Earnings Call Transcript - GPRE Q3 2022

Operator, Operator

Good morning, and welcome to the Green Plains Inc., and Green Plains Partners Third Quarter 2022 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 will now turn the call over to your host, Phil Boggs, Executive Vice President, Investor Relations. Mr. Boggs, please go ahead.

Phil Boggs, Executive Vice President, Investor Relations

Thank you, and good morning, everyone. Welcome to Green Plains Inc., and Green Plains Partners Third Quarter Earnings Call. Participants on today's call are Todd Becker, President and Chief Executive Officer, Jim Stark, Chief Financial Officer, Patrich Simpkins, Chief Transformation 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 statements. Now I'd like to turn the call over to Todd Becker.

Todd Becker, President and Chief Executive Officer

Thanks, Phil, and good morning, everyone. During the third quarter, we experienced a challenging margin environment, resulting in a negative $0.09 a gallon margin, some of which were one-time events and the rest largely driven by the record corn basis we experienced across the Midwest, Southern Indiana and Tennessee. The drought lowered corn yields, tightening ending grain stocks as a result of three lower-than-average crops in a row. We saw higher corn basis ahead of this year's harvest, but we kept our plants running through that. The world is not running out of corn; it's just tighter than normal, and it was a quarter where the industry needed to adjust. Our average corn basis was more than $1 over futures with some plants exceeding $1.50, which was higher than last year, nearly $1 higher than the five-year average. The third quarter margins were lower because of this tightness, and farm ownership is in tight hands. The first impact other than corn basis is that because of the fundamental situation in corn, we decided to pull all of our seasonal maintenance shutdowns forward, completing shutdowns at 10 of our 11 plants. This impacted our operating utilization rates and also increased our repairs and maintenance costs for the quarter. The shutdown impacted our margins by about $0.04 a gallon. In addition, as a consequence of higher corn basis and the inverted ethanol market, we recorded an $11.2 million lower cost or market inventory adjustment, which also impacted our margins by about $0.05 a gallon, though to be clear, this is a noncash adjustment. Excluding these two items, our consolidated gross margin would have been near breakeven. Overall, our EBITDA for the quarter was negative at $35.6 million. However, for the fourth quarter, margins are positive for ethanol and have expanded in recent days, even before corn oil contributions, which I know many of you focus on. Even with harvest corn basis levels and the fundamentals across liquid fuels, Q4 is significantly better than Q3, though corn basis volatility still needs to be watched closely. Our physical corn coverage is approaching 70% for the remainder of the quarter. The Gen-1 volatility quarter-to-quarter has been unprecedented, and we remain exposed to that for a portion of our business as we continue to transform. Our third quarter financial and operating results remain strongly influenced by the company we are transforming from, rather than the company we are transforming to. Operationally, we are seeing strong Q4 run rates and record high renewable corn oil yields. With our seasonal maintenance program completed in Q3, we anticipate that the fourth quarter should be the highest quarter of the year for throughput and corn oil yields. Our MSC technology construction projects with Fluid Quip for 2022 are wrapping up, and we are preparing to start up the dryer in Central City and are getting ready to start loading our off system as well. The MSC build at Mount Vernon, Indiana began commissioning in October, and our Obion, Tennessee plant should begin commissioning in the next few weeks. One very interesting point is that during commissioning, the plants begin to benefit from higher renewable corn oil rates well before we bring the dryer online, and the load-off structures are completed. The ability to extract oil individually is the basis of a new offering from Fluid Quip called DCO Tech, which we believe we'll discuss later in the call. This increase during startups contributed to a