Green Plains Inc. Q3 FY2021 Earnings Call

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

Thank you, and good morning, everyone. Welcome to Green Plains Inc. and Green Plains Partners Third Quarter 2021 Earnings Call. Participants on today's call are Todd Becker, President and Chief Executive Officer; Patrich Simkins, Chief Financial Officer; and Leslie van der Meulen, EVP of Product Marketing and Innovation. There is 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 because of factors discussed in today's press releases and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I'd like to turn the call over to Todd Becker.

Thanks, Phil, and good morning, everyone, and thanks for joining our call today. Our overall transformation remains on track as does our theme of focusing on execution. During the third quarter, we have made significant progress towards our 2024 goal, and the fourth quarter is proving to be even more exciting. First, let's talk about the Q3 results. As indicated on our last call, we expected the third quarter to be challenging as margins started out very weak. We had near record corn basis levels throughout the platform. As we discussed, there were timing reversals of Q2 mark-to-market as well. Additionally, given the anticipated weak margin environment during Q3, we made the decision to accelerate our remaining scheduled maintenance shutdowns into September, which impacted our margins by $0.03 to $0.05 a gallon based on reduced production volumes and increased repair and maintenance expenses in the quarter. While spot crush margins began to expand in September, we only saw a small benefit of that expansion as we had begun our fall shutdowns. However, as a result of shifting the timing of fall maintenance, we only had one maintenance turnaround at our smallest plant, Atkinson, in Q4. While operational timing did have some impact on the third quarter results, I'm happy about year-to-date consolidated production margin averaging over $0.16 per gallon, which we believe to be generally above market because of our strong first half results. The fourth quarter has returned to a positive margin environment and based on the current market, we expect to return to profitability, even as we hedge some of this early to protect our balance sheet. We are benefiting from the expansion in margins, along with our higher run rates. I am pleased that we have secured our natural gas supply below the current market in physical, transport, and financial terms through the first quarter of 2022 and partially beyond that. We believe we are well positioned to be able to operate through any natural gas environment this winter. Operating expenses are experiencing some inflationary pressures that are impacting the industry broadly, particularly in the area of urea, denaturant, and sulfuric acid. Although with our Project 24 modernization program wrapping up, we will continue to see the benefits of reduced electricity, natural gas, and water usage at our Project 24 plants, and we expect to see additional benefits as we increase production levels at these plants rolling into 2022. The quarter was very exciting from a strategic standpoint, as we announced a new turnkey initiative to expand our protein footprint without increasing our exposure to ethanol, raise additional capital, providing greater assurance that our transformation can be carried out on schedule, broke ground on additional protein build-outs, and finished the construction of the Wood River Fluid Quip MSC system. More exciting than the operational success are the commercial successes our team has been able to achieve and also the progress we have made in renewable corn oil, clean sugar technology, carbon capture and sequestration initiatives, all of which I will address a little later on the call. Finally, our Board of Directors has continued its own refreshment initiative, significantly expanding shareholder rights while continuing to focus on good governance and adding diversity. Our Board recently appointed Jim Anderson into the newly created role of lead independent Director. Martin Salinas and Farha Aslam has also joined the Board, adding significant capital allocation, agribusiness, and financial expertise. Additionally, the Board amended its bylaws, updated its charters to the audit, nominating and governance and compensation committees. And adopted a new board qualifications, governance guidelines, and diversity policy. This has been in the works for some time as a result of shareholder input at our last annual meeting. Having sound Board oversight is critical to our ability to execute on our transformation plan and for the future benefit of all shareholders. As previously indicated, Green Plains Partners was able to increase their distribution this quarter to $0.435 per unit. This was something we were excited to be able to do for our unitholders. Now I'll turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners financial performance. I will come back on the call to talk more specifically about our thoughts around 2022, our ongoing initiatives and how each vertical fits into our transformation plan, all of which I think you will find very exciting.

