Green Plains Inc. Q2 FY2021 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. At this time, all participants are in listen-only mode. I will now turn the call over to your host, Phil Boggs, Senior Vice President, Investor Relations. Mr. Boggs, please go ahead.

Thank you. And welcome to Green Plains Inc. and Green Plains Partners Second Quarter 2021 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer; Patrich Simpkins, Chief Financial Officer; and Leslie van der Meulen, Executive Vice President, Product Marketing & Innovation. There's a slide presentation available and you can find it 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 from those discussed in today's press releases and the comments made during this conference call in its risks factor section of our Form 10-K, Form 10-Q and other reports filed with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And now, I'd like to turn the call over to Todd Becker.

Thanks, Phil. Good morning, and thanks for joining our call today. We've been focusing for some time on developing our organization to deliver on our transformation. The changes to our Board of Directors announced last week were another sign of that development and demonstrate that we are fully focused on our mission to lead the transformation into biorefineries, creating sustainable ingredients that matter and follow our shareholders and owners who want our Board to represent a broad group of diverse members that have the experience and ambition to help our company achieve its goals for all of our stakeholders. We want to thank Gordon, Jim, and Tom for their tireless commitment to our journey, and they leave knowing their efforts have contributed to our success. We also want to welcome Martin Salinas to the Board. He will also assume the role of Audit Committee Chairman. Martin has been a member of the GPP Board and is deeply familiar with Green Plains Inc., allowing him to step in and contribute right away. We have also been enhancing our executive leadership team and have a broad team in place for the execution of our plan and our future growth. Leslie van der Meulen was recently promoted to Executive Vice President, Product Marketing and Innovation, as part of our plan to build a high-quality organization to support our ingredient marketing and innovation platform with a deep bench of nutritionists, scientists, sales and marketing, and quality control. We did announce this morning that Walter Cronin is transitioning out of Green Plains to pursue personal investment opportunities and other interests in agriculture. Walter leaves knowing that the team he helped create and mold alongside me is ready to take on the opportunity to market, innovate, and produce products around a game-changing technology and IP portfolio. He will remain a consultant for the company while pursuing his other passions as he remains a true believer in our story. We expect this transition to be seamless as Leslie and Walter have been working side by side for many years. Leslie continues to build out his team, including a new Senior Vice President of Global Ingredient Sales, who has led the sales and marketing organization of the largest producer and distributor of fish meal in Peru. He is joining our organization to expand on our success with ultra-high protein and help drive higher inclusion rates in global agriculture diets and all other animal verticals. We are very excited about the evolution of this team as we put the pieces together that represent the future of Green Plains. We have been building the organization to deliver on our cultural transformation to ensure we can continue to attract and retain talent or human capital as we execute on the deployment of financial capital to support our transformation. We are hiring and have tremendous career opportunities in what we believe is the most exciting Ag tech and innovation platform in all of agriculture globally. Green Plains is on a path toward creating sustainable ingredients that matter, and we are building an organization of talent around this mission. While we have accomplished many key milestones on our total transformation plan, we know much remains. With Fluid Quip fully integrated into our platform, we have now ordered the essential long-lead time equipment for all of our upcoming MSC protein projects, which when combined with Fagen, Inc., brings greater certainty to completing each project in a nine to 12 month timeframe from groundbreaking. We also executed on our first shipment of dextrose out of our innovation center at York, keeping us on track to deploy clean sugar technology on a larger scale in the coming years. I will touch more on that later in the call. Turning to the quarter, we delivered strong financial results in the second quarter and first half of 2021 and continued to execute on our transformation plan, achieving several key milestones on our path to 2024 and 2025. Our consolidated margin was $0.37 a gallon, aided by a strong spot market, risk management and optimization gains, and mark-to-market gains on some forward physical positions as well. Our margins were also aided by record production yields in both ethanol and corn oil as our Project 24 initiatives and continued improvement in our MSC facility at Shenandoah are already contributing to our results; we remain focused on executing on all areas of our business as we continue our transformation to Green Plains 2.0. During the quarter, we produced 191 million gallons of ethanol, which equates to about an 80% utilization rate. Production has been trending higher as we bring sites online from our Project 24 initiative and should continue to increase after our Madison, Illinois location starts up. However, we are cautiously watching the current margin structure in the third quarter, which could impact utilization in the nearby months, but longer term, we anticipate operating capacity once Project 24 is fully completed by year end. We have a line of sight on 100% operating capacity resulting in sub $0.24 per gallon operating cost, which we believe, when looked at like-for-like, puts our asset base finally back in line with the best operating plants in the industry. While the second quarter margins were strong, industry production ramped up fast as we outlined on our last call, resulting in ethanol stocks for the industry at a much higher level than last year at this time. While the spot market is starting to improve, it still has a lot of work to do to become positive due to continued crop and supply uncertainty. On paper, however, fourth quarter margins are positive, and we will continue to pursue our process of margin maximization subject to industry conditions in that quarter. We will continue focusing on controlling things that are under our control; operating safely, innovating around science and technology, while creating sustainable ingredients that matter. Green Plains Partners recently announced a $60 million five-year amended credit facility led by BlackRock, allowing us to return to our prior strategy of distributing cash to our unitholders, which includes Green Plains Inc., the parent. We have great financial partners who helped refinance this line, and this showed our commitment to maintaining a financially strong MLP, and the partnership continues to be protected by long-term minimum volume commitments, driving continued stable cash flows. Now I'll turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners' financial performance. Then I'll come back on the call to talk more specifically about our ongoing initiatives and how each vertical fits into our transformation plan.

