Green Plains Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to the Green Plains Inc. and Green Plains Partners First Quarter 2023 Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Phil Boggs, Vice President, Investor Relations. Mr. Boggs. Please go ahead.

Thank you, and good morning, everyone. Welcome to Green Plains Inc. and Green Plains Partners First Quarter 2023 Earnings Call. Participants on today's call are Todd Becker, President and Chief Executive Officer; Jim Stark, 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. Concurrently, with our earnings announcement this morning, we announced an offer to acquire all of the publicly held common units of Green Plains Partners. We believe the proposed transaction will simplify our corporate structure and governance, generate near-term earnings and cash flow accretion, reduce SG&A expense related to the partnership, improve the credit quality of the combined enterprise and align strategic interest between Green Plains Inc. shareholders and the partnership unitholders by regaining full ownership and control of Green Plains total platform, including our terminals. All of this will allow us to be more flexible with our long-term asset and company strategy. This is as much commentary as we can provide on this potential transaction at this time. So let's get the first quarter results out of the way. As indicated, ethanol margins were very weak in the first quarter and began to recover too late for us to take advantage if we look backward. But since we are looking forward, things have changed significantly from the lows we saw in January as market fundamentals look very interesting for the remainder of the year for all of our products, and we'll get to that later. This was further validated with yesterday's EIA data. Our overall consolidated crush margin was negative $0.07 for the quarter, leading to a negative EBITDA of $27.7 million. Corn basis has continued to be high, particularly in the West. We experienced a basis that was approximately $0.25 a bushel over the prior year and $0.40 over the prior 5-year average. Ultimately, margins needed to adjust to this, and they have started to in the Western Corn Belt for the rest of the year based on the current forward curves and markets. Veg oil pricing was weaker than the highs we experienced in 2022, which was also a factor during Q1, even though we had most of our corn oil presold for the quarter. I'll give you some insight on current events later as it gets starting to get interesting for low carbon intense oils again, which is where we sit with our product. We also saw weak driving demand in the quarter coupled with continued excess ethanol production, which resulted in a challenging margin environment. For the last 15 years, we made sure we owned our natural gas for our winter production, and that was the right thing to do historically. But with the unusually warm winter we saw, natural gas pricing decreased below our cost, causing a drag on the spot crush margin. Because of this, we are limited in our ability to benefit from the reduction in spot pricing. Having our natural gas purchase early impacted our cross margins negatively as well, we will assess the best coverage strategy in the future for winter, but we believe this ownership is and always was the prudent approach. Recently, we have experienced significant improvement in overall ethanol margins as U.S. production has trended lower, while gas and driving demand moved above pre-COVID levels in some of the reporting weeks. Now we have to see if that holds. We believe since 2019, our inputs have driven to lower margins overall as an industry other than a few quarters as the world balance sheet for corn tightened between COVID and the Ukraine situation as well and weather. This may turn in our favor in 2023 and 2024. We are seeing strong early indications that this year's corn acreage will be expanded and get planted in a very timely fashion as we have a near perfect spring shaping up. We all know the ethanol margin can move quickly and on paper, it is well off the lows experienced in Q1. Going forward, we will choose our spots to lock in available ethanol crush margins to our hedging strategy as there are opportunities along different parts of the curve to lock in a positive base margin even before corn oil and protein contribution. Yes, this can't happen in ethanol as well. But it's been a while since we've been able to say this about the forward curve. But this is really a great setup. Our main focus continues to be on executing on the transformation to add incremental recurring margins and cash flow opportunities from our biorefinery platform through expanded protein and ingredients, low carbon renewable corn oil, clean sugar and decarbonization to insulate us from the volatility that we've experienced. While the first quarter was tough, we are well underway. With approximately 10% of our plant utilization capacity offline during the first quarter because of margins, our overall production utilization came in about 87%. Improvements in the margin gave us the opportunity to bring back all of our facilities back online. But it was just in time for us to enter maintenance and turnaround season. So we anticipate only slightly higher run rates nearby and strong run rates for the third and fourth quarter, where the actual highest margins are. Second quarter will be impacted from having Wood River offline for a period of time as we had an explosion of a whole stillage tank when the plant was not operating because of routine maintenance. With current engineering and construction estimates to complete repairs, we are targeting to bring that facility back online by the end of the quarter, at which time we will return to full rates across our platform. Anything longer than that will be covered by business interruption insurance, so we don't believe this will ultimately have a material effect on 2023, but we hope to be up and running before that kicks in as demand for ultra-high protein from Wood River continues to be very strong. As we exited the first quarter and early in the second quarter, our transformation strategy began to hit an important inflection. With improved ethanol margins, we brought our ethanol production capacity fully back online and all 5 of our MSC systems were lined out and producing high-quality, high-protein products to benefit our animal nutrition customers and business. For 21 days at the end of March, at the end of the quarter and into the first half of April, we averaged over 900 tons per day of ultra-high protein production with some days achieving over 1,000 tons of production. Some of these days exceeded our initial investment and expected volumes, and we still have more to go as we've just begun to truly optimize our process. We have achieved yields that exceeded 4 pounds per bushel pushing close to 5. We believe the MSE technology is the best and only system to ever see these types of yield numbers and the most consistent in producing high-quality suite of animal nutrition products, continuing to optimize these systems to maximize production provides opportunities to further enhance the potential of our assets. Our platform was performing as designed and at rate and demonstrates the annual run rate exceeding 330,000 tons per year for these 5 locations only and is achievable and more. After the events that occurred in Wood River location in mid-April, the protein location has been offline. And when we start back up, we believe we will once again be running at 900 tons per day, plus or minus day in and day out. Our anticipated MSC volumes for the second quarter are on the 60,000 to 70,000 ton range and as a result of this downtime, moving to 80,000 to 90,000 tons per quarter going forward. Later in the call, I will review our pricing and financial metrics associated with protein production. As you can see in the volume table in the press release, we added a line for ultra-high protein, and we get the full production, we will give you more breakout of financial outcomes as well. I will also review some of the things we are seeing for the last half of the year sales channels and higher proteins as well. But even more exciting than this is our clean sugar facility in Shenandoah is making great progress, and we have recently gone vertical, which we have posted pictures online, and you can see the walls of the securification tanks are being installed. It's very exciting to see this progress, and we hope to share our vision with what this project can do for the future and our company, and later in the call, I will go deeper on this topic. I won't spend a lot of time on the regulatory front except to say things are trending our way as well between RVO staying steady on ethanol and potential upside for renewable diesel, higher blends like E15 taking hold as we enter our fifth straight summer of year-round sales along with the Midwest E15 waiver, which, by the way, becomes permanent next year, which is very exciting. Renewable diesel supported by state-level programs to help our low-carbon renewable corn oil production achieve higher values, all the way to the IRA, which we have spent a lot of time on our past calls, and you could see it could be quite an interesting market for us to take advantage of. I will cover decarbonization briefly later in the call, but I'm happy to announce June 15 at 10 a.m. Central Time for our teach-in that we have been promising on the IRA and the impact on the future of our company. Our decarbonized alcohol will be a valuable feedstock to produce alcohol to jet and sustainable aviation fuel at scale, but that is the end game. In the meantime, there are many positives to unpack for our shareholders, and we are excited to educate all of you on this. Our balance sheet and liquidity remained strong, ending the quarter with $408 million in cash. Jim will provide a summary of our financial results and an update to our capital allocation for the balance of 2023. And now I'll hand the call over to Jim to provide an update on the overall financial results.