Thank you, Todd, and good morning, everyone. We reported a net loss for the quarter of $59.6 million or $1.18 per diluted share, compared with a $34.5 million loss reported for the same period in 2020. Our results for the period are inclusive of a $7 million one-time charge to depreciation related to the completion of our Project 24 projects and other initiatives, along with the $2 million one-time charge related to a true-up from the sale of our cattle business last year. Our plant utilization of 75% was favorable compared to a 66.8% run rate in the prior year and included the impact of the early plant maintenance shutdowns mentioned earlier and our Madison plant being offline during the quarter for Project 24 upgrades. Adjusted EBITDA for the period was negative $14.8 million compared to a positive $6.8 million we recorded in the prior year, largely related to historically higher corn basis across our platform and higher maintenance costs associated with the change in our maintenance schedule, partially offset by higher contributions from our corn oil business due to strong demand from renewable diesel. For the quarter, our SG&A costs for all segments were $26 million compared to $19.9 million reported in Q3 of 2020. The difference was driven in part by the addition of Fluid Quip's SG&A expenses during 2021 as well as wage pressure and higher legal expenses. Interest expense of $9.5 million was down slightly compared to $10.2 million in the prior year as a result of overall interest rates. On Slide 9 in the earnings deck, we provide a summary of our balance sheet highlights. We ended the period with $764.4 million of cash and working capital, net of working capital financing, compared to $226 million for the prior year quarter as a result of an active capital campaign during 2021, supporting our growth objectives. Our liquidity position at the end of the quarter included $720.9 million in cash, cash equivalents, and restricted cash, along with approximately $312.6 million available primarily under our working capital revolvers and delayed draw term loans. During the quarter, we also secured $164.9 million of additional funding through a successful equity offering to support delivery of our overall transformation plan and related opportunities. For the quarter, we allocated $63.8 million of capital to profit-sustaining and growth projects, including $41.6 million to MSC protein initiatives and approximately $13.1 million towards maintenance, safety, and regulatory capital. Total CapEx is anticipated in the year around $210 million based on current construction schedules, slightly lower than our original guidance. Maintenance capital for the year is expected to be about $35 million as we have increased our focus on high-return projects, supporting our Project 24 initiative with a focus on eliminating unplanned downtime and improving predictive maintenance. I am pleased to report the partnership realized adjusted EBITDA of $13.5 million for the quarter, comparing favorably to $13.9 million reported in the prior year when considering the reduction in the minimum volume commitments associated with the sale of both our Hereford and Ord plants. Continued financial performance, coupled with successful refinancing of the partnership's debt under a $60 million 5-year term commitment, enabled the partnership to return value to its shareholders by increasing the quarterly distribution to $0.435 per unit while maintaining a 1x1 coverage ratio. For the partnership, distributable cash flow was $11.5 million for the quarter compared to $11.3 million for the same quarter of 2020. Over the last 12 months, adjusted EBITDA was $53.7 million, distributable cash flow was $45.8 million, and declared distributions were $18.8 million, resulting in a 2.43x coverage ratio, excluding any adjustment for the required principal payments amortized in the past year. Now I'd like to turn the call back over to Todd.

