Green Plains Inc. Q3 FY2020 Earnings Call

Good morning and welcome to the Green Plains Incorporated and Green Plains Partners Third Quarter Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. At this time, all participants are in listen-only mode. I will now turn the conference call over to your host Phil Boggs, Senior Vice President Investor Relations and Treasurer. Mr. Boggs, please go ahead.

Thanks Carmen. Welcome to Green Plains Inc. and Green Plains Partners third 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 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 thanks everybody for joining the call this morning. For the quarter, we reported a net loss of $34.5 million or $1 per diluted share. This loss included a $13.8 million non-cash tax adjustment related to charges in our deferred tax assets. Without that non-cash adjustment, the net loss would have been much narrower or closer to $0.60 a share. More importantly, we are free cash flow positive for the quarter, including another strong quarter of cash distributions from Green Plains Cattle Company. We reported $8.8 million in adjusted EBITDA for the quarter and our consolidated crush margin was $0.08 a gallon, which included almost $0.06 a gallon of negative absorption from plants that were shut down due to regional market conditions, Project 24 upgrades, and normal scheduled plant turnarounds. Our plants that were operating earned almost $0.14 a gallon consolidated crush margin as the completed Project 24 upgrades helped improve the whole portfolio. We look forward to the completion of all of our upgrades which should reduce plant downtime that affected this quarter. Another impact to Q3 was the movement of sales from this quarter to Q4 and Q1 of industrial alcohol from York, Nebraska, as customers elected to wait to receive USP grade alcohol as our upgrade is almost fully completed. This not only solidified our sales book, but expanded it as well. I'm happy to report that we have begun to make USP grade but not just at the maximum rate yet. We expect to achieve full rate by late December. When we take all of this into consideration, Q4 is looking to be better than previous quarters based on current market conditions, higher operating rates, less negative absorption, and the completion of York's upgrade. We are trying to do what we can to lock down the quarter with a more active hedge program. So, as you can see, there's a lot of noise in our numbers, but generating free cash through all of that is what we are trying to accomplish as we achieve our path to 2023. Let me take a minute to review the accomplishments on the total transformation that we achieved over the past few months, including enhancing our liquidity which we expect to help accelerate our transformation. We are excited to close on our $75 million protein financing with MetLife during the quarter and continue to have ongoing discussions with additional parties to finance the balance of our protein initiative. We believe this will result in more financing alternatives than we have seen in the past and secure our path to transforming our platform. As we recently announced, we also sold the remaining 50% interest in our cattle business for $80 million. While we strongly believe in the future of this business, we are utilizing this capital to invest in a more accretive and predictable earnings stream. When combined with the $75 million MetLife financing, as well as the estimated $56 million tax refund, we expect to receive from the IRS in the near future we expect to have over $200 million in incremental liquidity to fund the protein build-out. Including our strong cash position, you can see we're in great shape financially, maybe the best shape in years. Our term debt limited to our convertible bonds and some project-based financing. And with that said we are basically net term debt zero. In addition, other than security for our MetLife loan, none of our assets are encumbered or used as any collateral for any financings. During the third quarter, we were also pleased to break ground on our Wood River ultra-high-protein project as our second installation and we are excited to have them join Shenandoah producing value-added ultra-high-protein upon its expected start late Q2 2021. We have also announced that we have chosen Obion, Tennessee location to be our third facility to receive the Fluid Quip MSC technology which will bring our total capacity with Fluid Quip Technologies to over 200,000 tons of ultra-high-protein annually. We want to thank the State of Tennessee, especially the Governor's office, who have motivated us to finish this project and we will continue to work with them to get this up and running as quickly as we can. At an estimated initial $0.15 to $0.20 a gallon uplift, we will be adding $45 million to $60 million in incremental EBITDA from just these three locations. Obion has been one of our best and most profitable locations over the years, and this technology will firmly cement it as a top-performing bio-refinery, if not the best-performing in our company and the industry. The $60 million Obion project is expected to come online by the end of 2021. We are also announcing that we are further upgrading our York location to alcohol purities above USP. While we expect York's USP project to be completed in the fourth quarter and have several customers excited to take that product, we believe that we needed to take the next step. We have contracted with Fluid Quip again to operate the York location to produce grain-neutral spirits (GNS) which firmly establishes that location as a long-term participant in various high-value alcohol markets. Our Mount Vernon location is well underway with its Project 24 upgrade and is expected to be complete in the first quarter of 2021. We have also received word from the State of Illinois that our Madison location should receive its permit soon, allowing us to proceed with Project 24 upgrade at that site. Given the success we have seen at our other locations, we anticipate meeting or even beating our platform OpEx target of $0.24 a gallon by the second quarter of 2021 when Project 24 is complete. So, as you can see, all these initiatives, we are continuing to execute on our strategy and are adding speed to our escape velocity to transform this company and lessen the reliance on the ethanol crush. During the quarter, we produced approximately 189 million gallons of ethanol which put us at a 67% utilization rate. Margins have mostly been contained in the spot market and remain inverted in the future. The weekly EIA data has been neutral to supportive towards margins as production has maintained levels below 950,000 barrels per day range until this week while inventory stocks have been consistently around 20 million barrels. This stock number supports positive spot margins as well, but the weekly numbers are something we are watching closely. Green Plains Partners continued with stable operations protected by a long-term minimum volume commitments in place and benefit from the rate adjustment that went into effect in July. During the third quarter, we began to amortize the term loan we put in place in June and paid down $12.5 million of bad debt. Now, I'll turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners financial performance. I'll then come back on the call to talk more specifically about our ongoing initiatives to transform the company through our GNS, alcohol protein, and aquaculture initiatives and a little more on markets and policy in the election.

