead.

Good morning and welcome to Green Plains Inc. and Green Plains Partners second 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 and Presentations link on both corporate websites. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in yesterday's press releases, in the comments made during this conference call and in the Risk Factors section of our Form 10-K and 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I'd like to turn the call over to Todd Becker.

Thanks, Phil. Good morning everyone and thanks for joining our call today. For the quarter, we reported a net loss of $8.2 million or $0.24 a diluted share. While we had a small loss, we were free cash flow positive for the quarter. We also reported $17.9 million in adjusted EBITDA for the quarter. Before I get more specific on our results, I would like to recognize how proud we are of our employees during the quarter, as we continued our high-quality alcohol donation program and partnership with the University of Nebraska, Lincoln, as students, staff, and professors made hand sanitizers. This product was provided for free to various organizations ranging from daycares to USDA offices to local school districts, which we believe positively impacted Nebraska Health and Wellness during this pandemic. The market value of this production from the hand sanitizer program was significant, and the gratitude from those receiving this was something we could not have done without a facility like Green Plains, York, Nebraska. We never ever said no to an organization in need. Our positive results were driven by several businesses within our portfolio. We had another record quarter in our investment in Green Plains Cattle Company, which will allow a dividend to be paid to all the partners. Our high-quality alcohol sales out of our York, Nebraska facility helped deliver strong results, and we had some beginning contribution from our high protein sales from Shenandoah, Iowa. Finally, the completed Project 24 facilities continue to reduce our operating costs per gallon. Without these improvements and initiatives, ethanol margins would have been very negative. While cattle in the last half of the year will become more normalized, the rest of the initiatives that provided better performance versus the market margins should continue as part of our ongoing results. While certainly ethanol margins will remain volatile, these initiatives are just the beginning of what is possible as we continue the total transformation of Green Plains over the next several years. We produced approximately 149.9 million gallons of ethanol, which put us at a 53.5% utilization rate for the quarter. We exercised our operational discretion to slow down shutdown plants as a result of the negative margin environment, but we did not furlough any employees during these slowdowns. We will continue to follow the data moving forward. While we have seen margins improve from their lows in April and the spot market remains slightly positive, margins are very inverted, which is clearly sending a signal to the market. The weekly EIA data has been negative toward margins as production is now over 950,000 barrels per day, which is too much in our opinion. While EIA stocks got down to levels we have not seen in many years, they began to rise last week. Clearly, this industry lacks discipline. The consolidated crush margin for the second quarter was $0.09 per gallon, which was strongly influenced positively due to high-grade alcohol sales. Fuel ethanol margins were generally weak during the quarter, but we believe that through a combination of slowdowns and margin management, we achieved better than the daily average market. We have now completed Project 24 upgrade at our Fairmont plant, where we are starting this plant back up and expect to see similar results to what we have realized on our previously reported Wood River facility as well as our Superior and Fergus Falls plants. Up next for Project 24 is our Mount Vernon location, which should be done by the late fourth quarter. Project 24 has been delayed at our Madison facility due to the state of Illinois permitting and also at our York, Nebraska location as we will now take that plant offline because of their positive contribution to the overall financial performance of the company. But we believe with what we have accomplished so far, we will be at or below $0.24 per gallon by the end of Q4 and expect to complete our Project 24 initiative by Q1 2021, subject to state permitting. We are excited to have announced that we have secured credit approval for $75 million financing to continue funding our protein initiative. This gives validation to our strategy and allows us to quickly proceed with Wood River as our second protein location as well as to begin engineering a third location as well. We expect Wood River to come online during the second quarter of 2021. When completed, we will have over 200 million gallons of capacity capable of generating $0.15 to $0.20 per gallon of incremental margin from this high value protein feed. This is incremental margin to what Green Plains historical platform could produce. During the coming months, we'll be working with our strategic partners to increase the value of this product and its nutritional characteristics, allowing us to move further up the margin curve. We will continue to work on project-level financing for every location at our platform as a product has immediate acceptance as a high protein replacement ingredient in aquaculture and pet food. We believe this financing is just the beginning of a rapid deployment across the platform. Green Plains Partners reported $13.2 million of adjusted EBITDA for the quarter. The coverage ratio was 3.99 times for the second quarter and 1.59 times for the trailing 12 months as amortization of principal for the new loan didn't begin until July. Now I will turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners' financial performance. I will then come back to talk more specifically about our York and Wood River USP and FCC alcohol production, protein and aquaculture initiatives, and a little more on markets and policy.