Thanks, Patrich. As I emphasized last quarter, we are in an execution phase now, and commercially, we have been focused on lining up multiple wins in high-value ingredients. Let me walk through each ingredient with you, and I think you will see we are making incredible progress and expect 2022 to be a major transition year for the strategy on multiple fronts. Please forgive me for the amount of information, but this is a really important call for us to outline our progress. Let me start with Ultra-High Protein ingredients. Based on current construction schedules, we expect over half of our production to be converted sometime in the middle of next year, with Shenandoah fully running and Wood River now making product and coming up to full MSC production capacity. Central City and Mount Vernon are under construction, and we are mobilizing equipment and a team to Obion and expect to break ground there in the next week or two. Later in 2022, we expect our first turnkey system with Tharaldson Ethanol to come online as well. All of this is possible as we have partnered with Fegan as our EPC contractor, and they are world-class when it comes to these type of projects. All in, company-owned production from protein, including Tharaldson, will be running over 600 million equivalent production gallons with more underway. With that said, construction and engineering remains on pace to complete our platform by 2024, depending on when some of those outstanding permits are obtained in states like Illinois and Minnesota, which could take longer. Now let's spend some time on our commercial successes and progress around this product. I believe Fluid Quip is the leading technology for protein production in the world from dry milling corn. It is the most consistent, most produced, most proven and most accepted today from a quality and consistency standpoint, which matters. We believe it is becoming the standard, and this matters to us, as our quality, digestibility, flowability, and consistency make it a very different product than other protein alternatives out there from corn, soy and the rest. This is a very clean protein product that looks the same anywhere we produce it. We are working in every vertical from pet to aquaculture to swine to dairy and poultry. As we indicated, our early focus was in Pet and Aqua, and we have seen great interest for certain higher value applications in swine as well. I'm happy to announce that we are basically sold out of Shenandoah once again for 2022 into the pet food space, and more importantly, signed a multiyear MOU with increasing volumes through 2023 as our customers want to make sure they have the supply secured. So increasing volumes speaks volumes to the acceptance of our product, and we have several other leading pet food brands that we are in final negotiations for 2022 and 2023 volumes from Wood River as well. Some of this has been an 18-month journey, and it's all around our specific product we produce. You don't just get to call up these customers and say, I have something to sell you. It's very collaborative to a very specific Ultra-High Protein produced using specifically Fluid Quip technology and processing. We expect success over the next several weeks on these agreements. It's been a bit of a chicken and egg, but they wanted to make sure the new plants are coming online, and we now have redundancy. So everything gets much more serious very quickly. The easiest thing for me to do on this call is just run through our highlights of our protein operations, technology development, and commercial activity. We are developing mechanical higher protein separations and believe we have a path of Fluid Quip technology, and this is believed to be possible before we even add biological solutions. We continue to lead innovation and product development to every animal vertical across the globe. We have assembled a dynamic commercial team with deep industry knowledge as well as world-class nutritionists. We are seeing strong and growing interest in our products, which helps solve a variety of nutritional characteristics and challenges, leading to a diverse portfolio of protein ingredients created from the MSC platform. As part of expanding our diverse portfolio of ingredients, we successfully ran a steady state 27 fermentation run at the end of the quarter, achieving higher protein concentrations at scale, basically full production rates. Our goal of continuing at 60% protein and above is in sight, and our next try will be to achieve this goal early in 2022, alongside our partners from Novozymes. We believe we must focus on minimum 60% protein concentrations, which will be the best outcome for our customers and our shareholders and achieve our intended nutritional and protein targets providing a new ingredient we can utilize in customer development. In addition to expanding our domestic reach, we are engaged in numerous ongoing discussions with customers in international markets as well. In Wood River, we have been running the MSC system for quite a while, while finishing the dryer upgrade. We saved significant cost by retrofitting the dryer as it is the type required anyway. During that time, we have consistently achieved corn oil yield of 1.2 pounds per bushel or higher. We believe these are some of the highest yields achieved in the industry as Fluid Quip's technology is incredibly expanding corn oil yields, and we believe this is just the beginning, and I'll discuss the impact of this in a bit when I talk about renewable corn oil. Additionally, we have seen growing interest in our post MSC distillers product, which is a high fiber, high energy ingredient, important to a number of key verticals in its own right. We are negotiating an international distribution agreement in high-value markets in all species and have pending export sales to Asia based on baseload volumes in agriculture for a certain proprietary outcome that we have found. Lastly, we have made significant progress in aquaculture product development and believe we still have the opportunity to create better tasting, more nutritious aquaculture products and develop new outcomes as we focus on achieving higher than 60% protein concentration. It goes much further than that as we help design rations for higher digestibility, better palatability, and better growth achievements all by using our products. Long term, we believe we will continue to separate ourselves from the commodity markets and deliver high-value specialty designed nutritional solutions to our customers who view the ingredients produced from specifically the Fluid Quip technology to be the standard. This is not just about making protein anymore. Let's move to renewable corn oil next. Our low CI renewable corn oil platform continues to accelerate along with the benefit of rising vegetable oil prices, and we believe the industry dynamics will continue to support this with planned renewable diesel capacity coming online throughout the next year and beyond. We have proven our platform corn oil yields will increase as our MSC builds come online, leading to greater overall capacity. In addition, our Generation 1 corn yields are pushing to an average of 1 pound per bushel. Our overall corn oil capacity should end the year at approximately 330 million gallons, which we believe will increase from there. With vegetable oil prices, $0.30 to $0.40 a pound or more above historical averages and rising, we could see total corn oil contribution exceed $160 million at $0.65 per pound as a baseload next year as well as over $100 million more than historical contributions. We are in multiple discussions on potential strategic corn oil offtake agreements that are ongoing, but we are patient to make sure we strike the right agreement for our shareholders. This is a long game. We don't want to get ahead of ourselves and make a decision too early as we are already getting premiums over soy for our oil as the CI value is starting to be realized in just the normal pricing of our product. We believe we can offer our partners increased surety of low-carbon intensity supply to participants in the global renewable diesel space, and that is a structure that's beneficial for all parties, which we believe is within reach for our company. On the clean sugar front, which I believe could be our moonshot opportunities for Green Plains and Green Plains shareholders, our team has continued to make significant progress on improving the operations at the pilot plant at our Innovation Center at York. The initial batch pilot system for CST is fully commissioned and now capable of producing tote scale 95 dextrose equivalent samples, and we have produced our first fully refined samples as well. All of the potential customers that receive samples produced at the pilot provided positive comments on performance of sugars tested. The pilot system continues to produce the engineering and technical data information needed for full-scale up design. Our initial review of CST sugar is equal to all public specifications. What I think is most exciting is we performed additional carbon intensity analysis for the unrefined CST product, and it netted up to 48% lower carbon intensity compared to wet milled sugar. Lastly, we have a meeting with potential over-the-fence biocampus opportunities with biochemical producers as well as synthetic biology applications. There is a strong commercial interest in co-locating at one of our facilities when we begin to implement a full-scale system in coming years. So we have covered protein, oil, and sugar, and let me say a few words about carbon. We continue our diligence to further invest in the carbon projects around direct injection, commercial use and, of course, the pipeline. Obviously, a direct inject site would be our first choice for capital allocation, and we have three possibilities, but there's a lot of work to do there. We will update you as we get more results from these studies over the next coming months. We are also, first and foremost, a shipper on the Summit Carbon pipeline for our western plants. Secondly, we are a founding investor, and we have seen a potential 4x multiple uplift of that at risk capital based on current valuations. Lastly, we're a founding shipper when we receive an additional uplift over and above our share of carbon credit based on the 45Q tax credit, which could be up to $6 million to $10 million a year as well. The expansion of this credit would be more beneficial to our strategy and investment thesis. More importantly, we need to ensure that this allocation of capital is the best use of our funds as we are a shipper in any situation, and we should expect this to compete with other opportunities we are working on. We are finalizing our comprehensive due diligence process over the next couple of weeks, and I hope you appreciate the depth of our commitment to making the best decision for our shareholders in order to best reduce our carbon intensity of our products. We are encouraged by the proposed carbon credit capture proposals, including potential expansion and extension of the 45Q tax credit and the creation of new tax incentives for sustainable aviation fuels, both of which have the potential to be an incredible opportunity for our Green Plains 2.0 platform as we see significant potential in low-carbon ethanol and sustainable low-carbon corn oil. We are in exciting times around the potential for low-carbon ethanol, which now includes alcohol-to-jet opportunities for sustainable aviation fuel, which could be the beginning of rebasing the value of our production assets and moving the industry towards a strategic feedstock in what I would call an Ethanol 2.0 environment. We are in exploratory discussions with potential partners ranging from technology, distribution, usage, and offtake in sustainable aviation fuel. To close, I wanted to take an opportunity to walk you through some near-term expectations rather than to continue to only focus on 2024 and beyond. So let's talk about 2022, and I am very optimistic. As discussed, we have several MSC protein projects that are under construction, and we anticipate them coming online by mid-2022. With over 50% of our platform capacity running next year for 2022, we believe the baseline protein platform will have the capacity to contribute somewhere between $40 and $60 million in EBITDA or $0.12 to $0.20 a gallon initially. But remember, we have several for the partial year or even just a few months in 2022. In specialty alcohols, we still see a premium for our product with our annual capacity for USP as well as industrial B grade at about 65 million gallons. This could contribute an additional incremental $15 million to $25 million over traditional fuel ethanol margins. On top of that, the contribution for renewable corn oil, and we can make a case of a baseload from these initiatives to deliver between $150 and $200 million in EBITDA in 2022 if the market remains at $0.65 or higher per pound, which it absolutely could before considering our base ethanol business without corn oil as we break total corn oil out separate plus other segments less corporate overhead. Our refocus remains on reducing the carbon intensity of all of our sustainable ingredients that matter, capitalizing on the world-class ag tech for our portfolio, we now own with our partners. Most exciting is that we expect to roll out our inaugural sustainability report next month. With all of that said, thank you for joining our call today, and we look forward to the question-and-answer session.