Thank you, Todd, and good morning, everyone. Net income attributable to Green Plains shareholders was $9.7 million or $0.20 per diluted share, a significant improvement over the $8.2 million loss equal to $0.24 per diluted share reported in the second quarter of 2020. Our net income was inclusive of a $9.5 million charge recorded in interest expense related to the private settlement of a portion of our 2024 convertible notes and a $3.8 million loss primarily related to the sale of our standalone grain elevators. Plant utilization was 79.9% compared to 53.5% in the prior year. Adjusted EBITDA was $54.8 million in the second quarter, $36.9 million better than the $17.9 million we recorded in the prior year. EBITDA for ethanol production improved $53.7 million to $52.1 million for the same period. For the quarter, our SG&A costs for all segments was $23.4 million compared to $20.5 million reported in Q2 of 2020, driven mainly by the inclusion of Fluid Quip SG&A this year and higher insurance expenses. Interest expense was $9.1 million compared to $9.7 million in the prior year. However, adjusting for the one-time charge of $9.5 million related to the convertible note transaction described earlier, interest expense was slightly improved from the prior year. I want to touch on taxes as well. On a normalized basis, we would be a 24% to 25% taxpayer. However, we recorded a $4.8 million tax benefit in the second quarter of 2021 on higher pretax income due to a partial reversal of our deferred tax asset related to previously recorded NOLs. Turning to Slide 9 of the deck, we provide a summary of our balance sheet highlights. We had $678.4 million of cash and working capital, net of working capital financing at the end of the second quarter compared to $243.4 million for the prior year quarter. Our liquidity position at the end of the quarter consisted of $615.4 million in cash, cash equivalents, and restricted cash along with approximately $294.2 million available primarily under our working capital revolvers and delayed draw term loan. We were pleased with the recent completion of a five-year $60 million amended term loan facility for the Partnership, which removes a nearby maturity and enables the partnership to return to its prior strategy of paying higher distribution. We invested $28.3 million into capital expenditures during the quarter, primarily related to our ongoing high protein initiatives. This included $5.4 million of maintenance CapEx. We are now anticipating total CapEx could be higher than $225 million guidance for 2021 based on construction schedules. Maintenance capital for the year is expected to be about $25 million but may increase slightly as we continue to focus on supporting our Project 24 initiative by eliminating unplanned downtime and improving predictive maintenance. The Partnership reported an adjusted EBITDA of $12.7 million for the quarter compared to $13.2 million reported in the prior year, mainly due to the reduction in minimum volume commitments associated with the sale of both the Hereford and Ord plants, offset slightly by a 6% increase in throughput rates charged by GPP. For the Partnership, distributable cash flow was $11.2 million for the quarter compared to $11.3 million for the same quarter of 2020. Going forward, the Board has announced its intention to return to its prior strategy of maintaining a 1.1 times coverage ratio on normalized trailing 12-month distributable cash flow. The new financing facility does not have a mandatory principal repayment requirement, and therefore, this partnership should have ample liquidity to support higher distributions, providing an improved return to unitholders going forward. Over the last 12 months, adjusted EBITDA was $54.1 million, distributable cash flow was $45.5 million, and declared distributions were $11.4 million, resulting in a 4.01 times coverage ratio, excluding any adjustment for the required principal payments amortized in the past year. Now I'd like to return the call back over to Todd.