Thank you, Todd, and good morning everyone. Green Plains consolidated revenues were $418 million in the second quarter, down $212.6 million or 34% from the second quarter a year ago, driven primarily by lower ethanol production run rates as compared to the second quarter of 2019. During the quarter, we adjusted our run rates down to 53.5% of capacity compared to an 80% run rate for the prior year second quarter, in order to maximize our respective operating margins. Our consolidated net loss for the quarter was $8.2 million, comparing favorably to a net loss of $45.3 million in the second quarter last year. Adjusted EBITDA for the second quarter was a positive $17.9 million, up from an adjusted EBITDA loss of $19.5 million for the same period a year ago. For the quarter, our SG&A costs for all segments of $19.6 million remained relatively unchanged compared to Q2 of 2019. Consolidated interest expense for the company was $9.7 million, which was $1.6 million lower than the $11.2 million in Q2 2019, primarily due to a decrease in overall interest rates. CapEx for the second quarter was $28.9 million with approximately $4.3 million of maintenance CapEx with the balance of $24.6 million being allocated to growth capital primarily for Project 24 and our high protein initiative. With the continued improvement in our overall liquidity driven mostly by non-product sales and financing arrangements, we are revising our target CapEx for the balance of the year and expect full year CapEx to be between $100 to $120 million in line with our original guidance. This estimate includes $28 million of CapEx spent for the Wood River protein project during 2020. On Slide 8 of the Investor deck, you will see a summary of our balance sheet highlights. We had $243 million of cash and working capital, net of working capital financing at the end of the second quarter, compared to $387 million for the prior year quarter. The balances for 2020 exclude our cattle business that was deconsolidated in September of 2019. Adjusting for the deconsolidation of the cattle business, the prior year cash and working capital total would have been $273.1 million with the difference between Q2 2020 and Q2 2019 being attributable mainly to a change in cash of about $50 million on a net working capital financing. Our liquidity position at the end of the quarter consisted of $183.6 million in cash, cash equivalents and restricted cash, with approximately $289 million in availability under our working capital revolvers. This amount does not include amounts that will be available under the recently announced financing facility or the current credit facility for the partnership. For Green Plains Partners, we have 151 million gallons of throughput volume at our ethanol storage assets during the quarter, which was down 75 million gallons or 33% from the second quarter of 2019 as a result of lower production rates at Green Plains plants. However, as a result of minimum volume commitment contracts with Green Plains Trade, the partnership build Trade Group for 235.7 million gallons of throughput. Accordingly, the partnership reported an adjusted EBITDA of $13.2 million for the quarter, down slightly from the $13.9 million reported in the second quarter of 2019, due in part to timing of accounting recognition of railcar lease expenses and other items. For the partnership, distributable cash flow of $11.3 million for the quarter compared to $11.7 million for the same quarter of 2019. On a last 12-month basis, adjusted EBITDA was $53.1 million. Distributable cash flow was $45 million and declared distributions were $28.2 million, resulting in a 1.59 times coverage ratio. Lastly, as Todd will discuss more in detail a bit later, we successfully refinanced the partnership with our existing lenders in June. As part of that financing, we will initially amortize $2.5 million of debt per month. However, with the principal payments on our debt not beginning until the third quarter, our coverage ratio was 3.99 times the second quarter. Now I'd like to turn the call back over to Todd.

