Green Plains Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the Green Plains Inc. and Green Plains Partners Second Quarter 2022 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, Executive Vice President, Investor Relations. Mr. Boggs, please go ahead.

Thank you, and welcome to Green Plains Inc. and Green Plains Partners second quarter 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, EVP 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.

Thank you, Phil, and good morning, everyone. We appreciate you joining our call today. Our second quarter financial and operating results have positioned the company well for success in our transformation as we gain critical mass in volume during the last months of 2022 and into 2023, where we expect to reach key inflection points that demonstrate our execution of our outlined plan and showcase the potential of our modernized platform. Years of planning and executing our modernization strategy have allowed us to operate at 97% capacity in the quarter, the highest since Q4 2013, and we believe we can improve further as we optimize our recently restarted plants when there are no scheduled turnarounds. In the second quarter, we achieved EBITDA above our previous expectations, totaling $84.4 million, which included $27.7 million from COVID relief by the USDA. Excluding this payment, our operational EBITDA exceeded $56 million due to strong margins and effective execution by our team. Our financial results also benefitted from our natural gas hedging strategy that we have been discussing since late last year. Consolidated margins remain positive heading into the third and fourth quarters, although we are monitoring risks, particularly from the historically high basis in physical corn markets. While we've noted some weaknesses in certain geographic regions where we operate, we are observing these conditions along with the status of the U.S. corn crop. Demand fluctuations could impact overall usage in the second half of the year, but margins have remained consistent through July. Currently, we are tracking mid-teens per gallon consolidated crush for Q3. For Q4, we expect stronger margins with the inclusion of new crop corn, the startup of additional MSC facilities, and robust contributions from corn oil pricing, although these factors could be affected by a smaller than anticipated corn crop or sustained high physical corn basis levels through harvest. Overall, we anticipate finishing the year in a solid position both financially and strategically based on the current market landscape. As I mentioned, contributions from low carbon renewable corn oil continue to be strong, especially as more renewable diesel plants come online in the coming year. Our production yields are also improving, with our platform achieving a new high, particularly in our MSC locations, which averaged GBP1.2 per bushel of oil yield in June. We are continually finding new improvements that enhance quality and quantity, setting the company up to benefit from these products in the long term, particularly with prospective federal clean energy tax legislation. On the commercialization front, there is strong interest in our 50% and 60% protein products from regions including Latin America and Southeast Asia, as well as domestically. I'll detail much of our progress as we delve deeper later in the call. We also formed an exciting partnership this quarter with Riverence, the largest trial producer in the Americas, leading to increased global interest in our innovative products. Our MSC facility construction is on track, with commissioning and start-up activities currently underway at our Central City, Nebraska location. Additionally, commissioning will start in late August at Mount Vernon and early October at Obion, with project construction nearing completion. Our team has excelled in executing these projects on budget and within months of our initial timelines. We are engineering the MSC project in Superior, Iowa, with ground-breaking expected in November, followed by Madison, Illinois early next year. These projects are estimated to take seven to ten months for completion. We've also made progress on permitting in Minnesota, which may allow for quicker completion of those plants. This month, we plan to break ground on our first commercial clean sugar facility in Shenandoah. Furthermore, construction has started at our MSC turnkey joint venture with Tharaldson Ethanol. In July, we converted the remaining $64 million of 2024 convertible notes to common stock, further strengthening our balance sheet. With our new revolving credit facility, which includes sustainability-linked targets finalized earlier this year, we have effectively reduced any near-term maturity risks. Combined with our significant liquidity of over $600 million in cash and a positive outlook for the remainder of the year, we are in a strong financial position to continue executing and investing in our growth initiatives. Green Plains Partners increased their distribution for the fourth consecutive quarter to $0.45 per unit, and Patrich will provide more details on results. Now I'll turn the call over to Patrich to review our financial performance.