Thank you, Todd, and good morning everyone. Green Plains consolidated revenues were $424.1 million in the third quarter down $208.3 million or 33% from the third quarter a year ago, driven primarily by lower ethanol production run rates as compared to the third quarter of 2019. For the quarter, our run rates were 66.8% of capacity compared to an 84.2% run rate for the prior year third quarter. The difference in run rates between years was primarily due to a combination of Project 24 upgrades and production adjustments for regional market conditions. Our consolidated net loss for the quarter was $34.5 million, slightly favorable to a net loss of $39 million in the third quarter last year. As Todd stated at the top of the call, this loss does include a non-cash tax charge of $13.8 million related to a valuation adjustment to our deferred tax asset. Adjusted EBITDA for the second quarter was a positive $8.8 million, up from an adjusted EBITDA loss of $13.4 million for the same period a year ago. For the quarter, our SG&A costs for all segments of $19.9 million was $1.4 million higher than the $18.5 million reported in Q3 of 2019. Adjusting for a one-time benefit of $1.2 million in SG&A in Q3 of 2019 related to the reversal of property tax accruals, SG&A for Q3 2020 is generally in line with Q3 2019. Consolidated interest expense for the company was $10.2 million, which was lower by $0.3 million than the $10.5 million in Q3 of 2019 due primarily to a decrease in overall interest rates and slightly lower balances on our working capital lines. On Slide 9 of our investment deck, we present a summary of our balance sheet highlights. We had $226 million of cash and working capital, net of working capital financing at the end of the third quarter compared to $288 million for the prior year quarter. The net difference was $62 million between Q3 2020 and Q3 2019 is attributable mainly to a change of cash of approximately $72 million primarily driven by our capital expenditure program with the remaining variance resulting from changes to net working capital financing. The cash and net working capital amount for Q3 2020 does not include proceeds from the recent sale of our cattle business for $80 million. Our liquidity position at the end of the quarter consisted of $182.3 million in cash, cash equivalents, and restricted cash along with approximately $349.8 million available primarily under our working capital revolvers and delayed term loan. This amount also includes $4.3 million available under the current credit facility of the partnership. CapEx for the third quarter was $21.9 million, including $3.4 million of maintenance CapEx with the balance of $18.5 million being allocated to growth capital primarily for Project 24 and our high-protein initiative. Given the support of the MetLife loan agreement, we expect full-year CapEx to be closer to the upper end of our guidance of $120 million for 2020. This estimate includes $26 million of CapEx spend related to our Wood River protein installation. The majority of Obion's capital expenditures for the announced protein technology installation will occur in 2021. For Green Plains Partners, we had 189.6 million gallons of throughput volume at our ethanol storage assets during the quarter, which was down 49 million gallons or 21% in the third quarter of 2019 as a result of lower production rates at Green Plains plants. However, as a result of the minimum volume commitment contracts of Green Plains trade, the partnership billed trade group for 235.7 million gallons of throughput. Accordingly, the partnership reported an adjusted EBITDA of $13.9 million for the quarter, up slightly from the $13.3 million reported in the third quarter of 2019, mainly due to a 6% increase in throughput rates charged by GPP, offset slightly by other ancillary costs. For the partnership, distributable cash flow was $11.3 million for the quarter compared to $11.1 million for the same quarter of 2019. On the last 12-month basis, adjusted EBITDA was $53.7 million. Distributable cash flow was $45.2 million and declared distributions were $19.8 million, resulting in a 2.28 times coverage ratio. The coverage ratio was 3.97 times for the third quarter. Our coverage ratio excludes any adjustment for the $12.5 million in required principal payments amortized during the quarter. Now I'd like to turn the call back over to Todd.