Thanks, Patrich. So Green Plains is focused on three things right now: execution, execution, and execution. Our recent accomplishments demonstrate our commitment to execution as we recently announced our protein buildout schedule, bringing Fagen, Inc. on as our general contractor, a trusted partner to construct and complete these builds with high quality and high assurance for a job well done. They will build the remainder of our protein platform and have broken ground on our Central City location. Mount Vernon and Obion are both on track to break ground in the coming weeks as well. For those that aren't familiar, Fagen was instrumental in building much of the industry and even built several of our locations. Their name is synonymous with quality and execution, and we could not have found a better partner to help execute on multiple projects simultaneously. They have agreed to work exclusively on our protein projects for the coming years, a testament to the quality of our technology and IP portfolio. We are facing an opportunity unlike any I've witnessed over the past 14 years at Green Plains. The initiatives in front of us that can be accomplished through our ownership of Fluid Quip are exciting, to put it mildly. Our go-forward strategy continues to be focused on five verticals: ultra-high protein, renewable corn oil, specialty alcohols, clean sugar, and carbon. In protein, we continue to execute on our capital deployment and are nearing the finish line at our Wood River, Nebraska facility. As Central City, Obion, and Mount Vernon come online next year, we will have completed over 50% of our production capacity and reach an inflection point in our transformation. As I mentioned earlier, Green Plains has been developing a full sales and development organization to support our transition from commodities to ingredients. This includes nutritionists, scientists, quality control specialists, and sales and development professionals. As I said earlier, our team is going to look very different by the end of next year, and I cannot be more excited about the talent we are attracting to Green Plains. At this moment, we are in negotiations with several companies for multiple year offtakes, some of which we anticipate will help us move up the J-curve as we produce higher protein concentrations. We remain focused on delivering our 2024 guidance based on the initial investment thesis of $0.12 to $0.15 a gallon uplift. Green Plains has focused some of our preliminary scientific efforts around inclusion rates in aquaculture. We don't want to get ahead of the early and encouraging results we continue to see in our world-class aquaculture laboratory as well as with our partner customers, but our conviction grows in stretching our efforts to the top of the J-curve and allow our excellence to cascade into other protein verticals. Project execution is what will define this product vertical over the next few years, along with a vision for our continued innovation around our IP portfolio. Vegetable oils continue to be in strong demand due to rapid growth in renewable diesel, and our low carbon intensity renewable corn oil, as a waste oil, is highly sought after as a valuable feedstock. Maximizing corn oil yields through the deployment of MSC technology and other practices we are developing is already paying dividends, and we expect those yields to continue to increase in future quarters. Let me be clear; feedstocks are absolutely king. The inbound interest is profound, but we plan to take a measured approach to using our DCO platform to maximize the present and long-term value of the strategically advantaged feedstock to address renewable diesel markets. We are focused on partnerships that can extend beyond offtake agreements and can allow us to learn, grow, and expand the value that we can create together. We are defining success in our distillers' corn oil development efforts as creating value beyond just the value of oil, as we expect to participate in the margin structure that is available from renewable diesel, and the discussions and negotiations we are having allow for this participation. We believe that the days are coming to an end when someone just buys our oil to earn outsized returns because of our low CI scores and waste oil classification. We still believe the line in the sand will be drawn between waste and food oils, favoring our company and industry in the long term. Our York facility is producing high quality alcohol that meets the USP monograph, but we are taking a cautious approach to this market and the upcoming contracting season, which should provide some color on long-term values in the space. While nice to have components and it was fantastic in 2020, the significant upside in our business is firmly in the verticals of protein, oil, sugar, and carbon. We were pleased to deliver our first clean sugar dextrose product in the second quarter from the innovation center at York. We have begun to identify opportunities to enhance the equipment there. Along with Fluid Quip, we are beginning engineering reviews for a full-scale clean sugar technology design. This remains early days, but I am encouraged by the disruptive potential in creating a synthetic biology ecosystem around our innovative clean sugar product. Additionally, we are exploring our own ambitions around disruptive yeast and enzyme opportunities to further maximize the value of our biorefinery platform, as clean sugar is the fuel for that as well. We hope to be able to share more early next year on how science and technology will advance Green Plains further into the future. Clean sugar is core to our strategy, and we've begun several early discussions on co-location opportunities at the source for industrial biotech and synthetic biology companies and others to get the over-the-fence supply of dextrose, much like you see in today’s most successful wet milling complexes in the United States. There's still an enormous amount of work to do, and we are hiring a talented team to help execute on this opportunity as well. We also believe in the potential to use the fermentation capacity we have for both scale-up at York and full-scale elsewhere, which uniquely positions Green Plains to look at our own capabilities to produce unique products. As we have discussed before, our ultra high-protein initiatives have only just begun to look at what we can express from that and what products and characteristics we can create using synthetic biology and science to create novel ingredients for applications around the world that are needed and in demand. And then, last but certainly not least, is carbon. We are focused on our own due diligence for our potential investment in the Summit Carbon Solutions Midwest Carbon Express pipeline. We have assembled a world-class due diligence team, including experts in engineering, right of way, pipeline construction, and carbon policy to aid us in making our decisions. We believe Green Plains will be a thought leader in carbon, and we are attracting a team of advisers to complement our ambitions. Investing shareholder capital into the Summit Carbon Solutions project is a significant opportunity for our company, and we are reviewing this prospect carefully. Additionally, with our three Southeastern plants, we are reviewing opportunities for standalone carbon capture systems. The opportunity to reduce our CI scores at each of the facilities opens the door to a number of exciting possibilities as we produce low-carbon ingredients across our platform. Green Plains had a very unique opportunity to invest in the development company behind the Summit pipeline, and I sit on the Board of that company. This position offers us an opportunity to be one of the largest owners of the pipeline and create value beyond the reduced carbon values that we'll produce in the future. As I said, we are considering three of our locations for direct carbon injection opportunities, and we are exploring the potential returns on those projects. We have embarked on an outside engineering study to determine the locational feasibility for Madison, Mount Vernon, and Obion for direct injections into geological formations on those sites. If a positive outcome from this study occurs, we will move quickly to perform a detailed geological assessment. Please know we are taking a very detailed and diligent approach to all of these opportunities to maximize shareholder value. Legislation to expand carbon capture and sequestration continues to garner broad bipartisan support, and we are optimistic that this will help ensure the success of our partnership with Summit Carbon Solutions and the direct injection opportunities we are exploring. Even the Infrastructure Bill shows the enthusiasm from both sides of the aisle to help make projects like the Summit Carbon Solutions pipeline a reality. Carbon capture is a critical piece of our sustainability goals, which we are expanding, as we have begun to show the market that we are a true ESG story. We plan to unveil an inaugural sustainability report by the end of the year but have recently posted data sheets on environmental, social, and governance to our website, and the result was a significantly improved ISS score. We all know ESG is more than just numbers, and we believe we are truly a sustainable company that's just starting to build and tell our sustainability story, but the numbers matter, and our recent improvement is encouraging. This is just the beginning, and we will continue to clarify all of the exciting initiatives we have on the ESG front. Our key pillars are aligned with macro trends to lower our carbon in everything we do. While it may take some time to achieve the aggressive goals we have laid out, we are focused on executing on the key milestones in front of us to get there. We believe we have assembled an innovative ag tech team and combined them with our strategic partnerships to use science and technology to truly develop sustainable ingredients that matter for our growing world. Our path to 2025 is clear, but we know there will be obstacles along the way. Our job is to break them down and deliver on what we believe is the best opportunity in agricultural technology and transformation in the markets today. Thank you to our stakeholders for your support in our transformation. And thanks for joining our call today, and we'll start the question-and-answer session.