strong renewable corn oil yield in the third quarter, and we should continue to expand that in the fourth quarter as commissioning continues on additional locations. Pricing for this product remains very firm as there's only a finite amount of low carbon-intense feedstocks, setting us up well for 2023. As our company undergoes transformation, we made a decision to dedicate a senior member of our team to those efforts full time. Patrich Simpkins has been at the company for over 10 years, serving in a number of senior roles, most recently as CFO, and we are pleased he chose to take on the new challenge of Chief Transformation Officer. This was a natural time to dedicate resources for the next several years to all these important strategic efforts. Jim Stark, who you may know from his time in Investor Relations, has a dynamic background in finance and will take over as CFO. We also welcome Grant Kadavy as EVP of Commercial, bringing deep experience in agricultural process and global trade, and Jamie Herbert as CHRO, further enhancing our team with a history of success. These additions bring added depth and leadership to our organization at this pivotal time in our history and demonstrate our ability to attract the talent needed who can execute our plan and believe in our transformation. We broke ground on our CST facility in Shenandoah to produce low carbon intense dextrose, deploying Fluid Quip's clean sugar technology. Our developing BioCampus in Southwest Iowa has long been a showcase plant for us with our first MSC facility and now our first commercial scale dextrose facility under construction, which we will discuss later as well. Our company continues to transform, and we are firmly committed to completing that transformation. Our vision to explore ultra-high-protein technology has morphed into a pivot of our entire company to focus on customer-centric ingredients, innovative ag tech, and decarbonization. We are executing on that transformation plan and remain on track to deliver on these initiatives and guidance laid out for 2024 and 2025. The growing strength of our commercial operation continues to win new customers from our ultra-high protein product suite, customer acceptance and interest grow, and we are generating orders and interest globally across multiple species. We executed a 25% increase in our 2023 volumes in the pet food vertical for the upcoming marketing year. Many customers have indicated they have been waiting for volume, scale, and redundancy, and we are finally in a position to deliver on that as we exit 2022. Having over 330,000 tons of annual capacity for these innovative products now available to the market each year for Green Plains, when novel proteins were historically in much smaller quantities, is a game changer in our discussions. While there are a few sporadic products that can appear similar, no one else can supply the quantities customers seek in this novel protein space like we can, a critical differentiating factor. Commercial demand is growing in larger quantities now that we provide a product with unmatched scale and redundancy. With our expanding scale, we are executing sales to customers in aqua, pet, swine, poultry, and dairy globally, some of which are leaders in their respective industries. Developing a customer-centric market for these new products takes time, but we are achieving baseload volumes of 50% ultra-high protein product today across multiple species from customers around the world. I'll discuss the importance of this as we develop our 60% protein market later in the call. During the third quarter, we settled the remaining $34.3 million of 2022 convertible notes through a combination of common stock and cash, leaving us without any near-term maturities in our capital structure. We ended the quarter with over $500 million in cash on the balance sheet, remaining in a strong position to deliver on the strategy we have outlined for you. Green Plains Partners continues to deliver consistent results and will benefit from the strong throughput utilization rates of the platform we operate. For the fifth consecutive quarter, Green Plains Partners increased their distribution, raising it to $0.455 per unit. Once again, I'd like to welcome Jim to the call and hand it over to him to provide you with an update on our overall financial results.