Thanks, Todd, and good morning to everybody. Green Plains consolidated revenues for the first quarter were $832.9 million. That was $51.5 million higher than the same period a year ago driven by higher run rates, which enabled us to produce more ethanol, high-protein ingredients and renewable corn oil. Our plant utilization rate improved year-over-year to 87.5% during the first quarter as compared favorably to the 83.1% run rate reported in the same period last year. As Todd mentioned, we are working to restart our Wood River plant, which will have a minor impact on the second quarter utilization rate as that plant represents nearly 13% of our stated capacity. For the quarter, we reported a net loss attributable to Green Plains of $70.3 million or a loss of $1.20 per diluted share. That compares to a loss of $61.5 million or a loss of $1.16 per diluted share for the same period in 2022. When we look at the bigger cost variances between the two periods, higher corn and natural gas prices, combined with higher railcar lease expense were the main drivers. Higher railcar expense as a result of moving to a compliant DOT-117 fleet of rail tankers, which was common across the industry. Adjusted EBITDA for the quarter was a negative $27.7 million, which was in line with the prior year. We did experience a $4.5 million increase in depreciation and amortization expense versus a year ago. Our current expectation is that D&A will remain in the range of $23 million to $25 million per quarter for 2023. The increase is mainly due to the addition of MIC technology bills at 5 of our locations. We realized a negative $0.07 per gallon consolidated crush for Q1 of '23, which was in line with the prior year. On a sequential quarter-to-quarter basis, we saw the consolidated crush margin per gallon weakened $0.10 per gallon when compared to the fourth quarter of '22, and that tends to be the seasonal pattern that we see with the first quarter of the year traditionally being the weakest. Our Ag & Energy segment recorded $5.2 million in EBITDA, about $5.5 million lower than the prior year. This decline was driven by market volatility in our merchant trading and distribution businesses and our distillers grain flows and natural gas storage, yet we expect the year to come in largely in line with previous years. For the first quarter, our SG&A costs for all segments was $31.8 million compared to $30.9 million reported in Q1 of 2022. This approximately 3% increase was driven by higher wages across the platform, especially at our industrial sites as competition is fierce for planned employees, in addition to higher consulting and professional fees. Interest expense was $9.7 million for the quarter, which includes the impact of debt amortization and capitalized interest. This was higher than the $8.8 million reported in the first quarter of last year. This is due to rising interest rates on floating rate debt and reduced capital interest in the quarter as certain projects have been completed. The majority of our outstanding debt is at a fixed rate and higher interest rates did not have a significant impact on our balance sheet. We have no near-term maturities for the next 3 years and also note that our cash interest paid in the quarter was $10.1 million. We do continue to anticipate interest expense for 2023 to be approximately $40 million with the current interest rate environment and anticipated debt balances in '23. With our strong cash balance, we did realize interest income of $3.2 million in the first quarter, which did offset the increase in interest expense. Our income tax expense for the quarter was $3.4 million compared to a tax benefit of $1.2 million for the same period of '22, even though we incurred a loss during the quarter. At the end of the quarter, the net loss carryforwards available to the company were $108.2 million, which may be carried forward indefinitely. We do anticipate that our normalized tax rate for Green Plains for 2023, excluding minority interest should be around 21%. Our liquidity position at the end of the quarter included $408 million in cash and cash equivalents and restricted cash, along with approximately $159 million available under our working capital revolver. We remain well positioned to execute on the four pillars of our transformation. On Slide 9 of the earnings deck, we do provide a summary of our company's balance sheet. As shown, we ended the quarter with $376.9 million of cash and working capital, net of working capital financing compared to $464.4 million at the end of 2022. For the first quarter, we allocated $33 million of capital across the platform, including $24 million to our MSC protein initiative, about $4 million to other growth initiatives and approximately $5 million towards maintenance, safety and regulatory capital. For the remainder of 2023, we anticipate CapEx will be in the range of $120 million to $160 million, and that will depend on the spend at Madison and when it wraps up. For Green Plains Partners, we reported net income of $9.9 million and an adjusted EBITDA of $12.5 million for the quarter. That was in line with the $12.6 million reported for the same period a year ago. Again, our plant utilization rates at Green Plains were higher than the prior year, increasing the storage and throughput volumes for the partnership by 5.5% for the quarter versus the same period a year ago. The partnership declared a quarterly distribution of $0.455 per unit with a 1x coverage ratio for the quarter. For the partnership, again, distributable cash flow was $10.8 million for the quarter, slightly lower than $11.2 million for the same quarter of 2022. Over the last 12 months, the partnership produced adjusted EBITDA of $51 million, distributable cash flow of $44.1 million and declared distributions of $43.1 million, resulting in a 1.02x coverage ratio, and that excludes any adjustment for the principal payments made in the past year.