Thank you, Todd, and good morning, everyone. Green Plains consolidated revenues for the second quarter were just over $1 billion, $288 million higher than the same period a year ago, driven by higher prices for ethanol, distillers grains, corn oil combined with significantly higher run rates. Our plant utilization rate improved year-over-year to 96% run rate during the second quarter, comparing favorably to the 79.9% run rate reported in the same period last year. The completion of our modernization program and a focus on continued production improvement reduced fixed cost absorption and will help improve margins long-term. For the quarter, we reported net income attributable to Green Plains of $46.4 million or $0.73 per diluted share, compared to $9.7 million for the same period in 2021. EBITDA for the quarter was $84.4 million, inclusive of the USDA COVID payment of $27.7 million, compared to $50.9 million for the same period last year. For the quarter, higher production run rates, improved corn oil yields and contribution from protein sales allowed the company to exceed prior year same period performance, which included optimization and mark-to-market gains. For the period, we realized a $0.28 per gallon consolidated crush, significantly higher than the first quarter, but lower than the prior year. Our ag and energy segment also came in higher versus 2021, due to improvements in our merchant activities, as well as higher realized margins in our grain handling business. For the quarter, our SG&A costs for all segments was $30.1 million, compared to $23.4 million in Q2 of 2021. The increase of approximately $6.7 million is driven by a number of factors, with the majority coming from increased personnel costs, driven by higher headcount and wage pressures along with higher professional fees in support of our transformation. We expect SG&A to remain higher for the balance of the year, coming in around $28 million per quarter as we support continuous improvement efforts in digital transformation, plant automation and commercial development, all necessary for execution of our strategy. We believe these efforts will enable the company to sustain lower operating costs and improve margins long-term. Of that amount, we expect corporate SG&A costs, which came in about $16.7 million in the quarter, to be right around $15 million to $16 million per quarter for the balance of the year. Interest expense of $7.8 million for the quarter, which includes the impact of debt amortization and capitalized interest was $11.3 million favorable to the $19.1 million reported in the prior year's second quarter, mainly as a result of a $9.5 million charge related to a private settlement of a portion of our 2024 convertible notes incurred in the prior year quarter. As noted in my last quarter comments, we projected cash interest expense to be on average about $10 million per quarter. But now we expect that number to be about $10.5 million per quarter as a result of a higher rate environment. Our income tax expense for the quarter was $2.9 million, compared to a tax benefit of $4.8 million for the same period in 2021, resulting from a cumulative valuation adjustment to our deferred tax asset, which is reassessed quarterly. At the end of the quarter, net loss carry-forwards available to the company were approximately $104 million, which may be carried forward indefinitely. Our normalized tax rate for the quarter, excluding any valuation allowance adjustments, was 90.1%. On Slide nine of the earnings deck, we provide a summary of the company's balance sheet. As shown, we ended the quarter with $629 million of cash and working capital debt net of working capital financing, compared to $698 million for the prior year quarter. Our liquidity position at the end of the quarter included $604.2 million in cash, cash equivalents, restricted cash and marketable securities along with approximately $70 million available under our working capital revolver. For the quarter, we allocated $66.3 million of capital to profit-sustaining and growth projects, including $47.7 million to our MSC protein initiative, about $7.3 million to other growth projects, including our plant modernization initiatives and approximately $11.3 million towards maintenance, safety and regulatory capital. We continue to anticipate CapEx for the year of $250 million to $300 million based on our 2022 plan and current construction schedules. Turning to the partnership. We continue to realize consistent performance, earnings and cash flow, realizing adjusted EBITDA of $12.9 million, slightly higher than the $12.7 million reported for the same period a year ago. With volumes now trending upward as a result of higher run rates of the parent, we expect volumes well above MVC levels. As a result, the partnership continues to support higher returns to unitholders, increasing the quarterly distribution to $0.45 per unit while maintaining a 1.06 times coverage ratio for the quarter. For the partnership, distributable cash flow was $11.3 million for the quarter in line with the $11.2 million for the same quarter of 2021. Over the last 12 months, the partnership produced adjusted EBITDA of $51.2 million, distributable cash flow of $45 million and declared distributions of $42 million, resulting in a 1.07 times coverage ratio, excluding any adjustment for the required principal payments amortized over the last year. Now I'd like to return the call back to Todd.