Jim Stark, Chief Financial Officer

Thank you, Todd. Good morning, everyone. I'm glad to be back at Green Plains, and I'm excited for the opportunity to lead the finance organization. Green Plains' consolidated revenues for the third quarter were $955 million, which is $208 million higher than the same period a year ago, driven by the higher run rates. Plant utilization rates improved year-over-year to a 90.9% run rate for the quarter, comparing favorably to the 75% run rate reported in the same period last year. As Todd mentioned earlier, we anticipate utilization rates to improve during the fourth quarter due to having already completed our seasonal maintenance turnarounds, believing Q4 will be our strongest production quarter of 2022. For the quarter, we reported a net loss attributable to Green Plains of $73.5 million or $1.27 per diluted share, compared to a loss of $59.6 million for the same period in 2021. EBITDA for the quarter was a negative $35.6 million compared to a negative $16.6 million for the same period last year. As we indicated in our earnings release this morning, the third quarter faced a challenging ethanol margin environment driven by higher corn basis and weak driving demand, limiting the opportunity to generate positive margins. We also incurred a lower cost or market adjustment of $11.2 million on inventories contributing to the negative ethanol margin. For the period, we realized a negative $0.09 per gallon consolidated crush, which was lower than the prior year due to the factors described above. Our Ag & Energy segment came in higher versus 2021, recording a $2.7 million increase in EBITDA or 71%. I would note that the Ag & Energy segment has continued strong performance for 2022, running 60% better than the nine-month period last year. For the third quarter, our SG&A costs for all segments were $29.1 million compared to $26 million for Q3 of 2021. The increase of $3.1 million is driven by heightened personnel costs from higher headcount and increased professional fees in support of our transformation, as we noted on our Q2 call this year. Interest expense was $9.6 million for the quarter, which includes the impact of debt amortization and capitalized interest, roughly in line with the $9.5 million reported in the prior year third quarter of 2021. Our income tax benefit for the quarter was $1.9 million compared to a tax expense of $7,000 for the same period of 2021. The benefit is due to a reduction of the valuation allowance against deferred tax assets. At the end of the quarter, Green Plains had net loss carryforwards available to the company of $144.7 million, which may be carried forward indefinitely. On Slide 9 of the earnings deck, we provide a summary of the company's balance sheet. As shown, we ended the quarter with $534.6 million of cash, net of working capital financing, compared to $698 million at the end of 2021. Our liquidity position at the end of the quarter included $512.4 million in cash, cash equivalents, restricted cash, and marketable securities, along with approximately $155 million available under our working capital revolver. For the third quarter, turning our attention to capital expenditures, we have allocated $55 million of capital to profit-sustaining and growth projects, including $44 million on our MSC protein initiatives, about $7 million to other growth initiatives, and approximately $4 million towards maintenance, safety, and compliance capital. We anticipate CapEx for this year will be in the range of $250 million to $280 million based on our current construction schedules, which does include some capital for the clean sugar build in Shenandoah. Turning to the partnership, we continued to realize consistent performance, earnings, and cash flow, realizing net income of $10.2 million and an adjusted EBITDA of $13 million for the quarter, slightly lower than the $13.5 million reported for the same period a year ago. With volumes now trending upward due to higher run rates at 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 $0.455 per unit while maintaining a 1.05x coverage ratio for the quarter. For the partnership, distributable cash flow was $11.3 million for the quarter, in line with $11.5 million for the same period last year. Over the last 12 months, the partnership reduced adjusted EBITDA of $50.7 million, distributable cash flow of $44.9 million, and declared distributions of $42.4 million, resulting in a 1.06x coverage ratio, excluding any adjustment for the required principal payments amortized in the past year. Now I'd like to turn the call back over to Todd.