Thank you, Jim. We are seeing significant progress in customer acceptance as we enter new species, expand parts of the ration, and aim for new product replacements. Over the last six months, we have seen a 25% increase in annual commitments from our pet sector customers and have sold out about 75% of our anticipated 2023 production due to a mix of contracted and repeat sales. Some customers began with small orders before becoming key partners for us. As we continue to secure repeat business for our ingredients, we are noticing improvements in overall pricing, which we anticipated. We see a large opportunity to replace corn gluten meal and soy protein concentrate in certain rations, and we expect to dedicate part of our portfolio to this later in the year as we head into 2024 with a new 60% protein product that will truly demonstrate the earning potential of our technology and product range. Our MSC operations are progressing toward an average daily production target of nearly 1,000 tons from our initial five installations, as I mentioned earlier, which should allow us to meet our original volume goals for the overall platform without needing to convert all our locations, enhancing the capital efficiency of our investments. Financially, we have achieved a premium of around $200 per ton since inception, which remained stable in the first quarter. In the second quarter, we expanded this premium to $217 a ton based on current contracts, and we anticipate $230 a ton in the fourth quarter as corn prices decline while meal and equivalent prices remain stable. Our plans for the next MSE protein build are becoming clearer. We expect to receive our permanent permits for our Madison location by late third quarter or early fourth quarter of this year based on ongoing discussions with the state. Our joint venture with Darolton is on track for a startup in early 2024. We are still working through the permitting process for Fairmont, but we have identified more optimistic pathways than previously discussed. We believe that larger plants are better suited for protein technologies, and we are actively looking into reshuffling our portfolio to capitalize on this strategy. Our approach includes expanding MSC sites and protein sites to increase ultra-high protein and corn oil production, which may also boost some ethanol production unless it's at a CST site, where that grind will optimize unused plant capacity. We plan to partner with or possibly acquire larger plants where we can install our technology quickly and efficiently. We are currently working on engineering grind expansions, so we will have more updates on this in the coming quarters as we identify suitable locations. We will not install protein systems at plants under 100 million gallons a year until we move toward higher value products like 60 Pro and broaden the range of animal nutrition products that the MSE platform can offer. As many of you have observed during your visits to our plants and innovation centers, we have a robust pipeline of proof points and products that will increase the value of the ingredients we produce with our systems. It's important to remember that this system goes beyond protein; it is a precision separation technology that we believe is globally leading, allowing us to isolate various high-value products that were previously untapped. Another appealing aspect of this technology is the low carbon intensity of our products, which has captured significant interest from companies concerned about the carbon footprint of their inputs in pet and animal diets. As we've stated before, our goal wasn't just to build these systems for a 50% protein yield; that was merely the baseline for our initial investment justification. What we've realized we can achieve with our technology is producing fermented clean proteins, just as an example. We are working on enhancing specific functional characteristics of our protein in collaboration with our partners to make the product even more desirable. We are in the final stages of this project and believe that our work is unique within the Animal Nutrition field and the U.S. grain processing industry. This illustrates the advantages of our fermentation platform compared to traditional solvent-extracted feed ingredients. We have now created a clean fiber fraction for various animal feed markets, paving the way for adding fermented fiber to our selection of animal nutrition ingredients, thus presenting another scalable feed source for both domestic and international markets. The scientific validation and fingerprinting of this clean fiber fraction for different animal feed markets are ongoing, and this could significantly enhance the financial performance of a plant utilizing our precision separation technology. Our commercial product testing and validation efforts have made notable advances in aquaculture opportunities. The supporting science for both 50 and 60 Pro continues to highlight significant value distinctions between our fermented offerings and traditional solvent-extracted and concentrated products. We are committed to ensuring we achieve fair value for our products in agriculture rather than artificially inflating our position. Recently, we concluded a trial on specific species with high global demand, and once again, our products performed nutritionally as intended while also showing enhanced availability of certain key nutrients, which continue to differentiate us and provide additional value to aquaculture farmers beyond mere fish performance and growth. Although some of our builds have experienced delays of a quarter or two, including our Wood River facility being offline through the end of this quarter, we are optimistic about the long-term potential of this product. While the first half of the year posed challenges, we are on track with our initial projections for the latter half of the year, with potential for even greater performance if we achieve higher production goals and shift more towards the 60 Pro product. Demand for renewable low-carbon corn oil is rising, and we expect the new renewable diesel capacity coming online throughout the year to tighten this market and uplift overall vegetable oil prices. We are actively discussing ways to monetize our corn cash flows under favorable conditions while allowing the demand for low carbon intensity feedstocks to accelerate later in the year, anticipating a significant uptick in demand soon. Our corn oil is advantageous compared to other feedstocks because of its lower carbon intensity and will be a key feedstock for these new ventures. However, after