Thank you, Patrich. Let's take a look at our progress this quarter. Since we started our transformation, we have achieved remarkable advancements, yet we feel we are just at the beginning of what is possible. Our plant utilization levels and corn oil yields are reaching new heights. This is crucial, as we have consistently mentioned that the modernization of our Gen 1 platform was designed to support our technology transformation, ensuring the Gen 2 technology platform operates daily. The shift toward stable, predictable, and growing cash flows relies on our total production units running efficiently, operating safely, and protecting our team members. Despite high gasoline prices dampening usage, we have maintained strong ethanol blending, often reaching some of the highest levels ever as a percentage of gallons sold. We remain the most cost-effective clean octane molecule in the market and can sell E15 year-round for the fourth consecutive summer. With the potential growth from state and national low carbon fuel standards, we see this trend continuing to benefit our Gen 1 business. It appears Congress is on a path to pass the clean energy bill, which could positively impact various aspects of Green Plains. If passed, this legislation will extend the biodiesel tax credit for two more years, positively affecting our low carbon renewable corn oil, introduce a clean fuel production credit starting in 2025 for all renewable fuels based on greenhouse gas emission levels, offer a new tax credit for sustainable aviation fuel, including corn ethanol and alcohol-to-jet, expand the 45Q tax credit for carbon capture to $85 per ton, helping to decarbonize our company, and provide $500 million in infrastructure funding for E15 and higher blends to fuel retailers. We believe Green Plains is well-positioned at the intersection of agriculture, technology, and energy to provide market solutions and deliver value to our shareholders. Following the success of our protein trial discussed last quarter, we are now executing a global sales and outreach program and beginning to see positive results. Green Plains stands out not only because of our impressive IP portfolio but also because our operations can leverage this to achieve unique outcomes. We have developed an end-to-end system focused on product use and development across three innovation centers. Our customers recognize the benefits of using our MSC ultra-high protein products, known commercially as corn fermented protein, and have experienced the impact from animal feed formulations to final product outcomes across various species, leading to enhanced customer engagement and commitments. We are excited to partner with Riverence to develop nutritious feeds for the trout and salmon markets, both domestically and globally, as we commence work on the Idaho feed mill as part of our joint venture. Our discussions with customers in Latin America, Southeast Asia, and domestically have progressed well, and we are finalizing distribution agreements in key markets, enabling us to collaborate with established companies to efficiently reach customers. We expect several agreements to be finalized soon. In some markets, our ingredients are traded in 50-pound bags, creating opportunities for higher margins and volumes. Meanwhile, we continue to engage with some of the largest customers in the worlds of pet food, aquaculture, swine, and poultry. The global protein markets have shown significant price increases recently, positively impacting our margins going forward. We anticipate that our primary product from MSC in 2024 and beyond will increasingly focus on 60% protein production, despite our current output being around 50%, as we originally catered to pet industry customers. As we see growing demand, we are prepared to shift toward 60% protein as indicated by early market responses. One of the strategic reasons we partnered with Fluid Quip and subsequently acquired it was the potential performance upside of the technology. A notable success was our best 30-day performance at Shenandoah during the quarter, with corn oil yields near GBP1.2 and protein yields exceeding GBP4 per bushel. We are now seeing yields surpass GBP4.5 and GBP5 per bushel. In regards to our Tharaldson joint venture, it is set to become the largest MSC project worldwide, and we are taking all necessary steps to ensure a successful build and launch, with commissioning expected to begin in mid-2023. We are also exploring additional joint venture partnerships both domestically and internationally and are hopeful that some will materialize in the coming quarters. Our primary focus remains on completing our platform first. Low carbon renewable corn oil continues to play a vital role in our financial success. The second quarter marked a record high with MSC plants approaching our target of GBP1.2. The launch of Fluid Quip's technology, which increases oil yields in a single unit operation for third parties, is generating significant interest as a transformative solution to enhance plant capacity for producing low carbon renewable corn oil. Given the consistent demand for renewable diesel, we expect strong pricing for low carbon vegetable oils to persist, regardless of U.S. corn oil production levels. We have not announced any partnerships yet but are engaged in meaningful discussions, and we are witnessing the growing benefits of our low carbon renewable corn oil strategy. Our view extends beyond mere offtake agreements, and we are prepared to be patient, given that the earnings from this segment significantly contribute to our overall business. We plan to break ground on our first full-scale clean sugar technology deployment in Shenandoah this month, which we believe will revolutionize our company and the bio-economy. We are confident in our capacity to produce substantial amounts of low carbon dextrose and glucose from a dry mill plant but recognize the importance of demonstrating this potential to the market. Thanks to our work at our semi-commercial facility in New York, we are in discussions with potential co-location partners and off-takers. Our products are being validated and accepted as direct replacements for those produced by wet mills, offering lower carbon intensity and customizable grades. We recently signed a letter of intent with a co-location partner eager to collaborate with us to complete their project and implement their innovative food production process. We anticipate this will be the first of many partnerships across diverse sectors, including food, chemicals, and bioplastics, that require dextrose and glucose. Once our facility is operational, we will be able to distribute products by truck and rail to customers while we finalize over-the-fence initiatives. We see significant potential for the sugar strategy to accelerate rapidly, but our immediate goal is to complete the first facility. Our final strategic pillar revolves around carbon, or more accurately, decarbonization. Should the new bill pass with increased 45Q provisions and direct pay, many carbon projects could become viable, including our clean biogenic carbon efforts. The opportunity set will continue to expand. Regarding the Summit pipeline, they are making progress on right-of-way acquisitions, and we are on track for startup in 2024 and 2025. At $85 per ton, our Eastern plants present interesting possibilities for additional opportunities, and we are exploring these while remaining patient. We believe in the future viability of alcohol-to-jet technology, which could significantly enhance the value of the entire industry, and we are positioning ourselves to capitalize on this opportunity. In summary, we have numerous initiatives that will benefit our shareholders now and in the future, and we have never encountered a moment like this in an industry poised for remarkable developments. While we navigate the volatility of our Gen 1 assets and business, we are more excited than ever about the future of Green Plains. Thank you for joining today's call, and we will now begin the Q&A session.