Thanks, Patrich. Over the past few months, we have witnessed the industry production drop to levels we have not seen in modern history and come back just as fast as overall industry production dropped to about 50% of overall capacity. While the industry moved faster than other energy industry production to shut down during COVID, it came back possibly faster than those same industries. However, for Green Plains, we are in a better place than we would have expected at the start of the pandemic. What we learned was York, Nebraska produces a great product that was previously exported to industrial markets and now almost fully transitioned to domestic use. The quality of York's product is very unique as it was originally a beverage facility that has a very different profile than FCC and industrial alcohol being produced by others. That is why we chose this plant to immediately upgrade the USP. We have been able to redeploy some of the equipment we have in inventory from dismantling our Hopewell location, which is adding to the speed of completing this project. There are a lot of fast followers; just because you have a great certificate that says you make that specification, doesn't mean it's a good product. In fact, many of York's early sales were replacing substandard products from other ethanol plants. We have worked closely with branded consumer product companies to get our product into their cleaning lines. Meeting their strict QA-QC requirements from such companies is something that sets us apart, and our continued development of York and Wood River to USP secures our position to be a long-term player in this important segment of the industry. These customers know there are many ranges of quality and know that ours is exceptionally high. In fact, we believe the U.S. government should crack down on imports of B Grade and USP from Brazil, Pakistan, and other countries and ensure these products do not make their way into our supply chain as they are not getting tested adequately. Our high-grade, high-quality alcohol sales have been a strong contributor to the positive EBITDA achieved in the second quarter and should continue to help the balance of the year and through 2021. We now have almost 75 million gallons of capacity, which is important to our customers. We can provide high purity, high-quality product at scale, unlike many of the one-off projects that have occurred in this industry. We have already executed contracts with significant customers through the end of 2021, as demonstrated through our very important partnership with Lysol announced this morning. This affirms that we have something unique happening at York. During the quarter, we were pleased to complete the refinancing of our GPP debt. We extended it for 18 months and are required to pay a higher principal amortization, but we believe this benefit accrues directly to unit holders, of which we remain almost 50%. In addition, we are also very excited to be finalizing a $75 million loan facility to support the execution of our protein strategy. This project-level capital is just the next step in our transition to Green Plains 2.0, but it gives further validation of the financeability of these projects and enables us to accelerate our transformation. Our wholly owned Optimal Aqua venture has continued to make progress as well. The high protein ingredients we are making in Shenandoah are serving as a delivery mechanism, replacing traditional products in aqua feed. Green Plains is now selling various aqua feeds for bluegill, tilapia, trout, and other species. We have always believed that this would occur and this is only the beginning. Let me explain a little bit about our Optimal Aqua company and how it fits into the overall strategy. We long said that the world protein market is growing by 10 to 12 million tons per year. One of the drivers is the need to provide feed resulting in clean, healthy fish protein for human consumption, and it is a very efficient converter of feeds to edible proteins. Utilizing our high protein ingredients in aqua feed produces a better overall feed product with improved nutrition and digestibility profiles as it includes both the corn protein and the yeast from the process. So it has an all-veg and positive fungal components. It possesses other positive qualities our aquaculture customers have discovered and replaces the negative dietary effects of soy along with the negative environmental connotations of soy, especially from Brazil, as well. We have introduced real-world commercial feeds, as well as continuing with additional feeding trials of novel ingredients in our world-class aqua lab in Shenandoah. We are just scratching the surface on what this could become and will have more announcements on this strategy forthcoming. So to sum it all up, we continue to put strategic partnerships together with world-class companies along our total supply chain. On the front end, with our 10,000 pharma customers, where we are rolling out our customer-facing mobile apps this month for a more interactive relationship with them. We are using and developing our artificial intelligence to make our interaction more efficient and predictable; we are seeing very good early results. We believe this will not only take our ability to buy better, but will also be able to offer solutions to the U.S. farmer base that we have to be able to sell better. More to come on that initiative. To our high-quality alcohol business where we are tailoring very specific qualities and logistics to our customers' needs and in return developing long-term sticky partnerships. To our innovation platform with companies like Novozymes where we are tailoring nutritional solutions for our aquaculture and pet food customers and this is just getting started, which will increase the value of our high protein products. To our technology partners like Fluid Quip, where we are rolling out a high protein high quality production platform of new products that our industry never had before. To our Optimal Aqua business venture where we are tailoring custom solutions to help bring more and more aquaculture production onshore. As I said, we already have game-changing solutions under development, and some are already in full-scale commercial trials with more starting soon and results forthcoming. But so far the outcomes are positive. To our world-class aquaculture laboratory where we are using our new high protein feeds as a delivery mechanism for new and innovative products, all of which is located on our biorefinery site in Shenandoah, Iowa. All of these initiatives and many more are important as you make your decision whether to stay the course with Green Plains. But know this, our goal is within a few years to totally transform our platform where we intend to never be a prisoner to government policy again and minimize the impact of an undisciplined industry on our shareholders and stakeholders. I'm proud of the Green Plains team for executing during the quarter resulting in positive EBITDA. We have been focused on maintaining liquidity, a strong balance sheet and rapidly executing at every turn. Lastly, I want to thank our employees, many of whom are listening in right now, as it's with your dedication to safety and quality every single day that makes everything else possible. Thanks for everybody joining in the call today and now I'll ask for the Q&A session to start.

Thank you. And our first question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

Yes, thanks, good morning everyone. So I guess first, Todd, tremendous amount of moving pieces between kind of market volatility and the internal initiatives you have underway in the quarter. And I guess, I'm trying to parse through the ethanol crush margin that you achieved, and it was up about $0.18 a gallon year-on-year. Is there any way we can dissect the drivers of that between the industrial hand sanitizer sales, Shenandoah ramping from the high-pro Project 24, changes in kind of market crush margins and your internal hedging activities that seem to have been beneficial? Just trying to get my head around how to triangulate the performance through some of those different factors.

So as we're not going to breakout all of that because of competition reasons, I would tell you that if we had none of that, we would have been negative double-digit EBITDA crush margins. And then from there, you can see that we achieved a positive $0.09 a gallon, plus the uplift from cattle. So you can assume that much of that came from all the initiatives that you talked about, but we really don't want to break out the uplift from some of those initiatives individually at this point because the industry, I think, at this point is watching closely and we don't want to give them a road map to success.