prices peaked in 2022, we have seen a downturn, and corn oil prices have dropped as well, but interestingly, we recently traded at a premium to soy oil again, reaching as high as $0.07 or $0.08 per pound for a period. During the first and early second quarters, corn was trading at a discount to soy, which was unexpected, but increased production from existing renewable diesel capacity quickly shifted that balance to our benefit. Although lower overall prices have diminished the contribution from oil, it remains one of the major value drivers above the base crush for an extended period. Recently, there has been renewed interest in premiums, so we'll see where the market stabilizes for this year and beyond. Construction on our clean sugar technology is currently underway in Shenandoah, as I noted, and is on pace for completion by year-end. Even more encouraging are the prospective commercial partners and the advancements we are making in these discussions. We are establishing a pioneering clean sugar facility, initially designed to produce 200 million to 300 million pounds, with rapid expansion options to 500 million pounds. By diverting part of our corn grind, we can separate the starch and convert it to dextrose while routing the leftover protein fibers and oils back into fermentation to generate additional high-value products. While certain bulk buyers will want to validate the product once operations begin, we are confident in our ability to meet and even surpass customer expectations based on the success we've achieved in producing these innovative ingredients at our York innovation center and ongoing discussions with prospective customers who've trialed our products, which have matched or exceeded existing wet milling dextrose products available today. The main hurdle has been sourcing electrical gear, which continues to be the case. We are vigorously seeking ways to expedite this because our construction timeline is ahead of gear delivery schedules. Mechanical completion is expected by year-end, with the MCC gear determining our operational start date. I’ll share some updates on this initiative. The lower carbon intensity of our clean sugar product has been confirmed by life cycle associates, showing even greater reductions than previously estimated, with potential for further decreases. In May, we dedicated the York CST semi-works facility to finalize our capability in producing 43 DE products, which are valued in confectionery and fruit applications. We already know that when we activate the plant, we can produce 95 DE products right from the start, both refined and unrefined. The final step we will explore is using our systems to create crystal dextrose, and we believe we can successfully achieve that. It will take three to six months post-startup to obtain food safety certification, so our initial clients will be in the industrial sector while we are currently negotiating early offtake agreements. Remember, we are already food safety certified in New York. Thus, the process for Shenandoah will be timely since it will be the most modern and efficient facility globally producing this product. More updates are forthcoming, but we are seeing a lot of customer engagement. Additionally, margins are even higher as confirmed by recent validations from current companies that operate wet mills. Our decarbonization strategy is proceeding as planned. The summer Carbon Solutions pipeline project is making headway, with over two-thirds of the right-of-way acquired, and we expect this pipeline to come online around 2025, which could benefit from the early availability of the 450 clean fuel production credit. The future of this industry is low carbon, and we are leading these efforts. Our joint venture with United Airlines and Tallgrass, Blue Blade Energy, is currently optimizing the catalyst for our exclusive keystone technology from PNNL, and depending on the progress of key milestones, we could begin constructing a pilot facility as soon as 2024. We are continuously evaluating various promising technologies, and though SAF and ATJ represent a story for the latter half of this decade, it significantly enhances our outlook for ethanol volumes and amplifies the value of our assets in the meantime. With bipartisan support for key provisions in the IRA bill, such as the 450 clean fuel production credit, we are confident that decarbonization will play a vital role in shaping our industry's future. We are devising strategies to implement combined heat and power systems, direct injection for carbon capture and sequestration, and more at select locations. During the teach-in, we will provide an in-depth discussion on all these developments, so I’ll conclude by stating that the programs we have in place align and intersect with the themes we've discussed. As you’ve heard today, the value of our IP portfolio embedded in fluid technologies distinctly sets Green Plains apart from others, and we believe this advantage is often underestimated. We are also working on initiatives such as 70% protein upgrades, which are under development and could gain momentum in late 2023, representing a significant future value driver. We anticipate increased oil yields as we continue to leverage our technology to achieve 1.5 pounds per bushel, with proof of concept expected by mid-2024 as we transition to an engineered solution. We believe Blue Blade possesses the leading precision separation technology for growth in synthetic biology and other industrial applications. In nearly all instances, effective separation of solids from the process is needed, and our MSC systems represent some of the largest systems operating globally today. This segment of our business holds substantial value. We expect to share exciting news regarding several initiatives we are pursuing in the latter half of 2023. I assure you, there will be noteworthy developments, so please stay tuned. Lastly, as soon as we deliver our first load of dextrose from a dry grind facility, the world will recognize the value of our IP portfolio and, in turn, the worth of Green Plains. Our four pillars—protein, oil, sugar, and decarbonization—combined with our Gen 1 platform and the potential for Alcohol to Jet Sustainable Aviation Fuel, illustrate that we have numerous initiatives in progress. However, our primary focus remains on delivering results in the present. These efforts are interconnected and aligned, and we remain dedicated to achieving our vision. Thank you for being on the call today. I understand it was extensive, but we can now commence the Q&A session.