Certainly. And our first question comes from the line of Jordan Levy with Truist.

Good morning, all. Can you hear me?

We can hear you. Thanks, Jordan.

Clearly, nice, clean quarter you all put up, both from the higher crush rather than just operationally. It looks like it was a really clean quarter. I wonder if we compare this to 2Q '21 where we saw kind of a similar margin environment. Can you maybe walk us through how you're thinking about GPRE today compared to a year ago, both operationally and from a financial performance perspective? And what I'm getting at here is, I know you all don't break out High Pro and the other segments just yet, but what are sort of the parameters we should be looking at to track that all the work you all are doing and have done and continue to do in the transformation or starting to flow through to the results there?

Yes. I'll discuss briefly and then let Patrich provide more specific details. Q2 last year had some one-time effects from optimization and mark-to-market adjustments. This quarter was much more straightforward, highlighting the capabilities of our system, a higher operational run rate, improved contributions from corn oil, and better contributions from protein along with all our ongoing initiatives. Therefore, it's challenging to make a direct comparison between the two periods. What you’re observing is indicative of our company’s future. Compared to the same time last year, there was still a lot of noise affecting our business. Our ability to enhance the performance of our plants has improved; many of those plants were either not operational or were running at very low rates back then. Moving forward, our focus has been on establishing a solid Generation 1 platform to ensure that Generation 2 can be constructed, function, and excel every day, which is what we're witnessing now. On the technology front, we have additional deployments underway, and both Shenandoah and Wood River are operating fully this quarter. Overall, the company is in a substantially different position compared to a year ago.

That's great. Maybe as a follow-up, if we can jump back to a release a few months back with the Riverence announcement. I know you mentioned in your prepared remarks the feed mill you're starting to do the work on. Maybe if you could just walk us through some of the timeline there and then the implications of that partnership both with Riverence and with other customers in the aqua space?

I think the key point there is they're great partners, good friends of the company. We're working together on the best outcomes for their production using our products in many different ways and working together on developing those rations. And I think what we get out of that, they have some of the leading genetics, if not, the leading genetics in salmon in the world and we get to see how our product performs. And if you've been to Shenandoah, many of you have on the call, we're actually doing trials right now on those products. So what that really did is it garnered attention globally from the industry and we've seen our related activity accelerate because of that with large players around the planet that need alternatives to what they've had in their rations before to feed whether it's a variety of aquaculture species. So I think what it did is it put us on the map to say we have unique solutions for the global aquaculture industry where they can get into plant-based corn fermented products that we've shown in the past on some of these calls and in our investor meetings. What it looks like when you feed a product like this from flesh to performance to feed conversion ratios to the ability to start to reduce their dependence on soy and the anti-soy nutritionals. And I think it was just the first step in a multi-step process, but it really put us on the map from that perspective. I think what's unique about Green Plains, and I said it in my remarks, was because we do own the technology, we can do different things with this technology that really nobody else can in the world. Whether we want to increase our yield of pounds per bushel or increase protein or additional characteristics. We can start to maneuver back and forth on all of those depending on the customer needs. We have a lot of interest in this product and aquaculture globally and especially towards the 60% protein because of that announcement.

That's great. I'll take the rest of my questions offline. Thanks, guys.

Thank you.

Thank you. And our next question comes from the line of Adam Samuelson with Goldman Sachs.

Yes, thanks. Good morning, everyone.

Good morning, Adam.

Good morning. Todd, I wanted to discuss some of the actions currently taking place in Congress. Regarding your network today and the clean fuel producers' credit in 2025, what do you anticipate the CI score of the footprint will be, considering Summit and the sequestration involved? Additionally, I want to clarify that there can't be overlapping benefits from 45Q and the fuel producers' credit, and that the legal entities would need to be separated to allow participation in both programs as required economically?

Sure. I'll briefly discuss the CI score, and Devin Mogler, our Government Relations VP, will add some comments as well. From a CI perspective, our primary goal is to reduce the CI through carbon sequestration. Whether through pipelines, direct injection, or other methods, we expect to see significant decreases in our CI. Additionally, we are exploring opportunities through a process called institute fermentation, which can lower CI scores on certain products and lead to advanced biofuels. This is currently taking place in Gen 1, which is not widely recognized, but many plants will soon produce advanced biofuels thanks to advancements in fermentation. Looking at Congress and the discussions happening, the biodiesel extension is beneficial for renewable corn oil. We have a strong belief that corn ethanol and alcohol-to-jet will gain more recognition as viable options in the industry. With the $85 tax credit, we can focus on projects that were previously uncertain but can now thrive, such as our Eastern plants. Previously, we faced challenges due to less-than-ideal geological formations, but now the tax incentive allows us to consider piping to better sites, which is advantageous. By 2025, we anticipate that many of our plants could reduce their average CI score from 65 or 70 down to somewhere between 30 and 40 before we even explore additional energy production methods. We are on the brink of transforming how we produce energy, converting ingredients into energy, and the industry is visibly decarbonizing. It may take a few years, but we anticipate the industry could average a CI score between zero and 35. Devin, would you like to discuss the clean production fuel credit?