Todd Becker, President and Chief Executive Officer

Thanks, Jim. Typically, we spend time on protein oil, sugar, and carbon, but this quarter, I want to start with carbon. The Inflation Reduction Act is a real game changer for our industry and company. While there may be some transitory quarter-by-quarter volatility from our Gen-1 business, we are increasingly optimistic about the tailwinds from this recently enacted bill and continue to believe we are uniquely situated as a company to capitalize on the decarbonization incentives included in this bill. The potential impact on our transformation is immense and is still underappreciated by the market. While it doesn't kick in until 2025, the new technology-neutral clean fuel production credit or 45Z will significantly change fuel ethanol production as we head into the possibility of alcohol-to-jet later in the decade. The new credit provides an incentive of $0.02 per gallon for each point of CI reduction below 50. The program uses the Argonne GREET model, and many of our plants are not far from that number today. When we start with sequestration to get below 50, we can then look to further reduce our CI at each of our biorefineries, adding things like combined heat and power to biodigesters or even wind and solar options. When considering the opportunity in carbon initiatives from our Midwest plants positioned on the Summit Carbon pipeline to our eastern plants, we are identifying partnerships and other opportunities to sequester and decarbonize. We are very excited and anticipate significant annual contributions once all of our initiatives are completed, just in time to leverage the clean fuel production credit. Our renewable corn oil business continued to reach new highs in yield as additional MSC facilities come online. The third quarter was another record for us, and we believe the fourth quarter will be higher yet again. The uplift in yields and corn oil values is included in our MSC margins, but the base corn of our Gen-1 platform produces just under 300 million pounds, which at $0.70 or $0.80 a pound gross price could generate approximately $150 million to $180 million of consistent earnings above base ethanol. We expect to produce 400 million pounds per year in total as we approach 2025. This is a valuable product stream that is in high demand with the growth of the renewable diesel industry. There is continued interest from counterparties to monetize our DCO stream in various ways, but we have the ability to be patient due to the strong market, which seems to grow tighter every day, and prices appear to be firm. The extension of the $1 per gallon biodiesel and renewable diesel blender tax credit is also beneficial to our renewable corn oil values. We consistently see corn oil trade at a premium to soybean oil because of its lower CI— at times as high as $0.10 per pound or more premium. We believe this differential will only expand when the clean fuel production credit kicks in as new state and national LCFS programs come online, further encouraging renewable diesel producers to source low carbon intensity waste oils as a feedstock. You can see from the term structure, the market is very tight and seems to roll up every exploration month, notwithstanding a random macro move lower, which is quickly supported and bought. Our long-term view is that low carbon oil stays firm through the end of the decade as the onset of new renewable diesel production has yet to be felt. Now let's talk protein. On the protein and ingredient front, construction of our MSE platform continues to progress with over half nearly complete. It has been a herculean effort to deliver five major builds by the end of 2022 amid unprecedented supply chain tightness and a labor market that has been challenging. In 2023, we will have 560 million gallons online with an equivalent protein capacity of over 330,000 tons. Central City is complete; Mt. Vernon is complete, waiting for a permit to start the dryer, and Obion will begin commissioning in the next several weeks. The load-out will finish in early January, and as soon as we turn on the site, we will start making oil, with excellent oil share. Our JV turnkey plant is under construction in North Dakota, which will be the largest MSC ultra-high protein production facility in the world. We expect to break ground on our Madison location in early 2023. Since the inception of the program, permitting in Minnesota for our Fairmont and Otter Tail plants has been a gating item that could come as early as nine months and as late as 18 months from now. With that said, we can be patient at a large plant from a capital efficiency standpoint, but at a smaller plant, we will move to install Fluid Quip's new DCO technology as permitting is not an issue, and the economic return on capital is significant. We're targeting low carbon renewable corn oil first at Otter Tail with DCO Tech as we await permitting. We are on track to deliver on our overall MSC projections. With the ability to run the larger plants at higher Gen-1 rates combined with higher MSC yields, we will still achieve roughly the same overall MSC footprint but with a different mix of plants. Our base protein projections remain on track to deliver $150 million to $210 million of incremental value to our Gen-1 ethanol platform and can go higher as we build out our 60% protein market and other innovative products we are working on. We continue to assess what capital to invest in our York and Atkinson, Nebraska facilities as they are the smallest in the fleet, and our current run rates across the platform can make up for any shortfalls there. We are maximizing our return on capital while keeping our guidance intact. DCO Tech is revolutionary, and Fluid Quip uses our data and learnings to offer this technology to the industry, helping us monetize our investment there, as they prepare a turnkey DCO technology solution. We continue to believe the value of Fluid Quip's portfolio is significant and significantly undervalued as a component of our overall company's valuation. The construction of the first-ever deployment of Fluid Quip's innovative clean sugar technology at our Shenandoah, Iowa biorefinery is underway. Adding this technology is the next step in the transformation of our dry mills. This installation is already generating interest from multiple potential partners and customers who share our vision to build a low-carbon footprint BioCampus to produce lower carbon ingredients. We remain confident in the rollout of CST after we prove to the market we can make this product at scale and in spec. Our first facility is designed to produce greater than 200 million pounds, with upside to 500 million pounds with additional capital. Dextrose has been in high demand recently, and current pricing could lead to even stronger future contributions. This plant will manufacture refined and unrefined 43, 63, and 95 dextrose products for use in food, chemicals, synthetic biology, and industrial production processes. To give you an example, if we had capacity online today, the equivalent margin based on today's dextrose pricing would be approaching $1 per gallon, or in bushel terms, almost $3 a bushel. We will have years of additional investment opportunities in this space beyond 2024, believing we have strong IP leadership position. We believe clean sugar will be a significant part of our growth story over the next three to five years as well. As for longer-term opportunities, we see alcohol-to-jet sustainable aviation fuel as a major opportunity. With carbon sequestration in place, our lower CI ethanol will be an ideal and plentiful molecule for conversion to sustainable aviation fuel at commercial scale. We believe that our platform and partnerships position us to have a key impact in this space before the decade ends. When you put everything together, our 2024 projections, excluding the Gen-1 business and ancillary businesses, are on track to achieve our previous EBITDA baseline guidance, with continued upside opportunities from our MSC protein initiatives, base corn oil values, and clean sugar, which will just be getting started and can grow from there. Any material shift to a 60% protein product or greater or other protein ingredients and innovations taking place would also add to these totals. Our initiatives and growth pillars are aligned with the macro factors of protein growth, the expanding bioeconomy, low carbon transportation fuels, decarbonization, and low carbon ingredients, and we are executing to create value on behalf of our shareholders, our owners, our employees, our business partners, and our customers and our communities every day. With that said, thanks for joining our call today, and we can now start the Q&A.