Our first question comes from Adam Samuelson from Goldman.

I'm trying to take notes on the many points you just discussed, Todd. If I could highlight a few of the newer topics, I believe this was the first time you mentioned the possibility of expanding corn grind capacity. Could you clarify what that would involve and how much of that starch is intended for ethanol versus clean sugar? Also, new ethanol capacity hasn't been a major necessity in the United States over the last decade, so I want to ensure I understand where the capital is being allocated.

No, I understand. We currently have about three plants with MSC installed where we want to increase grinding capacity. For instance, at the Shenandoah plant, some of the grind will be redirected to clean sugar, but this does not change the protein, oil, and feed content. Essentially, we are just shifting some starch from ethanol to sugar, which leaves some capacity unused in the latter part of the plant. While the energy yield might slightly increase with grind expansions and the capital expenditure is not very high, the key benefit of expanding grind is the significant increase in protein and oil, which is what really drives returns. Additionally, down the line, we might also switch between producing more dextrose. With current high margins for dextrose, converting more grind to dextrose is advantageous at Shenandoah and other facilities. This also creates extra capacity for growth. We mentioned this on the last call and have been discussing it for about six months, so it shouldn't come as a surprise. We're beginning to evaluate plants like Shenandoah, Gobain, and Central City, which are easily expandable and have sufficient corn supply. We are also assessing our smaller, less optimal facilities to see if we can monetize them or use them for different ingredients. We are in the early stages of this evaluation, but the returns from expanding grind, particularly from protein and oil, will definitely support the investment.

In the prepared remarks, there was a discussion about the realized premiums from your Hy-Pro sales, both in the first quarter and expanding to $230 a ton in the fourth quarter. Considering that premium level for your fourth quarter volumes, how should we view the protein concentration in that sales book? I'm trying to understand how much more potential there is as you work towards a corn gluten meal or soy protein concentrate replacement at 16% protein.

That's still based solely on the 50 Pro premium. When we assess the current market situation, we see that the inputs for forward corn have decreased. Similarly, while soybean meal equivalents have also declined, the reduction hasn't been as significant as what we've seen on the input side. This has effectively widened the margin on paper, not accounting for any potential uplift from other products. We've made some early small sales of 60 Pro, and the premiums for those are currently running about $300 to $400 a ton above what we are selling the 50 Pro products for. The real opportunity lies in our ability to penetrate these products further. Currently, we are in discussions with several large customers for 2024 regarding using our products as substitutes for gluten meal and soy protein concentrate in their rations, which would further expand those margins as the year progresses. We have plans this year to sell some 60 Pro, and we are actively engaged in those discussions now. However, this is not reflected in the forward guidance we have provided.

Could you provide an update on the timeline for when you expect to start shipping the Summit project, particularly in terms of securing the necessary permits and rights of way, as well as how the contributions from the low car from CI and 45 might factor into this?

They are making significant progress, with their numbers reaching the high 60s across their platform. They have expanded into South Dakota to further increase those numbers through specific programs and have secured their port space. I believe this is crucial, as any project without port space lined up likely won't have a chance to be operational by 2025. The key will be whether they can continue negotiating their rights of way, obtain the necessary permits later this year, present their plans to the appropriate agencies in these states, and then begin construction swiftly. If I were to estimate, I hope we can start realizing some of these values in 2025. Keep in mind that the 45 is applicable from 2025 through 2027, so we want to capture some of that. Our belief is that the 45 will be extended; it's going to be a challenging process, but there are many stakeholders involved, not just the ethanol industry, but also airlines, refiners, and others. It's a unique collaboration where we all have a mutual interest in expanding the 45. We're optimistic that some of these projects will be operational by 2025. Additionally, we are pursuing other projects, and during our teach-in, we hope to engage in interesting discussions about other carbon intensity reduction initiatives and partnerships we are exploring.

Your next question comes from the line of Kristen Owen with Oppenheimer.

So can you just give us a sense of the moving parts that you've identified for 2Q between the ethanol crush, Train Wood River being down, some of the maintenance. Just help us understand what the buildup for crush margin can look like in 2Q? And then how we should think about any changes in baseline EBITDA bridge exiting 2023? And if we could start there, that would be great.

In Q2, we typically experience shutdowns, which affects our performance as well as the broader industry, as reflected in recent EIA statistics. Looking ahead at the next three quarters, especially considering base crush and other factors, it's important to note that margins were significantly negative at our last earnings call but have improved since then. We believe they could still rise further. Currently, without hedging, Q2 margins appear to be in the $0.12 to $0.17 per gallon range, depending on how quickly we can complete shutdowns and get Wood River operational again. For Q3, margins are projected at $0.15 to $0.20 per gallon, and in Q4, they may reach $0.22 to $0.25 per gallon, with some daily fluctuations based on Chicago market movements. It is encouraging to see a baseline crush potentially remain positive in the latter half of the year, and we will monitor how this translates as we close out 2023. An interesting observation is that as plants age, running at a higher capacity of 1.1 million barrels per day might be less sustainable; it may be more practical to operate closer to 950,000 to 1 million barrels. Operating at maximum capacity has become more challenging due to aging infrastructure, longer shutdowns, increased costs, and labor difficulties. While the margins suggest we should be operating more efficiently, various factors impact this. Overall, it seems that the industry may no longer sustain a capacity of 1.1 million barrels on a 355-day rate, and as these plants get older, maintaining efficiency becomes more complex, which is a benefit as we head into the driving season where demand is strong.