Sure. And so as Todd mentioned, after two years, the biodiesel tax credit shifts from $1 across the board to being based on greenhouse gas reductions. And so that further advantages our DCO. So it gets the CI credit not only at the federal level for being low CI waste oil as well as a California or Canada or Washington State Oregon credit as well. So believe there's a lot of upside there of being able to double dip on that low CI of DCO.

But just to be clear, the ethanol as well would qualify that you sell just generically apart from just the renewable diesel from corn oil?

Correct. With a low enough CI as long as it has greater than a 50% GHG reduction, it can qualify for that program as well in addition to any California credits.

Yeah. Okay, perfect. That's just I guess my questions. I'll pass it on. Thanks so much.

Thanks.

Thank you. And our next question comes from the line of Kristen Owen with Oppenheimer.

Great. Good morning. Thank you for taking the question. Wanted to ask a little bit about the 2022 outlook that you provided last quarter, the 140 to 160 corn oil, 40 to 60 protein. How much of that roughly would you say we've captured to date? And I'm really just trying to think about sort of the exit velocity of that business as you get these additional facilities online in the back half of the year. And what that means for those businesses in 2023?

Yes, we are still on track to meet our forecasted numbers, depending on the successful startup of the plant. Corn oil prices have decreased from their highs but remain at a premium compared to soybean oil in the current market. With additional plants expected to begin operations in the latter half of this year and into next year, I anticipate that corn oil prices will continue to hold strong relative to soybean oil. We have a high-quality product with a favorable carbon score, and we are experiencing robust demand for it. Regarding protein, our focus is on the progress made from 2022 into 2023. By the end of this year, we will have about 560 million gallons of our 950 million gallons operational and converted for 2023, with more launches anticipated next year. Looking at our 2023 outlook, we expect increases in both corn oil and protein volumes. This is where we can identify significant growth, particularly if we can commence our North Dakota partnership in the middle of next year and get Superior operational as soon as possible. We are continuously improving our construction processes to be more efficient, potentially reducing costs with declining material prices. We are confident in our ability to adhere to our guidance through 2024 and 2025, and there are encouraging indicators that suggest we may exceed those goals.

That's really helpful, Todd. I wanted to ask one follow-up question related to the Riverence agreement. You sort of talked about what that means for this particular market. But I'm just wondering what the cadence of customer conversations has been like since you made that announcement? You touched on it briefly this particular market, but I'm just wondering what the cadence of customer conversations has been like since you made that announcement? You touched on it briefly in your prepared remarks, but just wondering if you could expand on that for us? Thank you so much.

Yes, thank you. I'll speak briefly about this and then pass it over to Leslie. The recent announcement is significant on its own. The partnership holds substantial value for both sides, and our potential in product development is promising. It has also enabled us to connect globally with stakeholders needing replacement protein products, especially as production decreases from regions like the Black Sea and South America. We're witnessing notable shifts in the protein markets, particularly concerning fish meal from Peru and its quotas. As we mentioned, we are finalizing several distribution agreements that we expect to complete in the coming weeks, which will enable us to begin execution. These agreements span regions from South America to Southeast Asia, the Mediterranean, Africa, and even Mexico. Green Plains has a broad international reach, but we’ve discovered strong partnerships worldwide that have excellent customer connections, whether in aquaculture, swine, or even pet markets. This allows us to move our products more efficiently and rapidly. Consequently, we’ve seen renewed interest from global customers eager to review trial results in aquaculture and the benefits we've achieved in pigmentation when compared to corn-derived ingredients. Overall, this has resulted in increased activity, not only in local distribution deals, but also with international players seeking alternative protein sources. Leslie, I’ll conclude there.

Yes. I think the other thing to recognize is that the Riverence agreement and announcement came on top of our 60 pro announcement from early this year. So when we made the decision that we wanted to go deep in aquaculture because we see the tremendous growth opportunity, a lot of things have been set in motion. So to put it in a positive perspective, it was really more a positive tidal wave that is coming to us from the response from not just the critical players in the feed industry, but just the embrace to continued development on the ingredients by doing the test, as Todd mentioned, showing data for growth, absorption, digestibility. So everything came together really nicely. So it's another piece of confirmation. And that partnership, yes, it really shows how participants in the value chain can really deliver better quality ingredients and better quality fish.

Great. Thank you so much.

Thank you.

Thank you. And our next question comes from the line of Manav Gupta with Credit Suisse.