No, that's fair. I appreciate that limited color. And then as we think about, kind of, the balance of the year and we think about Shenandoah continuing to now, at full rate and Wood River launching mid-next year, help us think about what kind of premiums that you're starting to just realize on the high-pro that you're producing, and what's the roadmap to getting that higher from both a protein perspective, which obviously adds value, but also the different addressable markets as you start getting those redundancies in place from a quality control and supply chain resiliency?

That's a great question, thank you. When considering the baseline distillers' grains we produce, which range around $100 to $120, every $100 premium we achieve for our product adds approximately $0.06 per gallon to our margin. We believe this margin, before further enhancements, stands at a premium to high protein soybean meal. During our initial production, we are generating protein levels of 51% to 53%, which exceeds our expectations. The foundation of our business is positioned as a high protein soybean meal substitute, contributing an additional $0.12 per gallon or a few hundred dollars premium over distillers' grains. The protein content's impact, as we noted regarding the J-curve, indicates that as protein levels rise, margins increase more rapidly. Since high protein soybean meal is around 47% protein and we are producing at least 51%, we're securing higher premiums than high protein soybean meal as well. Our initial sales have provided an uplift of $0.14 to $0.17 per gallon, depending on the customer, translating to a $200 to $300 premium over distillers' grains or up to a $100 premium over high protein soybean meal, and we anticipate further increases. The value of our product, in our perspective, actually rises with greater quantity as it allows for a consistent supply chain that caters to a larger addressable market. Major feed buyers typically require suppliers to produce at least a thousand tons a day, equating to 365,000 tons a year. With only a few plants currently operating and others, like Wood River, coming online, we expect to reach that capacity and tap into larger markets. Currently, we are focused on meeting the requirements in pet food and aquaculture. It may take up to half of our capacity before exploring other markets, such as all-vegetable specialty diets and poultry, which we believe will also yield a premium. Essentially, each $100 premium correlates to about $0.06 per gallon, using distillers' grains as a baseline and factoring in the increased value of our protein product as the J-curve indicates. It's clear that we can enhance our margins. Lastly, with Wood River and Shenandoah operating, we're looking at a combined 200 million gallons. We project an increase of $0.15 to $0.20 per gallon, which equates to an additional $30 to $40 million in EBITDA across our platform from just those two plants, with under $100 million in investment, representing a payback period of less than three years.

Thank you. And our next question comes from the line of Ben Bienvenu with Stephens Inc. Your line is now open.

Hey, thanks, good morning. At this point, the consolidated crush margins look really solid, congratulations on that. It appears to be mainly driven internally. I wanted to focus on the hand sanitizer business, which is somewhat less significant in this quarter, and discuss how you plan to position your assets to become a more prominent player in this market in the future. I'm interested in when you anticipate making commitments and converting some of your capacity to produce that product. How do you view the demand for the product compared to what you supply in a post-COVID world, given the previous surge in demand? Additionally, how variable is the revenue per gallon for the products that you sell?

First of all, we are not solely selling our alcohol for hand sanitizer, which is an important point. Our alcohol is used in a variety of products, including cleaners and disinfectants, as well as hand sanitizers. The initial surge in demand for high-quality alcohols was primarily driven by the hand sanitizer trend. However, the market became confused due to FDA recalls and warnings, with some companies believing they could meet standards but failing to deliver quality and leaving customers dissatisfied. Our company has established a reputation for providing a better alternative to subpar products, which allowed us to transition from Ted and John's hand sanitizer business to supplying more branded products that require long-term agreements as the demand for quality has increased. We've formed partnerships with notable companies like GE Current, Xerox, and Lysol, indicating a shift toward quality rather than just the initial excitement. It's essential to recognize that many new companies entering this market may struggle to meet quality assurance standards, which is something that differentiates Green Plains. While demand has been inconsistent, larger global companies are starting to show increased interest, and this demand is surpassing the slowdown observed in some startups. Our partnerships illustrate our ability to meet quality standards, manage logistics, and consistently deliver high-quality products in large quantities. I believe that this demand is long-lasting, as evident from customers seeking long-term contracts with us, driven by the reliability of our supply and product quality. We see this trend continuing through 2021 and possibly into 2022. Any resurgence in COVID or other viruses will likely sustain this business further. While many new entrants are emerging, not everyone seems to grasp the complexities involved, especially concerning quality control, which is becoming a more professional landscape. Moreover, we are beginning to witness growth on a global scale, with international markets showing increasing interest. Historically, export prices were lower than domestic prices, but that is changing as global markets are starting to pay comparable rates. This shift marks a quick maturation of what was initially a chaotic market. In summary, the current demand is elevated, and I expect it to stay high for at least the next 18 months, potentially extending beyond that timeframe.

Very helpful. And Todd, is that, is the revenue per gallon, is it variable or fixed in the contracts that you supply or give us a sense of what's embedded in whether it's volatility or line-of-sight to pricing?

