Gevo Inc (GEVO) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011Gevo, Inc. Earnings Conference Call. My name is Keisha and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Jack Huttner, Executive Vice President of Corporate Development and Corporate Affairs. Please proceed.

Good morning, and thank you for joining Gevo's first quarter 2011 earnings conference call. With me today are Pat Gruber, our Chief Executive Officer, Mark Smith, our Chief Financial Officer, and Chris Ryan, our Executive Vice President of Business Development Downstream.

Before we begin I would like to make some brief introductory comments. Earlier today we issued a press release which outlines the topics that we plan to discuss today. If anyone has not yet seen a copy of the release it's available on our corporate website at www.gevo.com.

Additionally, I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on the Company's website later today.

We want to advise you that this discussion will include forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These forward-looking statements include, without limitation, statements regarding Gevo's expectations regarding the timeline of its commercial production of isobutanol and completion of a joint venture agreement for the retrofit of its second commercial plant.

These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of the management of Gevo and are subject to significant risks and uncertainty. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of May 6, 2011, and the Company undertakes no obligation to update or revise these statements whether as a result of new information, future events or otherwise.

Although the Company believes the expectations reflected in these forward-looking statements are reasonable, these statements involve many risks and uncertainties that may cause actual results to differ materially from what may be expressed or implied in these forward-looking statements.

For a further discussion of risks and uncertainties that could cause actual results to differ from those expressed in these forward-looking statements, as well as risks related to the business of Gevo in general, please see the risk disclosures in the annual report on Form 10-K of Gevo for the year ended December 31, 2010 and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by Gevo.

This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Certain of the information discussed, including EBITDA contributed by our Luverne facility and the Gevo development segment are considered non-GAAP financial measures. The Company believes this information is useful to investors because it provides a basis for measuring the operating performance of the Company's business and the Company's cash flow.

The Company's management uses these non-GAAP financial measures, along with the most directly comparable GAAP financial measures in evaluating the Company's operating performance and cash flow. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP.

And non-GAAP measures presented by the Company may not be comparable to similarly titled amounts reported by other companies. As appropriate to most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP or included in the earnings release which is posted on our website.

In today's call, Pat will begin with a review of our recent accomplishments. He will then turn the call over to Mark to review our financial results for the quarter. Pat will then wrap up with a summary of our upcoming milestones and Chris Ryan will be available for question-and-answer section of today's call.

I will now turn the call over the Pat Gruber, Gevo's CEO.

Thank you, Jack, and welcome to our first quarterly earnings conference call. We are very happy to report the successful completion of our IPO in February in which we raised over $110 million in net proceeds.

As a result, today we are well positioned to support the near-term commercialization of isobutanol. And based on our joint venture model, we project completing the retrofit of three plants, our first, Luverne, plus two joint venture sites using these proceeds. The bottom line of our report this morning is that we remain on track to deliver the milestones we laid out during the IPO.

Gevo is fundamentally a commercialization growth story built on the efficient execution of our retrofit strategy. Now we are focused on four key commercialization activities. The first is to bring our isobutanol production facility in Luverne on line in the first half of 2012. Next, we are focused on converting our existing customer letters of intent to definitive agreements and adding additional customer agreements and getting them in place.

Third, we are working to acquire and access additional production facilities beyond Luverne to fulfill the future customer demand. And, finally, we are working diligently to build and protect our IP portfolio. Now, we have made progress in each of these categories.

First, let me update you on our progress for the retrofit of the Luverne plant, which will be the first commercial scale plant to produce isobutanol. We expect this Luverne plant to produce approximately 18 million gallons per year of isobutanol. Now, that also -- that 18 million gallons translates to approximately 68 million liters per year or 50,000 metric tons per year.

Now, we will use Luverne to serve customers primarily in the chemicals markets. We will also use some of the production volume to seed fuel markets.

Initiating production and sales at a meaningful commercial scale is our number one priority. In this morning's release we announced our groundbreaking ceremony on May 31st for the Luverne retrofit. Although this is largely a ceremonial step, it allows us to reaffirm our planned timing of commercial production and sales from Luverne in the first half of 2012.

Throughout this first quarter we have been focused on completing the detailed engineering with ICM. Our engineering approach is designed to identify the engineering and planning issues up front, allowing for an accelerated construction phase. People refer to this as frontend loading.

We have also been working closely with the Minnesota pollution control agency, the town of Luverne for planning and permitting. As a sign of our progress, our air permit was published in the local Luverne newspaper on April 24.

We are on schedule for onsite engineering work to commence early this summer. We expect to commence -- we will build the plant throughout the latter part of this year, start up the Luverne plant in 2012, then begin producing and selling product. That's our number one focus.

In addition to allowing for accelerated construction, our engineering processes continue to support our capital expenditure estimates of $22 million for this project. That includes $17 million in direct retrofit capital expense, plus $5 million in site-specific and conservative first plant estimates.

Our technology teams have been working at the demonstration plant in St. Joe, Missouri, confirming our engineering design work and optimizing our biocatalyst performance. This work also supports our engineering design approach and is producing on schedule.