Hi, guys. I want to quickly revisit this entire reconciliation bill, climate bill. Finally, it looks like the administration is doing a lot more on to fight climate change. And there are multiple provisions in there, blenders' tax credit extension, sustainable aviation fuel and 45Q credits. Now you are directly impacted by BTC or directly impacted by 45Q credits. Help us understand, when you look at that bill, which are the things that excite you the most and you think GPRE benefits the most from?

You mentioned what's exciting about that bill. It reinforces that the ingredients and products we make are in demand, and decarbonization is the way forward. We are focused on lowering our carbon scores for all our products, including low carbon corn oil, low carbon proteins, and low carbon sugars that will be used in clean chemicals. This indicates that we were ahead in our investment strategies for these products. I believe that the alcohol-to-jet process is underappreciated regarding what our company and this industry can achieve, as the alcohol and ethanol industry is the only one capable of producing significant quantities of sustainable aviation fuel. While we need to advance technologies, there are already impressive solutions in the market and more are on the horizon, creating numerous opportunities for sustainable aviation fuel production from alcohol. Additionally, investments in infrastructure for E15 and higher blends, as well as the $500 million allocation for that purpose, show positive progress. We are also pursuing master limited partnerships, even if they are still developing in the renewables sector. Overall, we're optimistic about our position and the benefits for our industry and others involved in renewable diesel and carbon capture. Devin, do you want to add anything else?

No.

A quick follow-up here is, I think on the last quarter call you were very clear that as you took this transfer or made this process, there were initial parts where there was negative cost absorption, which was one of the reasons your earnings were coming in a little weaker, both in the fourth quarter and the first quarter. You indicated that the majority of that negative cost absorption had already been addressed. So when looking at the second quarter, it appears to be in line. I’m trying to understand if that statement still holds true, that a majority of the negative cost absorption related to the transformation process is now behind GPRE.

Yes, I think that is correct. In general, we had absorbed a lot of negative cost as we're modernizing our plants so that we could set ourselves up well to execute against our transformation, because the Generation 1 plant has to run every day, has to run well and has to run towards at lower cost. And so that's the reason we've spent a lot of time and money on getting our plants with high energy use down to lower energy use. Now, I still think from the standpoint of where the industry is today and where we're at today, we've seen significant inflation in some of the chemicals that we use. So I think some of that ultimately as inflation subsides over time will come back down. That has driven the general cost of the industry higher. Labor costs obviously had gone higher, probably it won't reverse. And then some other things that have inflated during the last couple of years, potentially will drive costs lower. But it's really for us it's about running these plants as hard as we can every single day, making sure the whole platform runs well. As the wet millers say, say it's all about grind, baby, grind. But from a dry mill standpoint and what we do in conversions, we look a lot like a wet mill after our conversion that means you have to grind every single day as hard as you can, and the plants for the most part are fully set up to do that. We have some final little things that we continue to work on that seem to stay a little bit longer. But overall, our modernization program is effectively complete, but it's never done. I think we're going to continue to see where we can drive costs more out of it in the future.

Thank you for the detailed response. Congrats on a good quarter. And we all hope that we'll pass this goal, we can decarbonize faster. Thank you.

Thank you.

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

Hi, everyone.

Hey, Eric. How are you?

Hey, doing well. What about you?

Good.

Good. So I just want to talk a little bit about clean sugars. Just curious, as you think about that, obviously, you started with high pro and you're progressing there. I mean, for clean sugars, do you expect a similar timeline in terms of when you get the commercial momentum? Is that a few years out or kind of given some of the progress you're making in other areas, does that potentially speed up the timeline on the clean sugar side?

I believe what we've outlined for 2024 and 2025 is still on track, at least regarding the rollout. Clean sugar is a longer-term project. We are currently in the process of building our Shenandoah plant and engaging with large customers who require dextrose for their operations. The advantage of our offering is its lower carbon footprint. We produce the same product as traditional wet mill production, with options for 95 DE and 43 DE, as well as refined or unrefined, filtered or unfiltered products, tailored to customer specifications on demand. This provides a unique alternative compared to traditional offerings that may not meet all their needs. Currently, we are in discussions with customers whose annual needs range from £20 million to £300 million and beyond. Our goal is to demonstrate that we are the superior choice for establishing their co-location site, and we are making significant headway. In Shenandoah, we are fortunate to be in a wonderful community with a strong workforce, which is crucial for a co-location plant. We have already signed our first letter of intent, which we are thrilled about. This is a great opportunity to validate and further develop our technology. We believe that, as previously mentioned, the margin potential in sugar is substantially better than in protein. While at 60 protein it becomes more competitive, the initial margins in sugar still surpass anything achievable in protein. Although our initial quantities may be smaller, we are confident that over the next five to ten years, we possess the leading technology and are prepared to invest in building the plant. We have significant opportunities for customer engagement both domestically and globally for these products, and we are very excited about the future.