Operator, Operator

One moment while I compile a Q&A roster. Our first question comes from Adam Samuelson with Goldman Sachs.

Adam Samuelson, Analyst

So, Todd, I guess the first question is thinking about high pro and commercialization. You went through the plant kind of rollout and the facilities that are coming on stream by the end of the year. And I guess I wanted to just clarify in thinking about the contribution from incremental high pro in 2023 as you now have, I think, 330,000 tons of ultra-high protein and as we just think about the incremental profit that that would generate as you sell those. And along those lines, can you talk about the commercialization of the 60% value high pro and where you're seeing customer interest and pricing indications and when that could be a contributor to the top and bottom line?

Todd Becker, President and Chief Executive Officer

Yes. Thanks. We expect in 2023 that with our capacity online and the assets under construction, we will see our first real contribution from this program during the year. So, when you talk about 560 million gallons converted, current values for 50 pro are somewhere between $0.12 and $0.17 a gallon margin available today, and oil share is a strong part of that. We think there's upside to those opportunities as well, but we are continuing to develop markets around that. We sold pet food for 2023 in our pet food vertical, and we're beginning to see significant interest in aquaculture, poultry, and swine for 2023. The margins range depending on what the customer wants from a protein standpoint, whether it's 48, 50, 52, or 54. As we enter 2023, the starting point is 560 million gallons converted, with margins ranging from $0.12 to $0.17 a gallon, potentially with upside from there.

Operator, Operator

Our next question comes from Jordan Levy with Truist Securities.

Jordan Levy, Analyst

Good morning, all, and welcome back to the call, Jim. Okay. I just wanted to start off and ask on your comfort level regarding liquidity. When considering the next eight quarters or so, we know the focus is on getting all the MSC online. You still have a good amount of cash, but these swings in the ethanol market can sometimes eat into some of that. So I'm curious how you feel about the capital runway going into 2023 and any updated thoughts on 2023 CapEx?

Todd Becker, President and Chief Executive Officer

I'll talk first a little about the market. Yes, when we look at the third quarter between the LCM, which is noncash, and obviously depreciation as well, we did see some reduction in free cash flow, but it wasn't significant enough for us to worry about anything. As we come into the fourth quarter, ethanol margins have turned positive again, increasing over the last week. So from that standpoint, the fourth quarter looks solid for generating free cash flow again, despite our continued execution on our build program. We ended the year with the liquidity we have and are starting to see opportunities to generate free cash flow, bringing on ultra-high protein next year and higher corn oil pricing. This was a unique third quarter with record high corn basis, and we were right in the middle of the hotspot. So, we’ve seen some relief from that, and margins have expanded to allow the industry to gain margin. Our run rates continue to improve, and we will execute through that as well. There is a tight or unprecedented diesel situation, a tight heating oil situation, and gasoline tightness as well. We're starting to see this impact ethanol, as people realize the molecule needs to be used. Our setup looks great, and the fundamentals reinforce our optimism for the future regarding our program.