Our first question comes from Craig Irwin from ROTH Capital Partners.

Congratulations on solid results where there was a lot of progress on a lot of different fronts this quarter. Todd, I wanted to ask about clean sugar. This is one of the big firsts you outlined in your prepared remarks. Your first shipments there can you maybe give us a little color on what you're learning with these shipments either in the process or from the customers and feedback in the market? And can you clarify for us, do you need to have the first 55 million-gallon plant fully commissioned to decide if you're going to go to the 150 as you laid out sort of in an upside scenario there?

We are gaining valuable insights as we continue to transition from a batch processing method to a continuous process, which we aim to implement on a larger scale. We have discovered that we can produce food-grade sugar, and we are preparing to install the necessary equipment since we see this as a significant market opportunity, in addition to the crucial industrial markets. Our initial shipments have gone to players in industrial synthetic biology and biotech, and we've previously supplied them as well. Their feedback will help us understand how our product aligns with their future plans. There is evident interest from sectors like industrial biotech, biochemical, green biochemicals, bioplastics, and food and confectionery industries. We believe that this technology is highly disruptive, and we are committed to ensuring its quality and scalability. An exciting aspect of our capability is the potential to convert one of our facilities into a clean sugar production site. Furthermore, this technology allows us to integrate some of our sugars into another system, enabling partial production at a facility. We are exploring all these possibilities. Our primary focus is to transform a traditional ethanol plant into a modern biorefinery, shifting from ethanol production to exclusively making dextrose. We envision that, upon the successful completion of our review and technical objectives, we can fully transition into a complete biorefinery that no longer focuses on ethanol production. We are thrilled with our progress, knowing we can produce this product and that we have customers eager for further testing, including some at a commercial scale, not just startups in synthetic biology. We believe we are on a promising trajectory. There are various approaches we could take: we could slipstream it, retrofit an existing 50 million or 60 million-gallon plant as we work towards 100 million or 150 million gallons, or adopt a combination of these strategies. For instance, at our Wood River facility, which is essentially a 255 million-gallon plant next to another, we could transition one section while maintaining the other as a traditional plant, or potentially transition both in the future. We are excited about our advancements, but we recognize there is still significant work ahead. We are starting the FEL 1 and FEL 2 engineering work, and the Fluid Quip team has a dedicated group focused on clean sugar.

My second question is about HR. So you said you're hiring, that's pretty good news, right? Investors are applauding the fact you named a Chief People Officer. Can you talk a little bit about the hiring needs over the next few quarters? What do you think is a focus for the company, is it necessary for execution capacity? And I guess the second part of the question is, we all really like Walter. We're sad to see him go. You said real consulting. I think you’re underlying real in the way you said it. Do you have any color you can share on his plans and availability to work with you?

Yes, we're hiring. As we expand our business and we think about the different needs of the company, we're hiring and we're thinking differently than we have in the past. In the past, we were really about liquidating low-value, low-margin commodities in a high production environment. It was much more of a commodity mindset. As you transition into protein, oils, sugar, and carbon, you have to change your mindset around high-value products with higher margin structures that you need to establish developed relationships at each of those verticals. So in ultra-high protein, it’s nutritionists to nutritionists, scientists to scientists, it's innovation with your client together, and what we can do with that 25% yeast within the product where we express amino acids for them that they need and are essential in their own supply chain, and we believe we can do those things as partners. While traders and marketers remain critical parts of what we do, salespeople, scientists, and nutritionists are increasingly essential. The decisions are often made by nutritionists and scientists who understand the value chain. So that's first and foremost; we need innovators and technologists to advance our objectives. In clean sugar, we will look for professionals involved in dextrose, glucose, engineering, and technology in sales and development. We're also seeking carbon specialists to help us understand the carbon project with Summit Carbon Solutions, which we find very exciting for our shareholders. Walter has, for many years, wanted to pursue ambitions in other areas of his interest. He came from soy processing and spent many years in that industry and trading. He has retained an interest in soy and trading. Walter aims to manage some of his own personal investments as well as consult in the soy processing industry and on upcoming projects. We've discussed his future at length, and it was important that he leaves us well set up with a sound organizational framework that we've built side by side. Leslie has been with the company for quite some time now, and they've been working cooperatively to help build this organization. Walter is leaving at the right time to pursue personal interests, but he leaves the company in terrific shape. I want to emphasize that he's going to be a real consultant; he is fully committed to our strategy and remains a shareholder. He helped develop this strategy for us. While we are excited for him in this next chapter, we also recognize his value here at our company.