Your first question comes from Adam Samuelson with Goldman Sachs.

Todd, a lot of ground was covered there in the prepared remarks. I'd love to dig a little bit more into the carbon opportunity. You talked about it on the script a little bit, but it wasn't much in the press release. And I guess, can you help us think about the key gating factors towards an investment decision around carbon sequestration, specifically on the pipeline, maybe help frame kind of what the potential equity investment could look like? We're waiting for clarity on the infrastructure bill in Congress on the 45Q tax credits? Just help us think about where the key kind of decision items would be there.

Yes. Thanks, Adam. And look, carbon is a very important part of our strategy and producing low-carbon ingredients is one of the most important parts of our strategy. So that's first and foremost. The first thing that we did was we got involved in the initial investor group to fund average capital to get the project started, and we've already seen, based on the first round of potential valuations an uplift from there. The second, obviously, is because we are an inaugural shipper, we get a little bit different of an economic share from the tax credit as well, which is also beneficial for our shareholders. That's all without any further investment. So at this point now, what we have is the ability to invest in the full project. We have to make sure that from the standpoint of best returns, it must be beyond an infrastructure return, but we're also motivated to ensure this project gets built as well. Thus, it's a little bit of a return from a standpoint of what will it return relative to the investment we put in place, but we also want to make sure that we help the project get off the ground and get built, and the carbon capture and storage teams are making incredible progress around securing storage, getting things starting to think about right ways, getting things done with the local landowners, and we're watching it very closely, but we also just want to make sure from a diligence standpoint that it's the best use of our capital. But in terms of us wanting to get this project built, we do, and that will be part of our motivation because we believe low-carbon intense fuels will have an advantage. We're looking very seriously at it, and we'll know and we're kind of going to make our decision in the next couple of weeks. But keep in mind as well, we also have three sites in the east that can either have direct inject or other opportunities that we're starting to see develop around the use of carbon for other products. We're looking at that closely as well. We have to be careful as some of our sites may be on seismic zones. So we're going to watch that closely to see if there are other uses for the carbon or whether we ship it somewhere else. But we are very highly focused on number one, the returns we've already achieved by being an early investor. Number two is the fact that we are a shipper on the pipeline as it gets built. Then number three, what is the investment we want to make? I think in the next couple of weeks, we're going to finalize that decision and just make sure that is the best use of capital for our shareholders.