For us, what truly matters is maintaining a clear vision and establishing partnerships that benefit both us and our customers. I believe we've gained business from competitors due to our ability to guarantee volumes and treat our customers fairly, which encourages our partners to extend contracts longer. We prioritize securing a margin over time with partners over achieving a higher price in the spot market. Our goal is to help partners meet their needs under reasonable terms while ensuring we can secure our margins as well, collaborating rather than merely chasing the best spot market price. Our company has always focused on locking in predictable arrangements, knowing that 75 million gallons of high-quality alcohol will have a dedicated market. We'd prefer this stability over engaging in the unpredictable and high-priced spot markets, although we do still sell some product in that area. Long-term agreements hold greater significance for us, despite being lower than current spot prices; they provide our shareholders with a solid baseline for earnings and baseline EBITDA before other factors come into play.

Okay, very helpful. My second question is around Project 24, and you guys have made really solid progress there to the point where it seems like you might need to start to rename the project, I don't know, Project 22 or 20. But can you help us think about what the barriers or governors might be on getting your network below that $0.24 level from a cost perspective? And just kind of quantifying or putting parameters around what we should be considering with respect to what that ultimate opportunity looks like.

I believe you're correct in your assessment of our trajectory based on the outcomes of our partnership with ICM, which has helped us reduce our operational costs. The improvements we achieved in Wood River have transformed it into a world-class facility, operating similarly to leading ICM plants. We’re in the process of converting the largest section of the plant to an ICM facility, and it has been consistently performing as such. Currently, the Fairmont facility is starting up, and although we faced a brief COVID outbreak, it's now under control, and we expect to resume operation next week. This represents our second major Delta-T, following two smaller ones. The primary focus will be on our Eastern plants, Mount Vernon and Madison, which are Vogelbusch plants where we are implementing similar upgrades. We are actively converting Mount Vernon and plan to take it offline for a few months for this process, which will significantly indicate our progress by the end of this program. I agree it won’t be labeled Project 24; it will likely be more aligned with Project 23 or 22. Once we reach these levels, I believe we’ll identify additional measures to further reduce costs, aiming to bring our overall platform down to around the 22 cent range. Notably, what we’ve accomplished at smaller plants, like in Superior, Iowa, or Fergus Falls, Minnesota, is quite remarkable given their historical high costs and operational structure. We've demonstrated that these facilities can operate at substantially lower costs, around $0.22 and $0.23 per gallon, which compares favorably against larger ICM facilities due to our technology enhancements. This is a significant shift for our platform, which previously many believed could not be optimized to match industry-leading cost levels. For context, a Delta-T 50 million gallon plant used to operate at $0.32 to $0.35 per gallon in costs, while our smaller plants are currently running at or below $0.24 per gallon. This represents a significant change in our capacity to manage margin fluctuations effectively.

Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.

Good morning, everyone. Hey, I just wanted to get back to the FCC, the USP alcohol. Just curious, obviously much more as you said after the early days, much more of an emphasis put on a higher quality or meeting certain specifications of some of your partners. With that in mind, I mean, what are your thoughts about what your ultimate volume levels could be and we know 75 million gallons at York. I'm not sure if you've ever disclosed what your production level is at Wood River, but would love to know what you think this can be going forward for the overall platform.

York has a capacity of around 50 million gallons, while Wood River has 25 million gallons. Together, these two plants will be upgraded to USP quality. We are now in the process of designing and planning to move towards VHQ, which stands for very high-quality. We aim to keep advancing and distinguishing ourselves due to our significant advantages. York is already a beverage grade facility, and Wood River will receive substantial distillation columns from our Hopewell facility, which we have available. This will help transform Wood River into a facility of equal caliber. We are progressing rapidly, but we are also mindful not to rush toward becoming a beverage grade alcohol seller. Our goal is to achieve the specifications of VHQ, which represents very high-quality pharmacy grade. It's important to recognize that the USP designation can vary by facility, and we advise customers to verify the quality of the products they purchase, as not every USP label guarantees the same standards. For now, we anticipate maintaining production around 75 million gallons, given the current projects. We'll observe if there are growth opportunities as we delve deeper into specialty and VHQ alcohols. Currently, we are satisfied with our sales volumes. The market is active, but I wouldn't describe it as having deep opportunities without considerable effort.

I understand. Following up on your earlier question, you mentioned your preference for long-term contracts. I'm curious if you can disclose details about the contracts you secured through the end of 2021 compared to those that are up for renewal. I'm trying to get a clearer picture of the contracts that reflect the current market environment and future expectations, rather than those that may have been established in 2019.