Thanks, Patrich. So our total transformation plan is executing on all cylinders right now and has a multi-pronged approach. Our goal to achieve $0.24 or below of operating cost per gallon at expected utilization rates is within reach and we anticipate hitting that mark during the first quarter even before all the projects are done. Second, we have been focused on the high-grade alcohol market. We have been able to quickly adapt our York production facility to service high-quality customers such as Lysol and have continued to ship product during the year with strong contributions to our results. While there have been some shipping delays, once our USP upgrade is complete, we expect customers to quickly execute on existing open contracts. Additionally, our Wood River USP upgrade is now anticipated to be finished during the first half of 2021. Even more important is an upgrade to GNS at York. Because of the design and quality already in place with the existing plant, USP upgrades are using some of the equipment from Hopewell as well. We believe we can quickly get all the way to GNS, opening the door to additional markets. We believe this will be an important step as it is clear to us that higher-quality alcohols produce longer-term offtakes and better customers. Third and most importantly is our strategy to upgrade our biorefineries to produce sustainable ultra-high-protein at each of our locations. In a year where soybean carry outs are shrinking and protein prices are soaring, we cannot move fast enough as this has been a 20-year trend of protein demand growth that is beginning to accelerate. In fact, this may be a record year-over-year growth in demand and the risk is truly there won't be enough. Even with our Obion announcement as the third location, don't be surprised if we are quickly back to announce additional locations as we seek ways to accelerate the rollout. Once Obion is complete, we will be capable of producing over 200,000 tons annually, generating 50% or greater protein levels. We are very happy to announce that we are almost sold out of Shenandoah's 2021 production to the pet food space and continue to work with customers in pet, aquaculture and dairy to take the remaining production over the next few weeks. What we are producing is better and higher protein with very unique amino acid profiles and yeast characteristics than others are producing in the space. More importantly, our fiber and fat content is low which is extremely important in the pet and aqua space. So that means all protein is not equal and ours certainly has an interesting advantage we learn about every day. There's a lot of confusion out there, but I can tell you our customers are not confused. We are already establishing Shenandoah and Green Plains as the go-to company for the highest quality control, quality assurance and lastly, consistency and quality of the product. We don't believe we will ever commoditize what we produce. We have completed several aquaculture trials at our world-class aqua lab in Shenandoah and we have seen very interesting results in taste and rate of gain. We are starting several more as we speak for ourselves and customers who are also using our lab for trials. In dairy, we have very interesting amino acid profiles that have been proven to increase milk yields in studies already. That's on top of the yeast benefit in our ultra-high protein products. Finally, we have inclusion in all veg animal feeding diets as the consumer is tired of seeing animals being fed to animals and our high-protein products will help solve that dilemma, which brings me to our partnership with Novozymes and now Hayashikane that are going to distinguish our protein production from competing technologies and other proteins. We believe we can move quickly to higher protein purity levels and even more important add nutritional upgrades unmatched by other technologies and producers. This all adds to our confidence that we are on the right path to transform the company and lessen the reliance on traditional ethanol economics. An additional benefit that often goes overlooked is that the protein production from the Fluid Quip process also increases corn oil capacity by an additional 50%. As a result, we could see our platform capacity increase from about 300 million pounds of corn oil production to over 450 million pounds. Much of our corn oil is sold as a low-carbon feedstock into the renewable diesel industry and with the growth in that industry, we believe there is plenty of demand for additional corn oil in the market, which can lead to an uplift and additional margins as a result, as we are not just going to give this away and watch those markets earn outsized returns and one of the lowest CI score feedstocks in the market, even lower than soybean oil. For your information, corn oil is 27.0 to 30.0 CI and soybean oil is around 53.0 to 54.0. I believe this is not being paid attention to from a Green Plains valuation perspective. If you look at the margin per gallon that renewable diesel producers are achieving in the back of our feedstock, when we produce over 450 million pounds or almost 60 million gallons of low CI feedstock, that is the future opportunity of its own. Lastly, I want to touch briefly on how our recently announced Hayashikane partnership validates and supports the long-term direction of providing sustainable high-value proteins and novel ingredients to support the growing global demand in human and animal nutrition. Last quarter, I talked a little about our wholly-owned Optimal Aqua venture and how our ultra-high protein can serve as a high-quality ingredient delivery mechanism. Partnering with Hayashikane proves just that. In trials already we have seen our ultra-high protein product in combination with Hayashikane technologies provide potential aquafeed solutions that meet the specific needs of RAS customers challenged by their species selection, water quality and infrastructure allowing us to better tailor products for improved feed conversion ratios and better cleaner tasting fish and seafood consumer products. Additionally, we believe our protein will ultimately find its way back into additional markets through Hayashikane as well. So what does it all mean? We are focused on 2023 for our completion of our transformation. While that is a few years away, time goes fast and we continue to see real proof points of this happening. With that said, we will define what that means in baseline 2023 earnings for Green Plains. While protein upgrades are completed, we will be producing over 700,000 tons of ultra-high protein with baseline earnings at 50% protein of $150 million to $200 million of baseline EBITDA. That is on a capital investment of approximately $400 million to $450 million. On top of that, York and Wood River USP, GNS production of 75 million gallons a year at a historical $1 to $1.50 per million per gallon to fuel grade that would equate to $75 million to $110 million of additional baseline earnings. On top of that, of course, is our Project 24 benefit of approximately $80 million per year. But even with a zero baseline ethanol margin, we could achieve $225 million to $330 million baseline EBITDA before you even add the fuel margin on top of that. Even more exciting to these numbers is the fact that we are producing higher protein purity already which only increases these numbers. For example, we believe when we hit 55% protein this adds another $70 million to $100 million in earnings over the 50% protein baseline. At 58% protein, another $170 million over the 50% baseline, and at 60% protein, based on the current market for 60% protein products, such as fish meal, an additional $370 million over the 50% baseline. These are based on additional markets that are trading today and all of this is outlined in the slides in the deck. I will give you an example. At 60% protein, if you use $1,200 a ton replacement cost, that is over $1,000 a ton premium to traditional distillers grains today. For each $100 a ton that equates to a $0.06 a gallon uplift to margins or almost $0.60 a gallon total uplift in total margins at 60% protein. That is not pie in the sky. We have the capability today as we speak to mechanically produce 54% protein at Shenandoah and in fact have produced on average of over 52% mechanically separated only protein already over the past three months. The importance of our partnerships with everyone from Novozymes to Hayashikane to our exclusive pet food relationships all give us confidence we can produce unique value-added ingredients as it's not just all about the protein that will transform our earnings power of Green Plains and we are working on other partnerships as we speak and we'll be excited to announce each one of them as we complete them. We are thinking very differently about this and expect to achieve escape velocity up the J-curve that we previously discussed with you. Finally, on this topic think about what is happening. If you look at traditional processing that is taking place at corn wet mills, these plants owned by some of the biggest agribusiness and food companies in the world, they produce over 200 products from each kernel of corn. A traditional dry mill for perspective produces three ethanol distillers grains and corn oil. What we have discovered is how to isolate a high protein fraction from the corn kernel giving us a real fourth product with significant value. And now USP and GNS alcohol giving us five and six; only 194 other product opportunities exist for us to go after and when we are done with this one, we can pick and choose the next highest value in the corn kernel and I can assure you there are companies and technologies that will emerge from this thought process and we expect to be one of the leaders pursuing this path. I'm sure nobody has put it this way before as a focus. It's always been an ethanol, ethanol, ethanol, but I think there's a dramatic shift coming to the dry milling industry. Once again, our employees continue to inspire my confidence in our transformation path. But I invite all of you to come see what is happening in Shenandoah, York or Wood River and you'll get a complete view of where we are heading across the whole platform. Thanks for joining the call today and we can start the Q&A.