I appreciate the insights. I would like to follow up on high protein. You mentioned consistently reaching 58% in commercial quantities and signing some new MOUs. Can you explain how you have priced those MOUs and sales, and how they relate to your concept of the J-curve of value creation at higher protein levels?

Yes. Thanks. Initially with our pet food customer, this is a designed product for their application today. So we're going to ship them the same product that we had shipped them last year as well because we're already in their ration, and we're working with them. Now as we know, we can start to achieve higher proteins at scale, what – when we start to think about 2023, '24, and '25, what's the use for this product? And how will they formulate around it? We are still getting a premium to soybean meal. We are very happy with the results from that. They are consistent with our initial thoughts on what this product is worth. I think where we want to focus, though, is instead of spending a lot of time between kind of 50% and 60%, in that 56% to 58% range, which we believe we can now have the opportunity as we turn these on to potentially produce at scale. When we set our sights on 60% and above, that's really what makes the difference in terms of the opportunity and getting included in higher-value products around the world. We are just taking the view at this point. We want to start to focus on 60% to 62% protein as a baseline product using biological solutions, and we'll know early next year. If that's the case, then there's really isn't much reason to spend in between 50% and 58% and we might as well just go straight up to the highest point we can. Now where the values will be for that and how long it will take to develop some of those markets, obviously, that will take some time. But once we know we can make that pet food product, we think that, that's going to be great potential for longer-term and higher returns on these projects. The first step, even before that is we actually believe the Fluid Quip team can achieve higher mechanical separations, and we're working high on that because OpEx versus CapEx is something we would much rather focus on. Our focus is towards the top end of that curve. If there are good markets between 56% and 58%, and we're starting to find those as well, we'll go there, but our goal is to really moonshot our way up to 60-plus as quickly as we can.

Your next question comes from Jordan Levy with Truist Securities.

Let me begin by asking about turnkey solutions. Todd, could you provide some insight into how you see the pipeline developing, given that it's still in the early stages? Also, what are your thoughts on the market development you mentioned, especially in relation to any new turnkey agreements?

Our team is engaging with potential partners who may be interested in these projects. It's crucial for us to select the right partner while also being selected by them. We are committed to focusing on the upper tier of our plans, emphasizing the best quality and the best locations that fit seamlessly into our portfolio. Not all protein is equal, and our products demonstrate this through their innovative features, quality, and adaptability. Daily, people are recognizing our capabilities, including the performance of our MSC systems and others currently in operation. We all produce the same essential product, which is vital for maintaining alignment with consumer preferences. Turnkey solutions are definitely a priority for us, and I believe we will achieve success through collaborative efforts. We have numerous opportunities at hand and are actively pursuing them. The Tharaldson facility will serve as an excellent example for the industry to grasp the potential of this product; it's one of the largest plants in the field, and we are excited to incorporate advanced technology there. Additionally, our market development initiatives for this product present significant prospects. We see interest both domestically and internationally, spanning various species. Currently, demand is driven primarily by pet food and aquaculture, with growing interest in dairy, swine, and beef cattle sectors as well. Our nutritionists are also working closely on these applications. In light of the growing global demand for protein, which has returned to high levels, we observe tight supply conditions for proteins worldwide, presenting a valuable opportunity that could last for several years. We anticipate limited increases in soy crushing capacity until late 2024 or 2025, which provides us ample runway to increase our market share with our offerings. Our market development efforts have made significant progress this quarter, including signing a multi-year MOU for product offtakes. Other negotiations are underway to secure this product because it’s critical they maintain a reliable supply. Once we reach full capacity at Shenandoah or when Wood River sells out, the supply will be constrained. This product is a premium replacement that delivers outstanding results, and securing agreements ensures that we have guaranteed supply. Ultimately, we expect to reach full capacity for this platform.

That's great detail. And maybe just as a follow-up to that, maybe if we take a step back and look higher level, bigger picture longer-term at the potential of the platform, what you've got, MSC online, and you start to look into CST and that sort of thing. I'm curious if you could just talk to how you see longer-term potential to drive synergies in the market development work you're doing once you evolve into the kind of the next phase of this transformation plan in terms of high-value ingredients?