I can only comment that in the beginning of the COVID crisis, the market was in that $5 to $10 a gallon range for some volumes because of the shortness of supply. And then it's come down from there. It's definitely a premium to fuel grade because it costs more to make. It's a much different supply chain, much different logistics, much different cost structure, but it's definitely not in that initial euphoric price range. But either way, when you take 75 million gallons and you multiply it by something better than fuel grade and as I said, probably not over that low end of that euphoric range, it's still meaningful. But it's just different customers will pay different for different needs, whether it's a long-term, short term totes versus rail trucks versus gallons. I mean, you can go on and on and on, and in fact, we are starting up two packet lines at the end of the month at Green Plains owns with a partnership with a pharma-grade company, a pharma company in a clean room facility. We're starting up two packet lines to give one milliliter, single-serving delivery mechanism for the market, and we've already, we're going to make packets, not just for our own distribution, but also for our customers that will buy the one millimeter, 1.5 milliliter packet lines that we order from European manufacturers right at the beginning of this, as we saw the vision for the need for different delivery mechanisms. We've partnered with others that make 1-gallon jugs that trade a lot higher because of the cost of production. So it's really all over the place, but we're involved in all the different sizes and all the different delivery mechanisms, and if somebody needs to move from totes to rail and rail to truck and truck to gallons, we can deliver all of that. And that's what I think makes us very unique in our ability to service very high-end, high-quality customers better than anybody else today.

Thank you. And our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question. Kind of a high-level policy dynamic; we're obviously watching the stimulus conversation in Congress wrapping up here, presumably. What do you think the ethanol industry can realistically get from the next stimulus package in your mind?

The gap between what we hope for and what is actually possible is significant. Hope alone won't guide us, and while it may be the only thing this industry has, the reality is that we likely won't achieve much. Everything else amounts to wishful thinking. If we do receive any support, we wouldn't refuse it, but it seems like a difficult ask that keeps being sidelined in legislation. Our supporters are making efforts to retain it because they recognize that this industry has suffered due to various policies and issues. The EPA has severely harmed this industry, and the trade war with China has also taken a toll. While we could use some compensation, I'm not optimistic that it will happen. Therefore, I would say the likelihood of receiving significant support is low. However, in comparison to other industries affected by the China trade and EPA policies, we, as the ethanol industry, have been disproportionately impacted, and that should be acknowledged.

Okay. One other kind of policy dynamic, this one from the other side of the Atlantic. When we talk about exports, it's usually Western hemisphere and in the conversation. But we're seeing more and more headlines from Europe about the European Green Deal, the climate law, etc. Why is the U.S. industry not exporting billions of gallons to the world's largest fuel market?

The administration is working to eliminate tariffs, which is essential for fair trade. Currently, we can import Brazilian ethanol without tariffs, but face tariffs when exporting to Brazil. The same issue exists with Chinese products and EU goods. This unfair trade policy affects our ethanol exports globally, making our products less competitive both in price and due to tariffs. While we've made progress in increasing our ethanol exports, we're facing significant short-term challenges caused by COVID and restrictive trade policies. We support the administration's efforts to dismantle these tariffs. It's frustrating that while we can supply ethanol to China, they are aggressively purchasing U.S. corn at historically low prices. This situation represents a serious issue in our agricultural policy that needs to be addressed.

Thank you. Our next question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is now open.

Thank you. Todd, I would agree with you, blatant ineptitude at the head of the EPA. My question is about high pro. So can you please update us on the collaboration with Novozymes? What you're working on and what you expect within the next few quarters incremental production available out of the yeast strains that you're using and other potential enhancements to the product? And then the Norwegians obviously want soy out of salmon. They've taken some specific actions there already. Can you quantify for us what the size of the Norwegian aquaculture market is and is it going to take many, many high pro plants beyond what Green Plains can do to satisfy their demand?

We are advancing in our efforts to increase our pricing by not just focusing on protein content, which Fluid Quip has been doing for years, but also by incorporating yeast and other elements to enhance our product offerings. The J curve we've discussed indicates that as protein levels rise, the value does not increase linearly but rather at an accelerating pace. Our approach extends beyond simply raising protein levels; we are committed to developing nutritional solutions through our partnership with Novozymes. They provide access to a broad range of products that can deliver substantial value to our customers. We aim to stabilize operations at our Shenandoah facility before introducing these new nutritional solutions, which we anticipate will begin soon. Our partner is eager to collaborate, and we are on the verge of implementing several innovations. Our track record of raising protein levels through various biological and mechanical technologies will merge with Novozymes' expertise to enhance our offerings further. This partnership is significant not just for product development but also for various customer engagements we are pursuing. As we initiate the second Wood River Facility, we will already have insights into enhancements that can boost our product's value. Looking specifically at the Norwegian market, we see an opportunity for high protein corn meal as a feed component in aquaculture, especially given the current transition away from soy due to its nutritional issues and concerns about land use. We are exploring ways to supply non-GMO corn and produce high protein corn meal tailored for that market. The demand in Norway is substantial, with an estimated 2 million tons needed for feed, and if we assume a 20% inclusion rate, that translates into a 400,000 to 500,000 ton opportunity from just one country. This potential doesn't account for additional nutritional characteristics we can offer or other aquaculture markets, and we're engaging with partners globally to expand these opportunities for our shareholders.