Our next question comes from the line of Laurence Alexander from Jefferies.

I guess two questions to start. I guess, first, on the protein side, can you provide a sense for the cadence of shipments and contribution to profitability in the back half of the year? And secondly, on the synthetic biology comments, can you flesh out a little bit how you're thinking about the yeast and fermentation platforms? Because I think it's been a pretty capital-intensive industry for other companies. And so it would be helpful to get a sense for how much you have know-how in-house versus that you need to build out the expertise in those areas?

In the back half of the year, we're going to bring Wood River online. Obviously, it is just startup, and we think that we should be starting up Wood River sometime in September. We're excited about that. We're on track to do that. We're waiting for one last key part, which is the only thing holding us back right now because of, obviously, supply chain constraints. We know when it's going to be finished and we have a truck waiting there for it. So we think sometime mid-September, we're going to fire that plant up. We've already been in startup mode, but we need to get the dryer started, which is the last piece. Once that comes online, we should have two to three months of production coming out of there while finishing up the year at Shenandoah. Contribution there, when we look at it, is all of Shenandoah for the full year and a little bit of contribution from Wood River towards the end of the year of '21. It really starts to get a full year of Shenandoah and Wood River. Right now, we’re in negotiations to determine where that product will go, whether it’s in aqua, pet, dairy, or poultry, as well as other areas. We think we'll have a full year of those two plants and then we will start to cadence in other plants in 2022. Probably Central City will come on first, I think we will break ground in Obion and Mount Vernon next. So, by mid-next year, we should have half of our platform running and that’s when we will begin to see the real contribution to the platform, likely in mid-2022. On the synthetic biology and yeast development side, we have recognized that this product has capabilities to do very special things because it is not just around protein; it is about protein and yeast. We have been developing a plan to capitalize on that. And part of it is our relationship with Novozymes. We have been collaborating to explore that yeast component and what they can contribute from their biological library, and we've been working closely on that. Thus far, we think we should retain some of these capabilities in-house because of the innovation centers we have. We'll also partner with others due to the relationships we have built. We’ve seen success in that already and we believe our capital intensity, based on what we already possess in sugar, fermentation, and yeast, will be much cheaper and much faster to get to market than others might experience.

Our next question comes from the line of Jordan Levy from Truist Securities.

The $0.37 per gallon margins you reported are certainly impressive. I want to try to see if we can get a sense of how much of that, on a high level, is attributable to the pricing in those mark-to-market contracts, Todd, I think you mentioned versus the better yields on the product side and the OpEx improvements on Project 24 and application of MSC at Shenandoah?

When we examine the mark-to-market aspect, it wasn't particularly substantial, but I wanted to highlight it because we anticipate it will likely reverse in the next few quarters. We have identified a gain of about $5 million to $7 million that we had to account for from physical contracts. Typically, we don’t have to make such adjustments, but we wanted to ensure that as we proceed with sales and purchases, we can operate all of our plants based on farmer supply in the third quarter. So far, we're on track to run all of our plants. We'll monitor market conditions and make decisions accordingly. I believe that the supply of corn for most of our plants is available. Additionally, we saw gains from our optimization strategies related to early crush and our options management, which minimized downside risks. This contributed another $5 million to $10 million, while the rest came from the overall business margins. We achieved record yields in producing ethanol and corn oil. Although we won't disclose specific numbers, we believe these significantly aided our success even at lower run rates. We're making good progress, and while the results have generated notable free cash flow to support our transformation journey, it remains crucial to ensure that our generation one platform operates efficiently, so that our generation two and 2.0 systems maintain stability. Therefore, it's essential to optimize our generation one plants to keep operating costs low and reduce downtime effectively.

And then just my second question is specific to the protein side of things and more particularly on the Aquafeed. Just wanted to maybe see if we could get an update on how things are trending over at Optimal and the agreement you guys have with Hayashikane, and what you're looking for out of that side of the business to kind of get it to the next level as you roll out the additional protein facilities?

How we look at it is Optimal will be a critical component of how we think about rolling out some of our products into finished products. They continue to collaborate around the aquaculture laboratory, and we're getting ready to open another feed innovation center in Omaha, which will produce commercial feeds for aqua and other verticals. That facility is nearing completion. This initiative is part of what we must do, which is work with our customers and think differently than others. We will help them implement their solutions, and we'll be there to assist. The Optimal strategy remains on track. We are working with aquaculture customers worldwide to assist them in designing their diets and their feeds. We are very optimistic about the opportunity. As we scale our protein, we will scale up Optimal alongside, and we have a stellar team built there that is preparing us to add value beyond merely selling one truckload at a time, but to move more into finishing, or providing a comprehensive solution to our customers, which we believe is unique in the market today. Leslie has been spearheading this effort for several years and can provide further details on the progress made.

Yes, we have been developing specific applications in yeast internally. We've done this ever since we took over the York innovation center back in 2017. The question we posed was how to leverage our internal capacity with our partners, as Todd mentioned, particularly with Novozymes. This collaboration has resulted in significant advancements that we're now trying to elevate to a higher level so that we can initiate commercial trials. The balance we've struck is truly between internal and external approaches.