When we look at kind of protein, oil, and sugar, those are the three main high-value opportunities, but protein is a baseline ingredient for many other opportunities around value-added agreements in yeast and fiber. Customers are calling us now for our fiber products that are stemming from the protein product. They're calling for yeast applications stemming from the protein product. We're just scratching the surface on that opportunity because the easiest thing for everybody to understand is protein concentration. It's much harder when you talk about wealth. However, there's also value in yeast and fiber, and there are other uses of this product, and we're developing different technologies around this product. That's a little bit harder to explain, but that's really where the real money is going to be made in diversifying our ingredient opportunity because it's not just, again, protein is a good metric. It's really a fully value-added ingredient strategy. When you layer on top of that the opportunity that we can produce a 95 DE or dextrose equivalent products that compete both financially and product-wise at better economics with what's being made today in markets that need more products, we're seeing great interest in potential partners that want to engage in over-the-fence opportunities, much like you see at other companies that produce dextrose because there is simply not enough availability left in the market today. We are accelerating that opportunity. We are even getting inquiries from people that want to buy the clean sugar technology, and we're not ready to sell it yet either. We're going to use it here first at Green Plains. If the market develops long term, which we think it can, that could be another opportunity for everybody. But if you just take a look at one really interesting market, the global glycol market and say, if you can convert that to a bio glycol coming off of dextrose as a feedstock and moving to bio glycol, that market is big enough that if you converted every single ethanol plant in the United States to dextrose, you still would only cover 20% to 30% of the market for a bio glycol type of product. The markets are so big in sugar opportunities, in chemical opportunities that you may never even have to worry about food applications going forward. On top of that, we're working with potential partners that have synthetic biology applications that have used our products and have said that they've gotten better results from our unrefined clean sugar product versus a fully refined food-grade product because of what's left in there that's providing them opportunities. If you take a look at the world around synthetic biology, it all starts with sugar. We're all very excited about that as well. Additionally, how do we not look at our vegetable oil opportunity? When we start 2022 with all of our plants running close to 1.0 yields and our MSC plants pushing towards 1.2 to 1.4 pounds per bushel of oil, and you think about the fact that we're already getting a premium to soy eating into some of the low carbon advantage that this oil has. Plus, when you acknowledge that you won't bring on a lot more oil and veg oil capacity until '24 and '25. We're sitting in a great place as you look at the reduction in canola oils for next year due to the Canadian drought. There is a chance that we may see numbers in the vegetable oil market start with a 7 or an 8 next year, which presents a wonderful opportunity for Green Plains shareholders as a starting point. Our view is we need to be patient and not sign too early because we have just started. We need at least 20 soybean crushing plants to be built in the United States just to handle some renewable diesel demand. Now on top of that, we're still a significantly lower carbon intense oil, which adds to opportunities. We view our strategic location in this opportunity to be very valuable for our shareholders. We'll do everything we can to make the best decision to monetize that opportunity for them.

Your next question comes from Ben Bienvenu.

I want to follow-up on Adam's question about carbon sequestration, but as it relates to the long-term opportunity around SAF. I'm curious, just when you think about the equation of making ethanol low CI ethanol a competitive feedstock for the SAF opportunity, which as you noted is really, really big. How important is that in the equation, getting that CI score down to make it competitive with veg oils, kind of irrespective of the fact that there's going to be a lot more availability of ethanol as a feedstock versus vegetable oils, which are likely to get sucked up by the renewable diesel production demand?

Yes. When you take a look at the need for sustainable aviation fuel and the demand for it, you can only go so far with renewable diesel to SAF. The rest, we believe, is most likely an alcohol-to-jet opportunity. Remember, for a gallon or so of ethanol, you're really only going to get 0.6 gallons of sustainable aviation fuel, which is why the tax credit needs to be so high in terms of when you're looking at $1.50, $2, $3 a gallon. It's because, number one, you're going to lose volumes. But number two, being on pipelines is going to be important — or a question in your carbon direct inject and other areas that you can sequester carbon is a key component to sustainable aviation fuels because you do have to have a lower carbon intense liquid fuel to start with. This is kind of a driving motivation. One thing you've got to be careful of is you may not be able to double dip in terms of the 45Q and the aviation fuel credit. So you're going to have to pick one of those. If you have a low-carbon intense alcohol, that's a great starting point. We are absolutely looking at this opportunity. We are in discussions with potential partners, not just only for the technology side and exploring different technologies available, but also in discussions regarding distribution assets. You should be considering demand for the product, how to move the product to market as well. Thus, it's not just about announcing a technology, which there's still a lot of fluidity around which technology to choose, and there are several out there, and probably more coming, quite frankly. We've got to see how this build back better ends up here, but sustainable aviation fuel seems to be one of the growing opportunities for U.S. ethanol and for the entire industry. We have established resources to investigate this opportunity, and I think we'll have more updates each quarter as we go on.

My second question is clarifying your commentary on 2022 kind of the EBITDA build that you offered. I think it's clear you guys are on the runway to the long-term EBITDA kind of baseline potential of the organization. The timing is less important relative to the big picture. But I just want to understand if I heard what you said. Are you saying between MSC, USP and corn oil, at the midpoint, you're thinking $245 million of EBITDA plus whatever contribution you would get from agribusiness and the partnership and the baseline ethanol business, did I hear that right, or is that run rate commentary that you offered?