Thank you. And my second question, I guess, I should start by saying congratulations on the $75 million debt financing. It really does give you a cleaner runway. Many of us thought you would probably monetize your cattle assets, sort of back-of-the-envelope math is you would get something similar to what you got for the other half $75 million. Is there maybe an opportunity to do high pro faster on monetizing cattle or maybe a plant sale if that's still available to you? What would it take to do high pro faster and is that potentially under consideration for the next couple of quarters?

We're focused on rapidly advancing our high protein initiative and aim to implement it across all our production facilities. We're developing a financial strategy to support this, incorporating various aspects we've previously discussed, some of which you brought up during this call. The exciting part of our announcement and the approval we're nearing, which we hope to finalize by mid-to-late August with a lender that we'll disclose at that time, is that it confirms this as a financeable asset. It's important to note that this isn't merely adding a few pieces of equipment; it's a stand-alone high protein production facility that sources from the ethanol plant but operates independently with its own dryers, production systems, loading capabilities, and quality controls. It's set to meet higher standards as we cater to the pet and aqua markets, as you have seen. The recognition from lenders that this is a viable project is expected to pave the way for additional project-level financing in various forms, which we will monitor closely. Securing the first $75 million was crucial, evidenced by the favorable terms of this investment, which further highlights our partner's confidence in its financeability. We anticipate this will lead to more announcements, whether through asset monetization, partnerships, or other financing avenues, and we aim to expedite our progress on this front.

Thank you. And our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.

Hi. I guess two things. First on the very near term, can you just confirm that the high protein will be accretive in Q3 or is there any offsets for rent time or lagging running it through the P&L?

If you consider Shenandoah, it is clearly going to make a contribution. We mentioned that Shenandoah has the capacity to operate at about 40,000 tons annually, ranging from 40,000 to 45,000 tons each year. With an uplift of $0.15 per gallon on those 45,000 tons at an 80 million gallon plant, we expect to see an EBITDA run rate of roughly $12 million a year, between $10 million and $12 million in EBITDA annually. We anticipate that contribution will begin to materialize in Q3 as we have ramped up to 100%, although we do have some downtime this quarter for system upgrades, learning new processes, and adding new capabilities. Overall, following some downtime this quarter, starting in Q4, you should begin to see that run rate of $0.15 to $0.20 per gallon at 80 million gallons for 40,000 tons of production.

Great. And how close are these units to the kind of theoretical yields or should we expect a multi-year optimization cycle once you are done installing these units?

Our models were developed based on a yield of just over 3 pounds of protein per bushel of corn, with each bushel weighing approximately 56 pounds. This gives an idea of the contribution of corn kernels to the protein output. In the short term, we expect to reach 3.5 pounds, although this may vary based on factors like location and protein testing. We are progressing rapidly towards that 3.5-pound target, but it will also depend on the post-production distillers' grains. We've noticed an improvement in the quality of our traditional distillers' grains due to our process enhancements, which include separating corn oil and extracting high protein content. This results in a cleaner post-production product. Overall, we see a potential yield of 3.5 pounds per bushel or higher, but it’s important to consider location-specific preferences regarding protein levels in the remaining distillers’ grains. Some locations may prioritize a cleaner product over protein levels, which could limit maximizing yield. However, we believe that with the Fluid Quip system, we can achieve yields as high as 5 pounds per bushel, significantly enhancing our margin potential, provided that the value of the post-production traditional distillers’ grains is maintained. Our objective remains to continue increasing yield through Fluid Quip.

There has been some discussion in the soy industry about using gene editing rather than GMO to upgrade the protein content in the soy. Are you seeing the same discussions in corn? So you could have a non-GMO high protein product that would be easier for you to convert?

We have a strong commercial partnership with Syngenta on Energen corn and are one of their largest partners for these types of products. We recently announced that 10,000 farmers are joining our platform, many of whom are already part of the Energen program. We've had discussions with our partner about our plans regarding the corn kernel and what they should consider when developing new genetics. They are very enthusiastic and believe they can assist us in addressing our needs related to the corn kernel, which could be a GMO product, but can also involve CRISPR technology. While scaling up seed still takes a couple of years, editing the corn kernel is easier compared to editing soybeans. Our collaboration with the seed company leverages both their advanced farmer platform and our capabilities, creating a comprehensive knowledge base for innovating characteristics in the corn kernel to meet our requirements in the Fluid Quip process. Additionally, we have talked about a non-GMO kernel that could support our non-GMO feed customers globally, and we're optimistic about their advancements in this area. Being a significant commercial customer of theirs, we've built a long-standing partnership. Our use of Energen corn has enhanced our yield and improved the operation of our plants, contributing positively across the board. The farmers growing Energen corn are featured on our platform, giving us access to their products. This collaboration is mutually beneficial; we see the value of engaging 10,000 customers on our platform, which could be advantageous for companies associated with seed, chemicals, or fertilizers, fostering valuable future partnerships.