Thank you. Operator instructions. Our first question is from Adam Samuelson with Goldman Sachs.

Yes. Thank you. Good morning everyone.

Hi. Hi, Adam. How are you?

I'm good, Todd. So a lot of ground that was covered in those prepared remarks. And maybe, I'm just trying to think through the EBITDA layout that you provided here. And so I want to make sure that I heard those numbers right. So $400 million total capital investment, to reach that kind of 2024 run rate earnings. As you think about kind of the value uplift on the high-protein side, what do you think the upper limit here – can you be clear where you are today in terms of both technology in terms of production in terms of sales and where you have very clear line of sight between – on the technology and customer formulation in terms of value realization?

So, where we're at today is obviously Shenandoah's now producing at full rate; it started service about four months start-up. We think Wood River will take us about a month. So it takes a little bit longer as we are just learning how to use the system. Where we're at today is mechanically, before we even kick in other relationships, we're producing an average of 52% to 53% protein, as high as 54% protein. What's really important is what I said in the call, was the fact that we are almost sold out for 2021 out of Shenandoah. Our pet food relationships are beginning to reformulate around these products and are starting to accelerate the demand, and we've seen that already. So while we're very excited about that, that's only one of our addressable markets. But actually, I think we're seeing more and more companies potentially start to reformulate around our products. Our product is different than products that others are producing as well because of our protein purity, but also because of some of the other characteristics. So we focus on quality, quality, quality, but we are also innovating with these customers using our relationships with Hayashikane and Novozymes as well. So we see the path, which is when you think about how the value chain works, it's obviously human nutrition first, which we don't think will hit right now. There is an opportunity for that at some point in the future. But then it goes to pet food aqua and then everything below that. So we're not even exhausting the aqua space and already being sold out in one plant. And we think when we bring out the second plant, we'll probably hit the continue to sell out to the pet market and maybe a little bit more into aqua. But we are also seeing a lot of interest in dairy as well. And it's really just a function of what is the substitution that your product is being used for. For example, in our dairy customers, they're going to formulate around the level of protein, the level of yeast, the level of fat and the level of fiber, and then the amino acid profile. So we're not – when you first talk to a dairy for example, they think, oh I'm just going to substitute for traditional distillers grains. And then they look at the product and then look at themselves and say, no, this could be substituted for a blood meal, it could be substituted for other very high-value corn gluten meal type products. So we're very excited about that. And we're starting to see that as well in dairy markets, and it's all about level of protein and how to reformulate. So, all of these numbers that we're giving you are really just replacement products in the formulation. I think in 2021 we will be on a path to a higher protein consistent higher protein at Shenandoah. And our customers will formulate – continue to formulate around those higher proteins and then you get paid for those higher proteins as well. So while you might sell a baseline protein of 50, there is scale above that much like you see in some of the wheat markets that you would formulate around as well. So we're very confident around these numbers. We're very happy that we were able to get the forward sales on the books for Shenandoah, the repeat sales as well, again, and we're very happy to see customers starting to formulate long term around those products on the label. So as we bring on more, we believe every plant that we will bring on will have – basically, can be sold out, if that's the way we choose to approach the market.