Jim Stark, Chief Financial Officer

Yes, Jordan, just to answer part of your question regarding the 2023 outlook, if you go back to what I said earlier, we have kind of brought the top end of our CapEx range down for this year to a maximum of $280 million. Looking ahead, we anticipate spending around $250 million to $275 million next year, including the DCO Tech build-outs that we want to undertake. We're very mindful about the cadence of capital and feel confident in our liquidity position and guidance.

Jordan Levy, Analyst

It's great color. Just a quick follow-up to that, given your MSC systems coming online and with Central City starting up, I'm curious how the startup has been progressing. I know Todd mentioned it starts— the corn oil yields start picking up before the protein comes on, so curious about the startup timeline trends.

Todd Becker, President and Chief Executive Officer

No. I mean, our view has always been that it takes about a quarter to ramp it fully up. Sometimes it can go faster as we learn more. Everyone is well-trained to run the systems now because they’ve been trained at other facilities. What we wanted to do is to start making oil on Day 1. Oil share today at $0.80 a pound means we want to produce as much as possible because that's helping pay for the investment. In fact, oil alone can almost start to cover the investment cost, but ultimately, what's important is production beyond that. Central City has just started up the protein dryer this week, and we are producing product, sending it to our silos with product specifications on track. We just continue to ramp higher. Ramp rates happen quickly once the dryer comes online. We’ve processed very well with all the teams operating systems effectively, and we expect a great performance.

Kristen Owen, Analyst

You talked about shipping in Q4 to a variety of protein markets, swine, poultry among them. How advanced are discussions with these partners? Could you share insights about cycle times regarding customer conversations, especially given the prevailing macro backdrop?

Todd Becker, President and Chief Executive Officer

Yes. It was challenging to get engagement when announcing Shenandoah was running and producing 45,000 to 50,000 tons of protein. Now we are increasingly credible and can effectively ship a full vessel globally. This credibility fosters broader attention and inclusion in significant orders across systems. Our dedicated sales team, nutritionists, and customer support collaborate worldwide on using the product efficiently in aquaculture and livestock sectors. Customers now require larger volumes, and with our improved capacity, we can meet their needs confidently.

Kristen Owen, Analyst

Super helpful. A related question regarding your 2024 EBITDA guidance, which you said was on track. I'm wondering about thoughts around protein pricing in that 2024, 2025 timeframe, considering more soybean meal is expected to come online.

Todd Becker, President and Chief Executive Officer

Yes. This has been a popular topic among our customers and shareholders. A couple of years ago, in the ethanol industry, we brought on approximately 40 million tons of protein to the market. While it may have fluctuated for a year or two, the absorption was rapid. We estimate about 15 million to 20 million tons of soy protein will come online in the next three to five years based on current projects. We anticipate that this protein will be absorbed quickly, supported by continuous demand growth of 10 million to 15 million tons per year over 10 to 15 years. Therefore, while there may be some fluctuations, we expect the market to adjust swiftly. Our product is not merely a soybean meal replacement; our offerings include unique benefits. We can discuss the specifics of these benefits as well.

Leslie van der Meulen, EVP of Product Marketing and Innovation

Indeed. As we consider these factors, our product’s position on carbon is tremendously appealing to customers. We are gaining traction as there's been increasingly significant attention on advanced nutritional products. As we progress towards higher protein offerings like 58%, 60%, we detach from the soybean meal basis into a completely new category with options like corn gluten meals, fish meals, and other concentrates that stem from the same system, requiring no further investments.

Ken Zaslow, Analyst

Could I ask two questions? One is, can you walk us through how you perceive 2023 expectations for consolidated EBITDA? You covered various factors, but I'd appreciate your broad outlook on this.

Todd Becker, President and Chief Executive Officer

Yes. At our last conference, we noted that MSC represents a $90 million to $120 million range opportunity for 2023. Corn oil is about a $165 million opportunity, while Ag and energy typically fall within a $30 million range. Corporate overhead is around $60 million, targeting an overall range of $225 million to $255 million. We're monitoring several moving aspects, with higher corn oil prices presenting potential upside. While there's downside risk to consider, we're maintaining our mid-range guidance.