Our next question comes from the line of Manav Gupta from Crédit Suisse.

My first question is, when I look at the RDB grade soybean oil, it's still trading at a significant premium to the corn oil you're producing. And if I understand correctly, the corn oil may be slightly more difficult to process, but its carbon intensity is like half of soybean oil. So as these pretreatment units do come online, do you expect the gap between the soy and RDB to compress materially as you go along?

Well, RBD is trading at a premium because the refining capacity in the United States is still somewhat limited. To get an RBD soybean oil, you obviously pay a premium for that. We deliver a crude oil, which is trading at almost parity with soybean oil today, just from a crude-to-crude standpoint. I think we've made a lot of progress in the last three months to reach almost equal footing on crude oils. If we had the capability to pretreat as well, we would receive a premium, but there's a cost associated with that. I believe we have made progress as well. Interestingly, the interest coming to us for our low carbon intensity renewable corn oil is substantial, given the projects that are starting up and being built in the United States, and they recognize the importance of our potential headline risk of a food oil versus waste oil with lower CI scores. If you can intermix that, or even go fully in some of these plants, we are witnessing interest in that as well. I think there will be at least parity, if not a premium for low CI renewable corn oil as more of this supply gets committed. I believe renewable corn oil supply will get locked up and become harder to procure, leading to a premium over crude soybean oil in time. We are having discussions across various parties to monetize our oil and participate in the renewable diesel margin. Ultimately, this industry will establish its own if we do not participate, because I think there is ample capacity. However, I believe we are positioned for what I consider one of the biggest opportunities in margin expansion concerning monetizing our oil and our position within the renewable diesel margin, which we see as part of our future.

I have a quick follow-up here. Could you just remind us about the cost of conversions of the 50 million-gallon facility, 100 million-gallon facility in terms of sands per gallon? If you want to add an extra mobility unit or if you don't have a ring dryer, could you just walk us through that math very quickly for the upgrade to the MSC?

So we have been in that range of around $0.40 to $0.50 a gallon equivalent, depending if you have a dryer or not, or if you need two dryers. If you have a plant that’s large enough, you might need two dryers just to process all of that capacity. So it's still in that range. At Shenandoah or Wood River, because they had a dryer and we retrofitted that dryer, the capital cost was somewhat cheaper. However, in Obion, because of the size of that plant, it will be a bit higher. It really depends on those factors, but it's in that $0.40 to $0.50 a gallon range for conversion. That’s why we’ve said at the baseline, the $0.15 a gallon investment thesis wraps around a payback period of a little under to just above three years, yielding a low 30% return on capital. That perspective hasn’t changed.

No, that's absolutely right. And if corn oil prices stay the way they are, the payback probably would be less than two years.

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

Regarding the carbon aspect of the Summit project, could you discuss any regulatory challenges you’re facing? I’ve seen some concerns raised about it potentially allowing coal plants to operate for a longer duration. What actions have you taken on the regulatory front in relation to this project?

The team at Summit continues to work on that. Most of what's been signed up on the pipeline have been ethanol plants that produced 99.6% pure carbon. So very easy cost of sequestration. They haven't focused much on coal plant power sites; rather, efforts are heavily centered on agricultural infrastructure. They're doing a great job across the five states, 2,100 miles of pipeline to navigate regulation at the local and state organizations, alongside the federal government and the core of engineers. Obviously, in the infrastructure bill, you'll see there are many opportunities for carbon infrastructure that they're willing to discuss financing with as well. I do not believe they likely would have moved forward without the assurance these pipelines probably get built, especially the carbon pipeline. Historically, we've seen oil pipelines that have been completed in the last 10-15 years, and I believe this carbon pipeline, from our viewpoint, stands a great chance for success. We were involved early in the process, we believe in the team and the company, and think that this pipeline, considering it’s structured through five agricultural states all the way to North Dakota, has provided us broad government policy support; obviously permitting and associated tasks need to continue, but thus far, we've only seen positive signs.

And maybe the last one for me. Just you mentioned that you are undertaking the internal analysis on your potential involvement. Any timeline on that, or is that more open-ended with details to be announced going forward?

We have assembled a diligence team, both external and internal. We believe we have some of the best and brightest from both sides involved in this diligence process. I don't think we are months away from making decisions, I think it will be quicker than that. We've been at it for a while. The Summit team wants to initiate the pipeline, and we believe that will require additional capital - with thresholds that will call for more funding. This fits our needs as well from a funding standpoint. I want to reiterate that we are investing considerable time here, and I believe this process will yield fruitful results shortly for Green Plains shareholders. It represents a fantastic opportunity for our shareholders. We are the biggest shipper to date signed up, but there are more substantial shippers who are also involved. We were initial investors in the development company, which required some at-risk capital. In summation, we believe we are well-positioned in this regard. With a $4 billion to $5 billion pipeline and the potential 45Q tax credits on top of the carbon value, participation as a large stakeholder could yield exceptional benefits for our shareholders.

Our next question comes from the line of Selman Akyol from Stifel.

So thinking about Green Plains Partners and sort of your 1.1 times coverage ratio implies pretty significant step-up in distributions. Is the goal to be where you were before you cut the distribution?