Okay. And then, if I could squeeze just one near-term ethanol market question in.

Sure.

Just as we get into the winter and the slow driving season, how do you kind of see the supply-demand relationship in ethanol inventories have ticked up a little bit, off the lows, but aren't that bad yet but how are we – how do we create the supply-demand balance and capacity utilization over the next three to six months?

Yeah. I mean, I think right now, we've probably seen the lows in the numbers on the EIA data for stocks and probably production for a little while as we get into winter driving. The interesting thing though is we're coming into the fourth quarter really still at a pretty narrow level of stocks below 20 million barrels. And while we expect probably over the next three to four months, as driving may slow – has historically slowed down, we would expect to see those stocks build. The only difference this year is that, obviously with COVID, we continue to see draws almost on – we continue to see draws almost on a weekly basis as driving demand continues to pick up in terms of just week-over-week year-over-year even in terms of people flying less. But I think what's also important is, what we're not seeing in the numbers, which we believe is the expanded blend rates that are taking place with E15 being rolled out in several states and even some of the demand that we're seeing increase from blends as well, and that's not inclusive of a little bit of a continued export program pace, overall, and potentially that could pick up over the winter, if China decides to engage once and for all on ethanol, of which we've only seen a little bit of inkling of that, but nothing I would make a bet on at this point. So I think overall, we'll probably go into winter like every winter expecting to see growth in stocks. And probably, an uptick in supply as well, in terms of production as you run – as plants that we're running are probably running more efficient and better with the cooler temperatures. So overall, – but if you look at the data and you plug it into the models this data still supports a positive spot margin, but that's all we're really getting as an industry maybe spot to 20 to 30 days. And after that, you just have to wait and see what happens.

All right. I appreciate all the color. I’ll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from Craig Irwin with ROTH Capital.

Good morning. And thank you very much for taking my questions. So Todd, I love the slide, slide number 10 from your presentation. It really lays out for us the progress over the next few years that we can expect. The difficult thing from our side is, you didn't give us 2020. Can you maybe help us sort of sketch out what the 2021 increase is over 2020 on an operating basis? Where are we at with achieved savings on 24, the base USP and then different protein, and USP upside potential? Can you just share the numbers with us now, so we see sort of the step-up sequentially moving into 2021?

I believe we are on track for a strong finish to the year, driven by higher spot ethanol margins and the transfer of some high-quality alcohol sales from the third quarter to the fourth quarter and the first quarter. The market dynamics have changed significantly over the past six months, with a shift towards higher quality alcohol, and I expect we will finish the year on a positive note. Currently, it looks like we could have our best quarter yet. We prefer not to provide specific guidance but acknowledge that trends are moving upwards, especially with the execution of our high-quality alcohol products. Our protein margins remain favorable as well, so I foresee a strong year-end. Regarding our baseline compared to 2021, we're factoring in the Project 24 upgrades as a zero equivalent margin, and these upgrades will establish the baseline margin. The baseline USP is currently at a $1 premium, and market conditions suggest it’s even higher now. However, we anticipate additional USP coming online, so we will be cautious in predicting high-quality alcohol sales until we transition fully to GNS, which we expect will allow for longer-term contracts. We have already achieved 80% of our shipments from York at USP grade, but we won’t compromise on quality, avoiding sales of lower-grade products. The transition to GNS should be manageable as we reintegrate relevant technology, given that York was previously a beverage-grade facility. The market is evolving, with GNS set to reflect the previous USP standards. We are also noticing that shipment delays originating from consumer market demand are starting to stabilize, allowing for better inventory levels. If we can achieve a premium over 50%, as we implement further biotechnology upgrades, the situation will improve. Our partnership with Hayashikane is significant as well. We've outlined contributions from ethanol, baseline alcohol, and protein that we are bringing to market, in addition to our agribusiness segments. This lays out a year-over-year uplift. I expect we will finish 2020 strongly, considering various market factors. Corn prices are gradually increasing, and ethanol production is keeping up, maintaining high correlations. However, we must monitor stock levels; if the ethanol industry ramps up production or stockpiles significantly, margins could come under pressure. At present, we still have a favorable spot margin. Furthermore, we are seeing an increase in distillers corn oil values in the renewable diesel markets, but we won’t enter into forward contracts at current levels, believing prices will continue to rise. Our product's value is critical, particularly as new renewable diesel operations emerge. With the high profit margins of over $2 a gallon for our low CI score products, we will be selective about sales and contract terms, observing market trends closely.