Now, turning to our second initiative of building our customer base, overall, we continue to work with customers targeted for supply from our initial plants, focused on specialty chemicals, solvents and specialty fuels. These are expected to be our highest margin, nearest term opportunities.

We are also continuing the development of the fuels market segments, both for isobutanol as a blend stock additive, and for the hydrocarbon derivatives of isobutanol, such as kerosene, jet fuel. In our early years of production we expect that we will serve primarily the chemical markets, while seeding fuel market opportunities. In these early years we simply will not have enough capacity to fully address fuels markets. However, we do intend to develop them for the long run.

As reported in January, we entered into a supply agreement with LANXESS, which grants us an exclusive first right to supply LANXESS with biobased isobutanol during an initial ten-year term for the production of synthetic rubber. This exclusive first right will be subject to the terms of a future supply agreement that builds on our nonbinding Heads of Agreement with LANXESS.

Pricing under the Heads of Agreement includes a mechanism that adjusts for future changes in the cost of our feedstock. Our relationship with LANXESS is underscored by LANXESS' investments in Gevo prior to and during the IPO. I would also like to point out that I will be sharing the stage at the BIO World Congress in Toronto next week with Dr. Ron Commander, head of LANXESS' rubber unit, for a plenary discussion entitled "Strategic Partnerships for More Robust Value Chains."

We continue to develop the solvents market segment. Gevo isobutanol will be a direct replacement for petrochemical isobutanol. We are working with our customers, such as Sasol, to complete definitive offtake agreements. We are pleased with our progress to date.

Consistent with our strategy of delivering to our customers a total solution for using isobutanol in their -- in the production of their products, we have entered into an engineering consulting agreement with Mustang Engineering to convert isobutanol into biojet fuel. The agreement is focused on downstream processing of isobutanol to kerosene, that's jet fuel, for jet engine testing, airline flight suitability tests and advanced -- and advancing the overall commercial deployment.

In terms of our development of biojet fuel, in this morning's release we also announced that fit for purpose testing of biojet fuel produced from isobutanol at the Air Force Research Laboratory is advancing with a final report expected this summer. Once we have successfully completed this step we would expect to initiate jet engine testing with engine manufacturers.

Our work with future customers also extends to products made from PET. Gevo sold samples of biobased para-xylene made from isobutanol to large international brand owners in the PET supply chain for evaluation and production of fully renewable PET. Now, para-xylene is the raw material for producing the major building block of PET. By making fully renewable para-xylene from isobutanol, the potential for 100% renewable PET is thus enabled. This is exciting. This work speaks to existing large market opportunities for isobutanol as a fundamental building block molecule.

In terms of our third corporate goal, we are making significant progress toward accessing additional production capacity through our joint venture model. We are encouraged by the interest we have seen in our JV model from well run, well positioned, late model ethanol plants.

The business model is that ethanol plant owners would contribute their production assets and we bring the retrofit capital of technology. We would produce and sell isobutanol in a joint venture. We are working with some of the best plants, the lowest cost plants in the industry with people who share the vision that there can be a very profitable life after ethanol. They share our vision that a product like isobutanol produced in their facility is a whole new economically attractive gain.

Our focus in establishing these joint ventures is on two key elements, returns consistent with our business model projections and the appropriate decision making and control of the joint venture. We have previously announced a joint venture LOI for a 50 million gallon per year facility based in the Midwest. Negotiations with this potential JV partner to access this plant remain on track to support our goal of bringing that plant online into production by the end of 2012.

Today, ahead of schedule, we announced the signing of a second joint venture LOI with another ethanol plant owner. This one would represent a potential third production site. Not only does this agreement provide us with site expansion options in the near term, it also contributes to our ongoing customer discussions by giving them the very important line of sight to expected future production and capacity growth.

We think that our ability to negotiate JVs that are value-added to both us and our partners is a key strength of ours here at Gevo. From this focus we expect that we will share in the profits from isobutanol sales in proportion to our overall contribution of retrofit assets and technology. However, as each negotiation unfolds we will also need to structure the JVs to meet the local requirements of each partner related to the underlying debt structure in any co-op member obligations.

Letters of intent that we have currently signed also demonstrate interest from farmer co-op sources. Now this is an important factor as we look to partner with local rural communities and farmers for agricultural feedstocks today and potentially for energy feedstocks in the future. We recognize that a long-term success is supported by these relationships.

And, lastly, our ability to generate strong returns for our investors is and will be supported by a strong intellectual property portfolio. We feel strongly that our IP portfolio provides another avenue for us to maintain our competitive advantage.

We are pleased to announce this quarter that three of our patent applications have been accepted into the USPTO's Green Technology Pilot Program. This program is designed to accelerate the examination and issuance of certain green technology patent applications. Building off of this we intend to pursue all avenues to accelerate and establish our IP positions.

As shown through our recent customer interactions, our IP stretches beyond production of isobutanol for the products made from isobutanol. This gateway approach opens up enormous potential markets.

And just to touch on one last item on the Butamax lawsuit front, there is no significant update. We filed our answer in the Delaware District Court on March 25th, denying all claims of infringement. The court date has since been set for April 1, 2013. There have been no other further developments in this matter.