No, what we stated is that we are focused on 2024 entirely, but we also need to consider the 2022 opportunity based on current market conditions. Given vegetable oil pricing at $0.65 per pound, we could see contributions significantly exceeding our historical performance, potentially reaching the $150 million to $160 million range after accounting for our losses in distillers grains. If the vegetable oil price increases, every additional $0.10 per pound could add about $30 million. We will be monitoring vegetable oil pricing closely. In 2022, we anticipate running 200 million gallons equivalent of protein for the entire year, supplemented by another 360 million gallons from our own system depending on the operational timelines of facilities like Obion, Mount Vernon, and Central City. Tharaldson will come online later in the year, possibly contributing only for a couple of months. We estimate a first real protein contribution of around $40 million to $60 million, noting that this isn't just any protein product; it’s a unique MSC product produced and utilized differently. We’ll have to wait for developments in the alcohol markets, with the B-grade market holding steady and the USP market weakening, likely estimating a contribution in the range of $20 million to $30 million for 2022. Normal contributions from our Ag and energy sectors will likely align with this outlook. We might view whether these should be standalone or included in the corn processing segment, potentially adjusting our SG&A accordingly. This outlines the baseline opportunity for the company without the ethanol margin factored in, which, as we know, is currently more complex. Lastly, to touch on our corn oil yields, the industry average was 0.7, and now Green Plains is achieving around 1.0 without MSC and Fluid Quip contributions. This presents a significant opportunity given the higher oil prices, which we believe represents a multi-year strategy beneficial to our shareholders.

Your next question comes from Manav Gupta with Credit Suisse.

My first question is, clearly, you have renewable corn oil, which is highly desired. There are people out there who have been able to get deals on soybean oil. Your deal theoretically should be a lot more valuable. I'm trying to understand, sir, here is there are two kinds of deals being offered, where, one, where the renewable diesel producer comes in offers the feedstock guy a good amount of money even to develop his resources and then kind of there's a profit-sharing agreement. But there's another kind of deal being offered by some of the newer guys who are basically saying the feedstock guy has to bring in the capital, and then we will kind of do a deal, which in a way would make you a partial owner of a renewable diesel facility. I'm trying to understand are you open to both kinds of deals? Or you're more open to the first kind of deal where you don’t have to put in the capital and become an owner of a renewable diesel facility?

Yes. We're focused on the first idea that you've discussed. But beyond that, we believe if somebody wants to secure our corn oil for long-term offtakes or security of supply, that, number one, we believe there is a profit share opportunity out there. Remember, right off the bat from a CI perspective, we believe that renewable corn oil should trade at about $0.10 in premium over soybean oil. We haven't seen a trade that high, but we have seen $0.05 to $0.07 a pound premiums being paid already. If we would have made a deal early, we might not have actually had that benefit of the CI uplift just from the market. We know what we have. If you take a look at the top four players in our space, together they make the most amount of corn oil — one has committed — one already owns renewable diesel. We haven't heard much from the other, and we have ourselves. There's a lot of oil at the top of the food chain here, and it's all very valuable because of the CI, the carbon intensity reduction that corn oil brings versus soybean oil, number one. Number two, it's a waste of food oils. The headlines right now on food oils are moving a little bit negative around food prices and the articles around there while leaving waste oils out of it. We think we're in a good place. I don't think we need to own renewable diesel assets, quite frankly. I think we're in a great position from the standpoint of having that feedstock. We believe we'll be able to take advantage of that for our shareholders. We think we are in a great position and we'll see what transpires. However, I don't think you want to rush to make a conclusion just yet because I think there are some very interesting opportunities around monetizing our corn oil. If you rush too much, you might come to the wrong decision, especially with the market already trading over soybean oil several times last year or this year.

No, I agree with you. You should not be in the business of owning renewable diesel facility. I was just trying to make a clarification. The second question, which you mentioned about these bills, which are coming up. It finally appears that even though until 2026, everybody gets a blenders tax credit. But after that, the way the language is structured, it's looking like even EPA or RFS is moving towards lower carbon intensity fuels and incentivizing you to actually take into consideration carbon intensity even for something like a blender's tax credit. I'm just trying to understand, in your view, when you look at these regulations as they are coming in, are we moving in a direction where we can say we will have a national low carbon fuel standard mandate at some point where carbon intensity would definitely or would be taken into consideration in a much more meaningful way? Because right now, if you look at RFS, it doesn't take into consideration the carbon intensity at all.