We won’t be quite where we were simply because we don’t have the same throughput volume just from the sale of plants. However, in effect, we had provided prior guidance at a 1.1 coverage; we will be doing the same. You can backtrack that and arrive at what distributions would be on an annual basis. The partnership has significant liquidity and will continue to maintain that liquidity. The Board will consider what to do with any excess liquidity above the 1.1 coverage or whether they wish to lower it below the 1.1 coverage. But that remains the plan as of now. Back-of-the-envelope calculations will indicate a substantial distribution to our unitholders.

And I guess kind of going back to the liquidity, and I'm trying to think about growth; it seems your leverage will be pretty low, but if you’ve got a sort of $60 million cap there. I’m just kind of wondering, would you need to seek additional outside financing if you wanted to grow the partnership, or should we think of the partnership as being steady state and just sort of returning cash and running through the contract length, if you will?

I don’t think you should look at it that way. The first and most important step we needed to take this year was to refinance the line and ensure we can resume distributions. We have accomplished that. I believe that was a worry of some, but it was something we weren’t overly concerned about; we knew refinancing was attainable. Completing that has set us on a multi-step process to establish the future of the partnership. My anticipation is not solely to have a partnership and run through the contract. That is not our approach. We have to determine the long-term viability of MLPs and what we can do with them. We haven’t spent a lot of time on that yet. However, I believe that by having the optionality of this pipeline investment, we might evaluate that in the future. Again, the first two key aspects were to refinance the debt and resume distributions. Beyond that, we can explore the strategic aspects of moving forward.

And then just the last one for me. Can you just remind us how long those contracts run through?

Eight years from just about where we are now. We detailed those adjustments when we executed the sale of the Ord plant. So it's eight years effective from July, call it 2029, if I'm correct.

Our next question comes from the line of Adam Samuelson from Goldman Sachs.

Todd, a lot of ground has already been covered here, but I wanted to circle back first on high pro. You mentioned ongoing conversations with a variety of customer types for 2022. Can you help us think about with Shenandoah operating consistently? At this point for 2022, should we think about the offtake of those facilities being purely at the 50% level, or do you foresee meaningful amounts being contractually committed at higher protein content? Help us think about the range of outcomes in terms of price realization and your ability to move up that J curve?

I think exactly what you are implying: a range of outcomes. We are in discussions right now for the protein levels of the plants and are negotiating higher protein concentrations to determine the products' value. As you know, we've achieved 58 protein and even as high as 60-plus. Our focus is actively working with customers— especially in patent aqua, to confirm what they are ready to procure. I do believe we will have sales from 50 pro through 58 pro at various utilization rates across diverse species, particularly in aquaculture. We anticipate making significant progress in 2022, and by 2023, we expect even more. Our efforts are centered around both mechanically and biologically exploring protein concentrations. Furthermore, we are working on nutritional solutions to align with some of our product providers around taste and profiles. Expect a diverse product line in 2022, transitioning towards higher-value characteristics in 2023 and 2024, as we progress up the J-curve. The process is ongoing as we aim to achieve milestones over these years, progressively moving towards their superior valuations.

There was an allusion in the prepared remarks that CapEx might be above the high end of your prior guidance. Can you clarify if that is project timing-related? Additionally, is capital cost inflation and inflation in metals and materials affecting the high pro investments' costs?

Inflation is minimal at this stage, which is why we proactively ordered all our long-lead equipment early; we noticed a bubble in terms of steel prices and related materials. The increase in guidance is due to two factors. One, we went ahead and purchased all crucial long-lead equipment earlier than planned; and two, based on construction schedules, if they progress more rapidly than initially expected, that could cause the costs to elevate.

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

I didn’t hear it; maybe I’ve missed it. What was the incremental profit from Shenandoah relative to the rest of the portfolio there, because of the?

We do not break those numbers out yet, Ken. I believe as we bring on more of our protein portfolio in the future, we will share that information. However, we’re achieving satisfactory results and performing very well in that business today.

And if I think about that, you're attaining the return characteristics and looking at industry margins; they weren't so great. Would you agree that this business has delivered on expectations on the high pro? Is that a fair assumption?

Throughout our overall production, it is still a small contributor due to it being an 80 million-gallon plant versus a total production of 1 billion gallons. That 80 million-gallon plant is delivering the returns we anticipated. This is a small segment contributing to the overall margin. We stated in earlier communications that from our optimization initiatives, we saw about $0.05 to $0.10 a gallon this quarter; an additional couple of cents per gallon from mark-to-market gains, and the rest was primarily from yield generated by traditional generation one platforms. It remains a small contributor due to the one plant's capacity representing about 8% of our production. Margins improved in Q2 and ended up better than we initially expected.

When you're thinking about bringing on Wood River, Obion, and Central City, what type of customer composition are you targeting? What are you observing right now at Shenandoah? Are you looking primarily at the pet food industry, which is a bit stickier? Have you developed markets in the protein processing business? How are you approaching this? What is the interest level, and how are you tailoring your portfolio around these new facilities?