Can you describe the range of feed trials you're currently conducting? I understand you have a comprehensive aquaculture lab at Shenandoah that is effectively educating your customers and demonstrating the benefits of High-Pro. What is the current status of active and potential trials for products being developed with Novozymes and other partners? What kind of research do we need to present before large potential customers will be willing to pay significantly higher prices than we've encountered so far? Are there specific milestones we should be attentive to?

Yes, I believe we will delve deeper into this in the upcoming conference calls as we continue to see positive results. Our ongoing aqua trials have been successful both at customer locations and in our lab, showing improvements in grade of gain, taste, and texture using High-Pro, whether alone or in combination with our partner's technology. We are already observing better flesh colors compared to traditional aqua diets by utilizing the high protein, ultra-high-protein products produced in Shenandoah. Customers are noticing this improvement along with enhanced taste profiles. In the next few quarters, we will discuss the technology aspect of our business in more detail. In Q1, we will continue our palatability trials for pets as we aim to fully integrate our first several plants into the pet food market, where there is significant innovation occurring around our products, particularly as we transition to higher protein levels. It's important to note that while we emphasize protein, this product consists of 25% yeast, which includes a dried distillers yeast along with ultra-high-protein components. We expect to see our first yeast for aqua available in the second quarter, and we are actively collaborating with all of our partners, whether in dairy, aqua, or pet sectors, to innovate around these products. This collaboration is not limited to protein levels; we engage directly with customers, including those from Novozymes and Hayashikane, to understand their needs for increasing palatability or growth. While some may view Novozymes as solely focused on raising protein levels, that perspective is narrow. Currently, we can mechanically produce up to 54% and, through collaboration with Fluid Quip, we anticipate increasing this without initial reliance on enzymatic methods. The goal is to leverage Novozymes' resources to aid our aqua and pet customers in product development and innovation. This represents a significant shift for Green Plains. If we consider a wet mill as an example, it still produces ethanol, but that aspect takes a back seat to its 199 other high-value products. I believe we will see similar developments in dry milling over time. Not every entity will adopt these changes; there are considerable capital and commitment requirements, including the need for nutritionists, sales teams, marketing, innovation, and partnerships like the ones we have established, with more to come. We are on a promising trajectory. Currently, we are in a transitional phase, as evidenced last quarter when we faced significant negative cost absorption. However, I anticipate we will experience considerably less this quarter and moving into 2021, especially as we rollout Project 24, which will further reduce our negative absorption. We aim to restart the Madison plant soon, as we are expecting the State of Illinois to grant us the necessary permit for Project 24. We are also reviewing our portfolio for any potential swaps or to identify areas that may not align with our strategy. There remains a market for ethanol plants, and there's been increased engagement from those considering the long-term viability of ethanol as it relates to renewable diesel. Numerous potential partnerships in that arena exist. As I mentioned, we are in a transitional state which will take time, and while there will be some fluctuations, we are currently in excellent financial condition, with ample access to the capital needed to develop our high protein initiatives. We remain in discussions with partners regarding this. Despite the upcoming noise in the quarters, the key takeaway from this quarter is that we generated free cash flow. Regardless of the accounting figures, it is crucial to note that we achieved positive EBITDA and positive cash flow during this period.

That's a good place to be. Well, congratulations on the execution in the difficult environment and we’ll look forward to the high-pro progress and all the other initiatives. Thanks.

Thank you.

Thank you. Our next question comes from Ben Bienvenu with Stephens. Please, go ahead.

Hi. Good morning everybody.

Good morning.

I've got one short-term question and one long-term question. On the short-term question, the $0.06 of negative absorption you called out three buckets: the scheduled maintenance, the Project 24 upgrades and the regional market conditions. Any way that you can size those within the $0.06? And then, Todd, you kind of teased this in the last answer, but how much of that $0.06 should we expect to linger into the fourth quarter or is it all going away?

Yes. I'll just comment on and Patrich will comment on more of that. But one thing I think we also missed is some of our quarter was impacted by the role of our high-quality alcohol from quarter-to-quarter. I think that was part of it. But I'll let Patrich talk about the other three buckets. Go ahead, Patrich.

Yes. I think, look, generally as you break down the absorption, two-thirds of it is plants purposely offline relative to market conditions, a-third of it relative to Project 24. However, when you think of that other two-thirds, remember those plants will actually get Project 24. So if you're thinking about it in terms of future, those are plants that actually would have been on that negative absorption would not have been there, had they had Project 24, which in fact they will. So it's a little bit of chicken and egg. I mean, if you just look at the strict numbers with respect to Q3, that's the breakup. But when you think about actually layering on Project 24, that negative absorption effectively goes away in 2021.

Got it. Okay. My long-term or intermediate-term question is, as it relates to high-pro and the financing of these projects. Just based on the current pace, which has been a solid pace of getting these projects up and going, it seems like you could kind of get to self-funding by mid or late 2022. Is that too early? Is that a realistic timeline? How are you thinking about the threshold at which you start to be able to self-fund these projects?