I think we're trending in a direction that everything will be based around your carbon intensity. What the final program looks like is hard to say. Whether or not you can qualify for all credits available or if you have to pick and choose, we have to also watch that carefully. If you make the wrong decision too early, you might be opting out of the program that you want to be in. I think you need to be careful on which path you choose because it's not an all-for-one solution. You might have to pick and choose where you want to go to earn your opportunities in low carbon. I agree that we are moving towards a low-carbon standard of some sort. But again, it's hard, at $85 a ton, 45Q tax credit, just keep this in mind, everything works. Your project needs to stand on the tax — the 45Q first, because I think that the value of carbon is something we have to figure out what is that going to be long term because at $85 everything works. It doesn't mean that there aren't opportunities around lowering carbon intensity but also having opportunities around sustainable aviation or low-carbon ethanol or a combination of both on top of low-carbon corn oil and low-carbon ingredients. We are already seeing that beyond low carbon fuels, we are being asked if we can provide low-carbon ingredients centered around our Ultra-High protein but with added nutritional characteristics. We're being asked that already as we put carbon intensity in the bag of our feed. That's a whole other opportunity around our ingredient platform, especially being low carbon. Just be cautious, as you do not want to make the wrong decision too early because there's a lot of moving pieces.

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

I wanted to add a question at the end. It's great that you've signed a multiyear MOU for pet food sales in 2023, and I know you are aiming for more sales or contracts in 2022. However, at a high level, how do you balance the benefits of securing those contracts early with the goal of achieving a margin of 60% or higher? Specifically, what do you anticipate regarding margin outlook at those higher levels compared to locking in contracts for 2022?

Yes, that's a great question. The key here is that once you're in the market, especially with a consumer product, the objective is to maintain that position. We have successfully done this now for three to four years. Once you achieve this, these relationships can last 10 to 20 years. By obtaining multiyear memorandums of understanding, we aim to secure value and ensure our customers can purchase the volumes they need. Our goal is to lock in these volumes while also discussing opportunities for enhanced protein levels or improved nutritional outcomes in each of our agreements, leaving room for negotiation. Selling a specialized product, particularly one involving Ultra-High Protein made with Fluid Quip technology, requires careful consideration. We anticipate progress on these agreements in the coming weeks. There has been some back and forth, but our clients wanted reassurance that new plants are being built, and we now have contingency plans in place. The situation becomes much more serious quickly. We need to be cautious about committing too soon, as other opportunities could arise, like low-carbon ingredients in Europe or aquaculture supplies in Asia. At some point, there may not be enough stock of this unique product, as the MSC Fluid Quip product significantly differs from available alternatives. Securing these agreements ensures we have a reliable supply, and ultimately, we expect to reach full capacity with this platform.

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

I have two questions. First, could you remind us what the margins were for Shenandoah and how they compared to the rest of the company? Additionally, can you provide some context on that?

Yes. As we indicated earlier, the initial margins at Shenandoah were $0.12 to $0.20 a gallon, and they continue to hold. When we look at that relative to contributions, it's starting to contribute potentially $0.01 to $0.02 a gallon overall to our total platform because it's only less than 8% of our total production. We're very happy with the results. We're very happy with product quality and the corn oil yields because, obviously, at $1.1 to $1.2 pounds per bushel, corn oil yield at Shenandoah was $0.65 a pound. That assists the overall margin for the protein systems. Net, they're holding steady and we're looking to grow them.

The second question I had, look, I'm looking at your slide where you have the 2020 quarter run rate EBITDA. When you take those pieces apart, do you think you're tracking in line above or below those numbers? When I look at the renewable corn oil, I think your thought is that you're going to have capacity about almost 400 million gallons; you're at 330. Are you looking to plant that as well?

Yes. We're going to continue to reevaluate the opportunity in 2024. Obviously, some things are increasing and some things are decreasing. You have to ensure that they stand up a clean sugar system between now and then. Our renewable corn oil at $0.65 a pound and potentially higher through 2024 is an adder. We have seen some contraction in the specialty alcohol margin, which would be a decrease. If we can achieve 60 protein and higher and nutritional outcomes that are beneficial for us, using innovation and technology around this product hopefully, the sustainable high-protein gives us higher numbers than that. We're not going to give full guidance updates yet, but I think you've got enough information from this call to start to rethink the distribution of 2024. We're holding steady on our thoughts from the opportunity in 2024 as a starting point.

Alright. We don't have any other further questions. I'll hand the call back to Todd Becker.

Thanks, everybody, for coming on the call today. As we mentioned, we're making incredible progress around our transformation. It's a very big opportunity for our company and our shareholders. Notwithstanding, there's still volatility in the underlying business that we're focused on for the legacy business. Year-to-date, I'm really happy about the results. There's obviously some movement between quarters. Q4 is shaping up to be a pretty interesting finish for the end of the year for the industry as a whole. I think, on top of that, the success we're seeing around our product, product development, opportunities, innovation, technology, and customer needs, interests, and wants is really setting us well to deliver what we think will be a transition, great transformation opportunity in 2022 with the full transformation still ending in 2024. We believe we're in really good shape as we approach the next quarter in the next year and a year or two. So thanks for your support, and we'll see you next quarter. Appreciate it.

Ladies and gentlemen, that concludes today's conference. Thank you all for joining. You may now disconnect.