We expect Shenandoah will predominantly serve the pet sector through next year and beyond. A significant portion of Wood River will probably also go into pet. We’ve also delivered products to the dairy sector, and we're seeing an increase in aqua feeds, as we believe 2022 will be a big year on that front. Predictably, we’ll approach 2022 targeting various species, emphasizing pet, aqua, dairy, and even poultry for all-veggie diets while replacing existing ingredients. As we transition into 2022, our strategy will involve shipping into three to four distinct markets at varying protein levels and concentrations before even discussing potential characteristics of the products we can present to our customers.

And the costs associated with the incremental sales force and all of that, how does that alter the margin returns? Does that significantly change anything? I’ll leave it there.

No, I don't believe so. Each penny added over the entire platform accounts for about $10 million if the protein adds a penny collectively. It may impact the first penny out of the $0.15 as we aim for much higher margin contributions. The conversation about building our sales force, nutritionists, and scientists is important; we've already incorporated a lot of this into our current workforce. However, there is still a substantial number of roles to fill. Labor has never been a primary cost driver in this business model, although we'll likely see an increase in SG&A over the next couple of years at the corporate level. Significant increases should not be expected.

Our next question comes from the line of Luke Washer from Bank of America.

I wanted to ask about your corn yields again, clearly, a great quarter regarding corn yields. I think it was 0.84 pounds per bushel, which I think is a quarterly record. How much of that is driven by Shenandoah versus are you potentially doing other debottlenecking of your other plants? Can we expect this kind of yield going forward and moving up higher as you roll out that MSC technology?

Yes, it’s not just from Shenandoah, although we are seeing significant contributions from it and the expected outcomes from MSC based on the guidance we gave. We're increasing our yields before even adding on MSC protein. The previous yields were overlooked since they only contributed a few cents. However, with $0.64 oil or $0.65 oil, the contribution from sustainable corn oil is potential margin within the teens per equivalent gallon. So, we are directing focus to higher value contributions. Debottlenecking is occurring across most of our generation one facilities to enhance corn oil yields and capitalize on these prices. Review our margin contributions this year, which reflected over $0.10 a gallon, primarily due to corn oil, which traditionally was around $0.03 to $0.04. Therefore, this initiative bears substantial potential as our goal is to push toward 0.9 to 1.0 pounds per bushel yield. By integrating a Fluid Quip system, we believe we could reach 1.2 to 1.4 pounds per bushel over time, with the math on that proving impactful.

Just one more on what you were discussing regarding renewable diesel and your potential to capitalize on the economics there. Are you considering potential joint ventures or an equity stake? Can you provide a bit more detail on your approach and if this relates to the due diligence mentioned earlier?

Yes, I think the market has recognized the reality that more RD plants are emerging than the available oil capacity can support. The immediate next concern is CI and carbon intensity costs must be factored in to derive sound economics. Thus, you need to include the benefits of lower CI fats and distillers corn oil while ensuring profitability. The misconception within the RD market has been the perceived availability of oil for all these projects. If you observe all the projects being developed, whether under construction or recently initiated, it elucidates why the soybean crushing sector is thriving and why we're succeeding in our oil business as well. Our strategy—discussing various structures with plants—acknowledges that while we have available oil, we're not merely going to supply it without capturing some margin. Discussions that we initiated six months ago have considerably shifted; we are now in a position to secure favorable returns as the renewable diesel sector recognizes our low carbon intensity, thus allowing us to earn significant returns going forward.

Our next question comes from the line of David Driscoll from DD Research.

First off, I’d just like to say congratulations on the refinancing of the Partnership. I remember well where the company was in July of last year, so really great job, guys. It's a big deal. Todd, I wanted to ask about the regulatory environment and your insights on it. There's been a lot of events that have happened in the last quarter: E15, vapor pressure waivers, RFS volumes, what are your big picture thoughts and concerns? Where are we headed?

While there haven’t been many wins, I see the first cuts of protein valued at $0.15, the first cut of oil at $0.12, and the first cut of sugar at $0.60. Thus, taking all this into account, we think we are well positioned regardless of regulatory shifts. We believe there will be an increase in ethanol blending, even amidst these challenges due to outsized profitability linked with higher blending initiatives. Symptoms of regional markets adapting this principle are apparent. We long for the return of the export market since that will also assist with ethanol margin projections. Overall, we consider these regulatory challenges to represent transitory issues for our future ambitions at Green Plains. When we complete all our projects and introduce the opportunities surrounding protein, oil, sugar, and carbon— I did not include carbon— which currently reflects an additional $0.15 from the California LCFS. Even without that, we are still looking at 45Q and the emerging voluntary markets. Thus, we perceive transitory setbacks as less concerning in the grand schema of our pursuits for Green Plains.

At this time, I'm showing no further questions. I would like to turn the call back over to Todd Becker for closing remarks.

Yes. Thanks, everybody, for coming on. As you can see, we have some very exciting accomplishments last quarter and what’s ahead of us. We are definitely very excited about all of our verticals: protein, oil, sugar, and carbon have massive opportunities ahead of us. We're progressing with these opportunities and believe they will be highly rewarding for our shareholders. We consider ourselves the most exciting ag tech and innovation platform in agriculture today. No other opportunities are equivalent to this at a company of our size with the market cap we hold and potential ahead of us. Thank you for all of your continued support. We look forward to next quarter and will update you on everything we are advancing across our verticals. We’ll talk to you soon. Thank you.

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