And then I guess the other question is when you would look at the kind of the bundle nutrient profile for the agriculture application, is getting the corn, are there ways to modify the corn protein to improve the mixability of other nutrients and micro-nutrients or the processing stability of the final compounds. So is there a layer of differentiation that you can do on the downstream treatment step, or is that something that is more sort of two, three steps down the value chain from you?

I believe we are taking a step after exhausting our technology partnerships to enhance the nutritional value and profile in our feeds, for both Aqua Pet and other animals. The significance of our relationship with Novozymes lies in our work to leverage their libraries and technologies. It's not solely about protein; it's about the various characteristics present in our feed. This situation is unique due to the combination of what we refer to as hardware and software. The hardware represents the Fluid Quip system, while the software encompasses all the partnerships we are establishing to deliver results. I anticipate that the corn kernel will eventually play a role in this, but our current focus is on the software relationships we have and are developing today. We have not yet fully explored those before considering their integration back into the corn kernel.

Thank you. And our next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is now open.

Yes, good afternoon. I will keep it to one question. If I assume your margins were breakeven two years ago, then I would conclude they are breakeven now as well. Considering breakeven from two years ago, what do you think the difference in profitability would be across those three different levels of metrics?

Two years ago, our breakeven point was at an operating expense of $0.32 per gallon. Today, that breakeven point is nearing $0.24 per gallon, representing an uplift of $0.10 to $0.12. Looking ahead two years, we aim for a breakeven of roughly $0.22 per gallon. This would translate to an uplift of about $0.12 to $0.14 per gallon compared to two years ago. In two years, if we project producing between 400 million to 500 million gallons of high protein at $0.20 per gallon, this could contribute an additional $100 million to our revenue. This figure is simplified for quick understanding. In two years, from an operating expense perspective, we anticipate an uplift of $0.12 to $0.14 per gallon, combined with another uplift of $0.11 per gallon from converting half of our platform to high protein, excluding the enhancements from nutritional improvements and other initiatives. If we extend this projection an additional two years, we expect to see an operating expense uplift of $0.12 to $0.14 per gallon, with a baseline of at least $0.20 across the entire platform. This would equate to a total uplift of $0.32 to $0.34 per gallon compared to two years ago, alongside an uplift of $0.24 today and projections for the future. There is also potential for an additional uplift of $0.10 to $0.20 per gallon at specific plants with our nutritional enhancements, not including the USP business, which we won't detail. This pathway is significant for us, and it reflects our focus on these developments.

Thank you. And our last question comes from the line of David Driscoll with DD Research. Your line is now open.

Great, thank you. Thanks for taking my questions. I appreciate it. I know what time it is. So here we go. On the utilization for the plants, Project 24, Todd, I think you said in the past that you expect, at the conclusion of Project 24, that your plants will be in the top 20% most efficient plants in the industry. If that's correct, then is it also correct to think that Green Plains should fairly consistently be running at a 100% utilization once Project 24 is done?

Yes. Once Project 24 is completed and we begin focusing on protein across the entire system, our plants will need to operate every single day. This means we will maintain a maximum run rate consistently. The reasons for past slowdowns were not solely due to market decisions. We had Madison down for permitting, Fairmont down for finishing up, and a couple of Hereford plants were down for market-related reasons. Additionally, Atkinson was also down for market reasons, along with various other fluctuations. While there were some reductions due to the upgrades for Project 24, it's important to understand that, as we aim to reduce our operating expenses to around $0.22 per gallon, we must ensure that we can run high protein every single day. It’s crucial to note that you should only add capacity if your plant can sustain daily operations, because failing to deliver to your pet food customers would mean losing their business permanently, and they may never return to our industry. Yeah. So we are going to have the ability to run our plants at high rates once we conclude Project 24. That's always been the goal, and I believe we are well on track to meet that.

Thank you. And this does conclude today's question-and-answer session. I would now like to turn the call back to Todd Becker for closing remarks.

Thank you everyone for joining us today. I won't take up much more time as we covered a lot during this lengthy call. We are making significant changes as a company and, while we are still facing volatility in our main ethanol business, you will witness a remarkable transformation. We hope you continue to support us. Thanks for being part of the call today, and we look forward to speaking with you again soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.