Ken Zaslow, Analyst

And what about the premium pricing you're receiving on high pro relative to your overall pricing; how consistent is that across your portfolio?

Todd Becker, President and Chief Executive Officer

Each customer and application varies slightly in pricing. For commodities, we can operate our MSC plants to produce lower protein products to remain competitive. Our projections of the uplift are between $0.12 and $0.15 a gallon, and we anticipate the 60 pro product can deliver a substantially higher premium as we proceed.

Adam Samuelson, Analyst

Sorry about earlier. Todd, I want to clarify your guidance points and ensure we're not double counting. You stated a $0.12 to $0.17 per gallon uplift from high pro, but it's also been referenced alongside distillers' corn oil. To clarify, is that uplift purely from high protein, or is it high protein plus corn oil on the 550 million gallons converted? I'm trying to clarify that.

Todd Becker, President and Chief Executive Officer

I can clarify that for you. No, we've clarified it and haven't wavered from this. The corn oil data we give you is based on the pre-MSC volumes across our system, close to 300 million pounds. For next year, the market is $0.80 a pound minus $0.12 to $0.15 in production cost, so our EBITDA revenue would net around $180 million-$190 million with varying projections. The corn oil earnings outside of MSC would be higher, but we included it because MSC isn't just a protein system; it also separates various products, including oil and protein.

Eric Stine, Analyst

Regarding carbon capture, while there are positive developments like tax credits and pipeline progress, there's also emerging local or state-level pushback against pipelines. I'm cautiously optimistic about the benefits starting in 2025, but what are your thoughts on the push and pull regarding carbon capture going forward?

Todd Becker, President and Chief Executive Officer

It's a compelling situation. First, understand the economics at stake. The Inflation Reduction Act is momentous for our company and the pipelines being developed. It offers a profitable avenue to invest in, whether via pipeline or direct inject from our eastern plants. The chance to generate low-carbon ingredients like proteins and oils and alcohol, especially considering alcohol-to-jet later in the decade, is monumental. The progress at our plants related to pipeline agreements is impressive, with high percentages of right-of-way locked down across several states. We encourage farmers to allow the pipeline through their properties, succeeding in many areas. There will always be a few holdouts for pipelines, but this is a broader agricultural opportunity to sequester carbon from ethanol plants to propel our sector. We're excited about it. The economics behind the IRA and requirements for energy use from fossil fuels make it favorable for us and others to pursue alternative energy strategies, reducing fossil fuel usage. The money offered through this act affords us a unique chance to decarbonize, which also applies to the alcohol-to-jet opportunity with high probability for success in the market.

Salvator Tiano, Analyst

My question pertains to the management of your ethanol system. You've indicated that you brought forward many maintenance and turnarounds. Given how extreme the basis was, are you considering shutting down any facilities? If it were to happen again next year, how would you manage your systems to avoid EBITDA losses?

Todd Becker, President and Chief Executive Officer

This was a unique, unprecedented situation with the inversion. On any given day, decisions are made on whether to run through this inversion or shut down. We opted to continue running. Historically, inversions break rapidly, but this one lingered significantly longer. We see that the need for product and low carbon oils is driving positive ethanol margins, even before factoring in corn oil at this point. While it's possible this could recur, we need renewals for corn in the US and South America. Watching weather patterns closely is crucial. However, we have a strong setup heading into 2023 and 2024, where we expect recoveries in output generation, bringing in a positive impact on our balance sheet. We've adjusted our strategy effectively with maintenance and run rates, which offers us resilience moving forward. Yes. Thanks, everybody. Obviously, not the quarter we wanted, but the upcoming quarter aligns with what we aim to achieve as we prepare for 2023. Execution across five major projects amid supply chain and COVID-related challenges has been successful. Our strategy, trending towards low carbon feedstock production and innovative market solutions in agriculture, is set to position us for success. We're optimistic about our financial outlook as we advance into Q4 and early 2023, and we appreciate your continued support. Thank you.

Operator, Operator

Thank you for participating in today's conference. This now concludes the program. You may now disconnect.