You mentioned the potential for a new fiber product. I'm curious about where that fits within your overall ingredient opportunity. How feasible is it to implement that on the production line? Additionally, how should we approach the sales process for a product like fiber, and how do you see that process evolving?

I’ll discuss how it evolves, and then Leslie will provide some insights about the product as a whole. We’ve discovered that, focusing solely on our intellectual property, we can produce a clean fiber fraction that we’ve modified through fermentation. This process utilizes precision separation and adds a component to create a fraction that holds more value than traditional distillers grain, though it may be less valuable than high-protein options, yet it generates much higher volume. This is part of our patented approach, and we are currently collaborating with customers both domestically and internationally on this fraction. It has the potential to significantly increase value in the future as we consider protein sources. Our focus on protein is not just about achieving a certain protein level and improving oil content; it's about exploring these other fractions that wet mills currently target and that various companies engage with in their grain processing operations. Leslie will elaborate on the product we have and the initiatives we are pursuing.

So Kristen, in terms of the development cycle, we really look at this as start as indicating as a holistic product development approach. So as we make improvements to the protein because the protein fraction comes from the original distilling fraction, we are keeping a close eye on what the potential is of the fiber. So it really goes hand in hand, and we are seeing improvements that make the products very interesting for specific markets that would actually be almost companion products to the protein. You asked a question in terms of how we fit this in on the sales force side of things, as we've built out the team and went deep into some of these markets with our Rolodexes of our sales team, this really becomes another product that they can sell to our customers. So we actually expand our opportunity and really build on to the view that we have an animal nutrition platform that really comes off of this precision separation technology.

The next question comes from the line of Manav Gupta with UBS.

I just wanted to talk a little bit more on the policy and macro side. We had all these renewable diesel plants that were supposed to start in 1Q, a number of them faltered. It looks like now they're finally starting to come on. MPC indicated there at 260 million gallons, probably going to 730. And at the same time, now we are finally starting seeing progress on the sustainable aviation fuel side, again, which you will be very integral part of. So help us understand what you're seeing out there in terms of finally picking up from the IRA benefit where you're actually seeing tangible benefits in terms of demand for both corn oil and eventually ethanol picking up as both RD and SAS start to gain momentum.

Let's discuss the oil situation first. As we mentioned, we were facing a weak market due to the U.S. importing some offshore used cooking oil, with some of it being rejected due to quality issues, which worked to our advantage. This situation contributed to a softer tone in the fast market earlier this year, but it has since improved significantly. I believe our low carbon intensity (CI) oil becomes increasingly valuable as more plants start operating, owing to the benefits of programs that allow us to monetize that low CI oil compared to soybean oil. Soybean oil will always be the most readily available and logistically favorable option in the industry, so it will maintain its significance and is suitable for certain processes. However, we are positioned well in this market. We've observed a shift from soybean oil pricing to now experiencing a $0.05 to $0.10 per pound premium over soybean oil futures, which equates to a 10% to 15% increase. Though this is not the peak we witnessed last year, we're moving in that direction. Additionally, the return of low carbon fuel standards (LCFS) will also provide support, as we've seen values rebound, enhancing the worth of our oil. The introduction of more plants is beneficial, and facilities operating efficiently is advantageous as well. As we've noticed with MSC, any industrial process generally takes longer to ramp up than expected. Some plants may take additional time to come online, but once they overcome initial challenges in operations, it will be beneficial for us. Currently, our involvement in sustainable aviation fuel (SAF) and alcohol-to-jet (ATJ) is still limited since we are not yet commercialized in any technology within the industry, although there are promising technologies being developed, including our own. The primary focus now should be on decarbonizing output, which is certain. The developments in SAF regarding vegetable oils and feedstocks don't greatly affect our alcohol market, but they do have implications for the vegetable oil market. We are more on track for advancements in ATJ and SAF production towards the latter half of the decade as it transitions from the ethanol industry.

Perfect. Next is a simple technical question, which sometimes our clients ask us and some would ask you straight away. Sometimes people asking GP would be able to benefit from IRA if the government doesn't change the CIC model from Corsa to the grid. So if you could help us understand that a little better?

Yes, we are definitely pushing for improvements in this area. While it's challenging, we can generate more revenue through REIT, and even without it, achieving the first 30 points of carbon sequestration puts us in a favorable position. Additionally, implementing our combined heat power systems can provide another 5 to 10 points, which are easily financed or can be placed on-site to earn carbon credits. There are many opportunities to explore; however, it's important to understand that it's not just a straightforward comparison between grids. While support from the government would certainly help, we believe the industry as a whole would benefit from that. Securing carbon sequestration allows us to participate effectively, and beyond that, there are additional points we can pursue through various methods, such as post-combustion fermentation and gas sequestration. Our on-farm programs also hold significant value. Overall, this is a lengthy process, and while we don't necessarily need these improvements, we would certainly like to have them.

Your next question comes from the line of Andrew Strelzik from BMO.