Got it. That's great color. Maybe last one for me just turning to the renewable corn oil and in renewable diesel space. I mean, just your updated thoughts on whether you prefer long-term contracts potentially spot or a mix of both from maybe where your expectations are now knowing your work in turn something in the future?

There is currently no one willing to commit to a price for oil over the next ten years, unless it's very cheap. The focus is more on identifying opportunities and how Green Plains shareholders can benefit. If I want to sell oil and secure a price, I have a three-year forward curve available through the Chicago Mercantile Exchange, and I can hedge oil or find someone in the over-the-counter market to do that. I'm not concerned about finding a market for our oils. The carbon intensity of our products is significantly lower, with only one type of vegetable oil being lower than ours. We are determined to continue reducing those carbon scores, and we are optimistic about the potential revisions from regulatory bodies regarding how oil qualifies in low carbon fuel markets. We believe our offerings are very valuable. As we near the completion of our program and establish our own plants, we're aiming for an annual output of GBP400 million. While we may not be the largest producer globally, we rank among the top five corn oil producers, and we present a strategic feedstock opportunity for partners. We're seeking partnerships that extend beyond just selling oil, and we are confident in achieving that. We are actively discussing various beneficial opportunities with multiple parties, and we believe it's only a matter of time. However, if we opt to maintain the status quo, it will still contribute positively to our future cash flows.

Yes, understood. Thank you.

And our next question comes from the line of Ken Zaslow with BMO Capital Markets.

Hey, good morning, guys.

Good morning, Ken.

Can you talk about the economics of high pro? How much will you actually realize in profitability of what the economics imply?

We initially mentioned that when we launched our 50 protein product as an alternative to soybean meal, the initial margin was between $0.12 and $0.15 per gallon equivalent. We also indicated that if we targeted a higher protein content, such as in the low-50s, the margin would increase to a range of $0.15 to $0.25 per gallon equivalent. For our 60% protein offerings, we expect margins of $0.40 to $0.50 per gallon equivalent. This is supported by some contributions from oil uplift and the higher unit value of protein due to the limited availability of 60 protein and above compared to 50 protein and below. Everything is on track according to our planned product mix. An interesting aspect of our technology is that when a customer requests only 48% protein, we can operate our plants at a higher capacity and consequently improve our margin structure. Initially, we estimated yields of 3 to 3.5 pounds per bushel, but we’re now achieving yields of 4 to 5 pounds per bushel. This improvement enables us to run operations more intensively. If we secure a large-volume customer requiring 48% protein, we might actually earn more than if we serve smaller-volume customers needing 50% or 52% protein. This flexibility with product mix and yield showcases the advantages of owning our technology rather than acquiring it. Our dedicated team, comprising founders and 40 engineers, continuously enhances these technologies. We've observed yields reaching as high as 5 pounds per bushel, which is exceptional compared to our global competitors in corn. Overall, while we’re adjusting our product mix, we’re seeing that margins are stable and, in some cases, potentially more profitable with lower protein offerings due to increased yields. We remain optimistic about the margin structure we've established and anticipate further increases.

So my second question is, in 2023, what do you expect your product mix to be? How do you kind of give some ranges of what you think how much will be 60%, how much will be 48% and how do you do that? Is there a composite profitability that you can assign to that that would be very helpful?

Yes, we plan to work on that in the coming quarters. At the end of 2022, we assessed our takeaway capacity, and we are about to enter the negotiation season for 2023 and 2024 with customers. I anticipate we will see a larger proportion leaning towards the low-50s compared to 60% for 2023. However, our goal at Green Plains is to shift this trend in 2024 and start producing higher levels of 60% protein versus 50%. We believe that 2024 will be significant for achieving a greater volume of higher protein products, and we are exploring opportunities to boost protein levels even further. Therefore, we expect a mixed product offering in 2023, and we will provide more specific guidance towards the end of the year. We are confident that 2024 will allow us to make a more substantial shift.

I look forward to hearing from you. Thanks.

Thank you.

Thank you. And our next question comes from the line of Michael Schoeck with Roth Capital.

It's Craig Irwin. Thank you. Todd, you were really clear in your prepared remarks that the second half of this year probably should be a pretty healthy financial outlook. But during the quarter, with the geopolitical events and some of the other happenings, the volatility in corn has been a fairly active discussion among shareholders and people looking at the stock to potentially accumulate here. Can you maybe unpack for us what volatility in corn looks like, potential positives, negatives for the third and fourth quarters? Can you maybe give us a little bit of color on your position for these quarters? And how should we think about the fact that corn has been coming off since a certain country started exporting again? Is this something that maybe does help us a little bit more in the back end of the year?