I believe that if we proceed at a slower pace, we could likely begin self-funding our projects by the middle of 2022. This timeline is influenced by protein prices. If we accelerate through the J-curve, self-funding would occur more quickly, but our aim is to expedite our project completion. Ideally, we want to finish Wood River and Obion, and potentially a fourth or fifth project within 2021, totaling five projects completed. We aim to achieve another five the following year. While these projects may be able to self-fund, they will likely require some additional funding as well. Our priority is to move as swiftly as possible due to the high demand. The global protein demand is projected to reach between 325 million and 350 million tons by the time we complete our projects. This is the total addressable market we are targeting. If Green Plains fully develops its platform, we could contribute 700,000 tons of supply into a growing market of 12 million to 15 million tons per year, within the context of the 325 million to 350 million ton market. Hence, we need to expedite our construction timeline. Our customers have expressed that we must increase our pace, emphasizing the need for redundancy and higher volumes. Major industry participants are clear that they require 250,000 tons annually from us, rather than just 40,000 tons from Shenandoah, and they will not consider reformulation until we provide these volumes and redundancies. This urgency is why our construction cannot progress quickly enough. While we could potentially start self-funding in 2022, our objective is to be well into the construction of projects five through ten by that time.

Yes. Okay, great. Makes sense. Thanks.

Thank you.

Thank you. Our next question comes from Ken Zaslow with Bank of Montreal.

Good morning guys.

Hi, Ken.

So as you complete these projects over the next three to four years, what is your long-term objective? Are you planning to maintain your current status, seek expansion, or consider a sale? What is the ultimate goal as you progress with these developments? You have a clear plan that leads to a conclusion. What will happen after that?

We aim to fully develop our plants, which also includes added value from Optimal Aqua. Our goal is to provide a comprehensive solution for customers facing the growing demand for protein in diets worldwide. While we may not focus on fish farming ourselves, we recognize that the rise in inland fish production will require innovative products. Essentially, we want to explore how far we can advance in protein production and what new formulations we can create. Optimal Aqua, which we have discussed, is centered on feed production, ingredient innovation, particularly with our Hayashikane partnerships. There is a pressing need for innovation in Recirculating Aquaculture Systems, and we are addressing this challenge. Additionally, as aquaculture expands inland, there are unique taste challenges that we believe our partnerships can help resolve with existing products. While it is essential to have a solid base of products and earnings, there are additional market opportunities we are beginning to explore with our partners. Our immediate focus is on completing our current initiatives while simultaneously developing our ingredient production and innovation capabilities. If successful, we could reach a significant level of protein production. There is a substantial demand for protein, particularly as we've seen with China increasing their purchases. Currently, there is a risk of limited soybean availability in the U.S. and worldwide. Unlike others in the industry, we are innovating by producing higher protein levels through our processes, thereby not just filling the existing protein gap but creating new opportunities unlike anything else in the industry today.

Another question, just the short term. What percentage of the capacity do you think will not come back after we get through all this? I've heard a variety of answers and curious to see what your answer would be.

There is still a significant amount of capacity that could return if demand increases. Regarding the current political situation, there is a president in office who supports the internal combustion engine, which I believe is beneficial for Green Plains and Iowa farmers. If the other candidate wins, he may favor electric vehicles, but also the low carbon fuel standard, which could translate to reduced gasoline usage and increased ethanol production. Ethanol is currently lowering carbon intensities through several initiatives, including carbon sequestration and improvements in Project 24, where we have seen reductions in carbon intensity, energy, and water usage. Additionally, our capacity to provide renewable diesel using low carbon intensity corn oil is essential. As global economies recover and people begin to drive more, there are still over 250 million internal combustion engines on the road in the U.S. and worldwide. While electric vehicles are on the rise, depending on who is in office, the outlook for ethanol demand in the next three to five years seems promising under either political party. More importantly, ethanol may play a role in California's low carbon fuel standard initiative, although that could be costly and whether it happens remains to be seen. Overall, as we recover from COVID and return to normal driving and demand patterns, the outlook seems favorable for ethanol supply and particularly for higher blends. However, we should recognize that the ethanol industry has capacity that can be mobilized quickly, and while they have historically lacked discipline, there may be a change this time.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Jordan Levy with Truist Securities.

Good morning, Todd. Good morning, team.

Good morning.

Todd, to touch on something you just hit on as well. As kind of Project 24 gets wrapped up and what that does to the carbon intensity of the plant and the fuel coming out of it, is there a potential there to target specific markets on the fuel ethanol side, whether it's looking to get those to California and realizing the uplift pay or something along those lines, or do the economics just makes sense to just sell the way you guys normally do?