I think if I did the math right, that you mentioned on some of the four consolidated crush margins, it gets you to like a run rate of $100 million EBITDA in the back half of the year, if I have that right with the contracts to the low end of the medium-term range you've talked about in the past. So #1, I guess, correct me if I'm wrong there. #2, how much of that do you actually have hedged out over those quarters? And is it at those levels or at different levels? And then #3, excuse me, what are the moving pieces left, I guess, to achieving that type of margin?

I believe the key point is that ethanol crush is fluctuating. With reduced corn input costs, we see some potential opportunities, especially as we approach the end of the year and observe basis levels in the West. We've managed to secure some corn and anticipate further opportunities, particularly late in the third quarter with an early crop planting in the United States. This will be beneficial, along with a slight recovery in corn oil prices. Although we have seen a rebound from earlier lows in the deferred curve, the margins still do not reach previous highs. I acknowledge the excitement surrounding our current position relative to the earlier downturn, but I believe there is still further potential for growth. Based on a stronger fundamental backdrop this year compared to last, I expect to see more advancements in both oil and base crush margins, along with potential expansion of our protein margins in the latter half of the year. We have started to hedge as we mentioned in the last call. In the previous year, we were hesitant to hedge as aggressively, resulting in missed opportunities reflected in crush movements. This year, we are approaching it differently, hedging between 50 million to 100 million gallons of production against our remaining output of 600 million to 700 million gallons. As we analyze the fourth quarter, I find it promising to use base crush to secure margins between $0.22 and $0.25 per gallon. We're closely monitoring developments, as we've seen a similar environment two years ago with much higher values. Despite some recent challenges, such as the Wood River accident impacting the second quarter, we are focused on getting that facility back to operation swiftly since it accounts for 20% of our MSC production. There is heightened demand for its products. Overall, the fundamental conditions for every aspect of our operations are stronger than they have been in some time regarding ethanol and protein values. We're also seeing improvements in our oil margins, and we’re looking ahead to our sugar startup. If we had our sugar margins running today, we could see over $1 a gallon contribution margin from dextrose. As we move forward with this platform, we own and control the technology and intellectual property, which necessitates planning for future expansion. It's essential to consider the location for our second dextrose plant well in advance of our initial production, as delaying that planning can result in significant setbacks. We aim to secure some offtakes to demonstrate our ability to achieve those profit margins, allowing us to quickly strategize for the second plant.

And the second question kind of on offtake agreements. It sounds like from a corn oil perspective, 2024 is kind of the right time for you guys in your view, which I think is maybe a little different than you had talked about waiting for a while. So I'm curious why you think that's the right time? Is it just a function of once we get RD, et cetera, all the plants online that will have reached some steady state of value. And so that will be kind of reasonable or is it something else that's going on there?

Our perspective on offtakes is clear: if someone wants to invest in our corn oil cash flows and gain control over them, we expect fair compensation. We're not rushing into offtake agreements simply because we could remain in the spot market for an extended period. We anticipate that corn oil will consistently trade at a premium compared to soybean oil each year, primarily due to its higher intrinsic value. Currently, there aren't many, if any, parties willing to enter a five-year fixed price offtake agreement. Therefore, while we could entertain offers for a portion of our future cash flows, we believe there are better opportunities available. As the year progresses and our projects come online, the true value of our corn oil business, and that of the industry, will become apparent. This isn't just focused on soybean oil; it also hinges on the low carbon requirements for sustainable aviation fuel. We are in a strong position and prefer to proceed thoughtfully. Our patience has been beneficial. The price of corn oil, whether it rises to 80 or drops to 50, isn't the primary concern right now; what's important is the premium and the upfront payment.

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

It's Aaron Spychalla on for Eric. Maybe first, Todd, you talked a little bit about partnering for MSC with other third parties. Can you just give a little bit more color on the opportunity there? Is there an active pipeline? And just what might capital needs look like there, given paybacks?

Okay. I didn't hear that first part of the question. Can you repeat?

Yes. Just on partnering on MSC with third parties.

Yes, we are still considering that approach. It requires a significant capital investment, but as we gather more evidence and as the industry recognizes the capabilities of our system, which is unique in terms of both its technology and consistent output, we see other exciting opportunities different from anything they may have encountered before. Our initial sign of success in partnerships will be when we launch our Thereson joint venture and operate a new protein system capable of producing 170 million gallons, resulting in over 100,000 tons of protein. The advantage of this joint venture is all the groundwork we've completed to command premiums for our products. When the market observes this, some will likely want to invest in building their own systems, while many may prefer to partner to access our innovative solutions. If you have visited us in Omaha, you would have witnessed the advancements surrounding our product, which extends beyond mere protein concentration. We are exploring many avenues with various customers to enhance taste, texture, nutritional profiles, and more, all of which will elevate the overall value of our products. It's a gradual process, and we are in conversations not only domestically but also globally about partnerships in markets that may offer unique advantages, like non-GMO opportunities. This marks the initial phase of what we anticipate to be an exciting implementation of this technology. It's not solely about protein; we're also focusing on clean fiber, taste, texture, and nutritional adjustments—capabilities in fermentation that we believe are unmatched in the industry. We are positioned very well, but it remains a step-by-step journey. The first priority is to operate our systems effectively. We need to ensure the successful functioning of our Generation 1 systems, which can sometimes be a challenge with older plants, but we will maintain our focus on that as we build on the initiatives we've discussed.