I believe this situation is not solely about corn. Regarding corn, we had an initial bearish outlook at 850, thinking that Ukraine would serve as a global storage and the U.S. would be the secondary supplier, which has turned out to be true. Currently, the market structure has shifted back to the U.S. serving as that secondary supplier, which is reflected in both the term structure and today's corn prices. The outcome of this crop will be crucial for the U.S. to achieve a good yield. There are areas showing excellent results, but we've also observed a potential decrease in yield recently due to weather conditions, including a record heatwave expected to last five to ten more days. Nonetheless, rains in the Midwest have positioned key states like Iowa, Nebraska, Minnesota, South Dakota, and North Dakota favorably for delivering crops. The Mid-South is somewhat dry, but in general, we expect yields to be lower than those projected by the USDA. Historically, betting against the corn crop and the weather hasn't been profitable in the last five years, which mainly drives the overall reduced prices. Additionally, exports from the Black Sea are contributing significant volumes of corn to the market. We've also noted unexpectedly good yields in Russian wheat, which have influenced the corn market's downward trend. In terms of ethanol, it continues to be significantly cheaper than gasoline, whether that's a $0.50 or $0.80 difference, plus the RIN factor. There's scope for a lot of corn utilization before impacting the industry since the economics of blending ethanol are very beneficial, which helps lower gas prices. The RIN market also assists with this. Despite higher stock levels, we've maintained margins, and we need to monitor this situation closely. This summer, corn basis levels in the U.S. were quite high, but we’ve still managed to maintain profit margins under those conditions. Paying significantly over futures for corn in Nebraska while still making a margin suggests that ethanol remains a vital part of our fuel supply, with increasing demand and decent exports. Although it's not as strong as in past years, there is still an appetite for affordable molecules. Overall, the corn market appears to have limited downside and possibly more upside risk, but betting against the weather has proven unwise in recent years.

Yes. No, that makes a lot of sense. My next question is about corn fermented protein. So in your press release you are very clear that you expect this current quarter to be one of your strongest in new orders. I assume that maybe predominantly 50 pro, maybe a little bit of 50 pro, but more importantly, would you expect these to be announceable orders or orders that we might have to wait until the next earnings call to hear about? And is there a possibility we start to hear about tonnage commitments in these different contracts?

We need to be careful about what qualifies as an announceable order, especially since we've already disclosed our pet food relationship. Now, many companies producing various protein products may seek to capture that business, but we maintain a solid partnership with them. We want to keep our strategy discreet and not reveal our plans for selling this product broadly. We are seeing movement into numerous global markets, and Leslie will provide some insights on that shortly. Currently, we have good momentum entering this quarter. We can accommodate different order sizes, whether it's for a 50 pro or a 60 pro. We anticipate a mix of orders this quarter, and we're particularly focused on the upcoming programs and campaigns for 2023. It appears strong interest is building for our 60 pro product for 2023 volumes, as well as for our 50 pro plus product later in the year. It's important to remember that we haven't had products available for sale. Our customers, especially those interested in high-value products, prefer to see production running before committing to large orders. We are now in a position to demonstrate our ability to supply volumes in 2023 that we haven’t previously been able to offer. Leslie, could you share some details about our progress in certain countries without revealing too much of our strategy?

Yes, let me try to clarify. The point you are making is important, and I agree. It is crucial for us to cultivate strong and meaningful relationships with key global players, who undoubtedly have their own unique dietary preferences. Our goal is to support them and position ourselves as their nutritional partner that addresses their challenges. When we enter a specific diet, it tends to displace others, which creates a delicate balance for us to manage. We know that the market desires transparency in this regard, but our priority is to deepen these partnerships. It’s worth noting that multinational feed companies have markets we can tap into now, while others require further development. We embarked on this journey several years ago, and I highlighted earlier that our aquaculture advancements are gaining traction. We must acknowledge that some partners desire to leverage our technology to enhance their products, but they may hesitate to make immediate announcements due to their competitive standing in the market.

Thanks for taking my questions.

Thank you. And now I'll hand the call back over to President and CEO, Todd Becker, for any closing remarks.

Thank you all for joining the call. As you can see, we are making significant progress with our products. We are optimistic about our transition out of 2022, operating at more than half of our platform with additional capacity coming in 2023. That’s when we expect to reach the critical mass needed to deliver strong results across all our segments, including our corn fermented protein and Ultra High Protein production. We are witnessing great advancements, innovation, and customer acceptance of this product, and we anticipate a notable transformation in Green Plains in 2023. For now, we are in solid financial shape and should finish the year with positive margins, although we need to monitor certain aspects. Based on the current market, we are well positioned to deliver results. We have much to accomplish, but we are executing effectively. Thank you for your ongoing support, and we look forward to speaking with you next quarter.

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