What we've observed is that the traditional ethanol sector produced an excess of low carbon intensity fuel for the California market and sacrificed a significant portion of that profit margin. I believe that there will be opportunities to regain some of that margin through low carbon intensity scores in the future. Currently, our primary focus is on protein and its development, while allowing ethanol to maintain its role as a contributor rather than the main focus. Therefore, we are not planning to invest heavily right away in simply becoming the lowest carbon intensity producer, as that strategy has not yet proven profitable. Nonetheless, several CO2 projects are beginning to take form, particularly in Texas and the northern regions, which I believe will significantly reduce carbon intensity scores. However, this will require discipline in managing where the margins are allocated. It is clear that biofuels and renewable diesel sectors retain more of that margin compared to ethanol, which has struggled due to oversupply. Overall, our emphasis is on protein and innovation rather than solely on low carbon intensity. Ethanol is a classic ESG industry but fails to receive appropriate recognition for its sustainable practices. We consume less power, gas, and water compared to other industries, yet we do a poor job of communicating our ESG advantages. We aim to improve this narrative, as we are among the lowest carbon fuels produced globally. We plan to enhance our ESG story, which is crucial for Green Plains, especially regarding protein. The transition of our products into aquaculture significantly lowers land use requirements—for instance, it takes only a little over one pound of feed to produce one pound of aquaculture gain, whereas in cattle, it often requires five to six pounds. This reduction in land use tied to our high-protein products is a significant aspect of our narrative and a major factor in attracting customers, potential investors, and financing for our improved ESG story. We anticipate that more of this will come to light, particularly from Green Plains, as we are eager to share this part of our narrative. I view this land use aspect linked to ESG in high protein products as a more strategic investment than simply pursuing low carbon intensity scores.

Certainly. Makes a lot of sense. And then just as my follow-up, on the Optimal and the recent agreement as well on the aquaculture market. In terms of the high protein, how the plants roll out, is there a time where you get to that point of redundancy in volumes where you're at the scale you need, or is that something that can be done as Wood River gets brought online and you don't need a ton of plants online to really target specific customers in that market?

I'll give you an example. It really depends on how many products we're introducing. For instance, one of the largest poultry companies won't even notice you until you reach 1,000 tons a day in the industry. Currently, in the U.S., ethanol production across our plants is getting closer to that mark, around 800 to 1,000 tons a day, with just one customer. I’m not sure we will ever reach a point where all our plants need to be operational. However, the more we produce, the more we see inclusion rates. We can't fully penetrate large animal production systems with our products due to a lack of redundancies. At Green Plains, our initial plants might focus on pet food and potentially aquaculture before we venture into other markets. We are developing those markets while also exploring opportunities in dairy, where we have observed a significant positive impact on milk yields from our methionine and amino acid levels. We have already started to replace high-value products, like blood meal, in dairy. Our research with the Cornell Studies indicates that our traditional dairy feeds, which include soy pass, outperform soy pass in dairy trials. We're very excited about this. Even though our production of 700,000 tons doesn’t significantly affect global protein demand or supply, it does matter for our company. Even if the entire industry adopted this, which I doubt due to the immense investment required, we could only produce about seven to eight million tons total against a growing yearly demand of 15 million tons for protein. This shows that we can only address half the total demand growth for protein each year, which is why we are so enthusiastic about this opportunity. If you consider a wet mill, there are around 100 to 200 products, and we are developing five or six, with one of those competing with high protein options. The demand is substantial.

Great color. Thanks so much, Todd.

Thank you.

Thank you. And our next question comes from Eric Stine with Craig-Hallum.

Hi, everyone. You've covered a lot, so I'll just focus on one point. You mentioned upgrading to GNS at USP and York. I’m curious about your thoughts on doing that at Wood River and when that upgrade might be implemented.

I believe that upgrading GNS is essential for our industrial alcohol business, particularly at York, as the costs are low due to it being a beverage-grade facility. Our product quality is already high, which will enable us to achieve top quality quickly. We aim to preserve the important relationships we've built with customers during this development, as they hold long-term value for us. However, I don't anticipate hiring many GNS salespeople; instead, we plan to collaborate with existing companies to utilize their distribution networks. We will engage in markets that demand high-quality alcohol, whether for consumption or pharmaceutical use. Regarding Wood River, we will focus on achieving USP standards first and evaluate our performance in the GNS markets. There is significant USP demand in consumer products currently. Major CPG companies that have partnered with us are also anticipating the upgrade at Wood River. We may not need to fully upgrade Wood River due to the associated costs, but if we recognize a clear advantage, we will consider it. The fact that York was previously a beverage-grade facility allows us a quicker and more cost-effective path to GNS compared to Wood River.

Got it. Very helpful. Thanks.

All right. Thank you very much.

Thank you, and sir I'm not showing any further questions in the queue.

All right, everybody, thanks for coming on the call. I know we talked a lot, probably spent a little more on our future than we have in the past in terms of outlining the numbers. But I think it's important for everybody to see that. There's a lot of other information around page 10 that we'd love to share with you. We continue to make great progress on our sales programs and the interest and innovation, and again, a lot of transitory stuff going on as well, but we're on a path and we believe in that path. And I think we're going to accelerate as quickly as we can to transform and hopefully can read back through what we presented today. And any questions please give us a call and we're very excited about the future. So, thanks a lot for coming on the call today, and we'll talk to you next quarter.

Thank you, ladies and gentlemen for participating in today's conference. You may now disconnect. Have a wonderful day.