Right. And then just maybe as a follow-up on carbon capture. Can you just talk a little bit about the plans for other plants that are not on the pipeline and potential timing and just capital needs there as well?

Yes. Currently, everything we have in the West is in the pipeline, as mentioned earlier. In the East, we are developing a project in Mont Vernon that we hope will advance in the next couple of months, allowing us to decide on the carbon management strategy. There are some compelling opportunities there. The economics improve when you can manage your own project, especially if it's near areas where sequestration isn't possible. It might take a bit longer, but it's definitely worthwhile. We're also examining options for Bobin, which is somewhat distant from sequestration sites, yet there could be rail or pipeline alternatives to transport it to the river for barge shipping. Additionally, we have liquefied carbon options to explore. Our partnership with Osaka Gas Tallgrass opens pathways to potentially pipe some of this carbon into synthetic gas, which could then be transported via the LNG terminal in the Gulf. So, more updates will come, but we are diligently working at our facilities, particularly in Madison and Mount Burden. Our initial focus there, even before sequestration occurs, is to assess combined heat power systems, reverse turbines, and cogeneration. The most intriguing aspect is that this can be achieved with minimal investment since other parties may handle the construction, allowing us to reap significant benefits while they earn returns from cogeneration. This approach is very capital-efficient for Green Plains, maximizing our gains with nearly no capital outlay. By implementing cogeneration, we expect to reduce our high power costs in the East, making those plants more competitive compared to the West. This could lead to pricing for Mount Burden and Madison that is similar to or even less than grid rates. I believe this represents a substantial opportunity for carbon reduction, translating to a 5 to 10 carbon point decrease, but we must also secure sequestration to obtain the optimal benefits.

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

Maybe just to take a step back quickly and talk to Fluid Quip. I'm curious, you guys clearly have your plate full with plenty of initiatives going on. But I'm curious how you're thinking about Fluid Quip as its own business as we move through the next couple of years, and I know there's turnkey initiatives and that sort of thing, but what's the appetite there to grow that business outside of the work they're doing for you all? Yes.

We have a strategic initiative focused on Fluid Quip to enhance revenues and profitability while maintaining it as a separate profit and loss entity within our organization. They can manage everything from our Generation 1 plants to MSC clean sugar hits, which is a significant advantage for Fluid Quip. There are multiple initiatives aimed at expansion, like achieving a 1.5% yield on oil, which is an upgrade to Fluid Quip Technology, and they are actively working on that. We are not directly involved in that aspect at Green Plains. Additionally, reaching a 70% protein is another Fluid Quip project we support, and we aim to optimize the process mechanically wherever possible. We are also exploring methods to approach a 60 Pro mechanically, which presents some opportunities. Fermentation is proving to be very intriguing as well, as they collaborate with various sectors, from dry mills to wet mills and other industries, to market their technology and machinery. I believe Fluid Quip is undervalued within our portfolio, though it still needs to demonstrate its full potential. Considering the value of their intellectual property, what they are developing doesn't demand extensive capital allocation, as much of the groundwork was laid before our acquisition. They have a solid franchise, but we currently lack sufficient sales personnel. If anyone knows individuals interested in selling our technologies, Fluid Quip is hiring because we have excellent offerings. We are engaging with diverse industries both domestically and internationally, from Canada to Europe to Brazil, assisting plants with various grain processing needs. I see it as an underappreciated asset for Green Plains, but contributions are forthcoming, though we may need to be patient. They contributed last year and will continue to do so this year, and we are optimistic about the future of this technology provider.

That's good to hear. And then just a quick follow-up. Any thoughts on the current landscape for ethanol assets? I don't know if you're seeing any ethanol M&A activity or anything there.

Yes, it's a bit unpredictable right now. I believe that the larger, more efficient plants are more valuable than the smaller, less competitive ones. We either need to expand those smaller plants or, as we've mentioned, we review our portfolio daily. If we can introduce any technology to one of our facilities, it might not be a long-term fit for our portfolio, but we trust that others will manage them well. We assess our portfolio continually and see potential for optimization. Currently, there aren’t many opportunities in the market for acquiring large plants, but overall industry sentiments have improved. I want to caution everyone that while the current situation seems very positive, it still has room for improvement. There are opportunities out there. However, for us, it's crucial to have plants capable of processing carbon, protein, oil extraction, dextrose, fiber, and nutritional products. If a plant is unable to offer these capabilities, we will consider its future role in our portfolio and explore ways to enhance it, whether through acquisitions or partnerships.

There are no further questions at this time. I would now like to turn the call back over to Mr. Becker for closing remarks.

Yes. Thanks. We really appreciate you being patient for this call. We know they don't go long sometimes, but we try to give you as much information on what we're working on as we can. There's a lot, and we think it's very valuable for our shareholders and stakeholders to understand what not just the near-term opportunities are, but the future opportunities. When we look at one of the most valuable opportunities for us is getting this clean sugar system up and running. And our view is that we want to have 200 million to 300 million gallons converted to sugar by 2027, which is a significant increase from what we are building today, and that really is where the game-changing starts to happen relative to everything else that we've been doing on top of everything else we've been doing. And so we're working on all of that, and we're working on behalf of all of you, hopefully, in the next couple of months, we have some more good news around the things that are important to you around technology and demand and offtakes and having a nice steady ethanol market for a little while would be nice, too. So we'll see you next quarter, and thanks for all of your support.

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