I now turn the call over to Mark Smith for a discussion of our financial results.

Thank you, Pat. With the IPO completed in February, we finished the first quarter with over $116.5 million of cash on hand. This quarter we reported revenues of $15.3 million. This reflected results from our acquisition of Agri Energy in Luverne, Minnesota, which was completed in September 2010.

Our strategic interest in acquiring the plant in Luverne was for retrofit to isobutanol production. Notwithstanding this, we pay close attention to the operations as we establish relations with local suppliers and maintain strong operations.

Despite the increasing corn prices during the first quarter our Gevo development segment, which includes the operations at Luverne, contributed approximately $100,000 of EBITDA. To remind you, Gevo development operations also include costs associated with our efforts to identify and develop joint ventures.

Research and development expense decreased $3.3 million in the first quarter of 2011 from $4.7 million in the same period of 2010. In the prior quarter, the prior year first quarter we recorded a license milestone of $1.6 million, which drove much of this decrease. There has been no change in our commitment to the product development activities.

Selling, general and administrative expense for the first quarter of 2011 increased to $5.2 million from $2.6 million for the same period in 2010. We have increased support staff related to business development, including upstream and downstream business development, public company obligations and incurred increased noncash compensation charges for stock-based compensation of $1.1 million, largely reflecting the increased value of Gevo shares between the periods. We have also incurred costs associated with the initial compliance activities as a public company.

For the first quarter of 2011 we reported a net loss before deemed dividend of $9.3 million, which compared to $7.9 million for the first quarter of 2010. I will now turn the call back to Pat for a review of our upcoming milestones.

Thanks, Mark. Now the past quarter has been a landmark period for Gevo and completing an IPO is a big deal. It puts us in a strong financial position that allows us to execute on our strategy and build our business and we are excited for that. The immediate next step is to break the ground at Luverne, get on and build that plant, get that thing on line, start producing and selling product in the first half of 2012.

Looking ahead, we plan to complete definitive agreements with a joint venture partner. Remember that while we are working diligently to complete a joint venture for our second retrofit site, our planning calls for our second plant to come on line in the latter part of 2012. So we are targeting a second joint venture partnership to have it in place by the end of 2011. It takes about 12 months to do a retrofit.

Our plant rollout calls for our third plant to come on line in 2013. During the coming months we will also be working to convert customer letters of intent to definitive contracts in support of our initial production capacity.

Following retrofit, Luverne is planned to produce approximately 18 million gallons of isobutanol per year. And our second plant is expected to produce approximately 40 million gallons of isobutanol per year.

We would be pleased to take you questions at this time. Operator?

Thank you. (Operator Instructions). And our first question comes from the line of Mike Ritzenthaler, representing Piper and Jaffray. Please proceed.

Good morning, guys. Congratulations on your first quarter.

Thank you very much.

My first question is on the additional customer agreements that you have been working on. Can you give us a general sense of the volumes behind the agreements? I think during the IPO road show you were at about 260 million gallons. Where is that today and can you give us a sense for how it breaks down into solvents, and chemicals and fuels?

Well, the initial production from our plant in Luverne would primarily go to solvents and chemicals, but seeding of the fuels market as well. Now, seeding in the fuels market could take -- for an 18 million gallon plant that might be maybe a third of the capacity might go to seeding the market for fuels. The rest would go to chemicals. And I think that same pattern would occur out through the second plant.

Okay. Thanks. And then the para-xylene samples that you sent to the PET manufacturers, when we have talked to brand owners such as PepsiCo and their peers there is obviously a big push for a 100% renewable bottle. It's a race for these guys. The renewable ethylene seems to be -- the technology to produce renewable ethylene seems to be right around the corner with the likes of Brass [Camman] and such, but how many viable technologies are there for the para-xylene piece of the backlog?

You know that with -- the way that one gets the para-xylene is to start with renewable octene. Octene comes from butene. That's four carbons. And butene of course comes from isobutanol.

So what's interesting is that because this chemistry already is well known in the industry, by us enabling the production of renewable para-xylene, and therefore PET by using, making renewable isobutanol it's kind of interesting because I don't know who has done it other than us. I'm looking at Chris now to see is there anyone else who has done renewable para-xylene or renewable [tritelic] acid with PET?

So the only other approaches of making biobased para-xylene that I'm aware of make a mix of aromatics, including things like benzene that are generally unwanted in the environment. We have the only targeted approach to para-xylene that I'm aware of, biobased para-xylene.

So what Chris is referring to is that because our process streams are clean, our isobutanol is clean, makes a clean butene stream, we can make a clean para-xylene stream without all the other cats and dogs. And that's an advantage unto itself.

Okay. Interesting, thanks. And then I'll throw one to Mark here on a housekeeping note. What -- on share count what should we be using going forward for the rest of the year?

Pretty close to the number you are seeing, you will see on the front of our 10-Q, which about 25 million shares outstanding.

Okay. All right thanks, guys. Congratulations.

Thanks.

And our next question comes from the line of Brian Gamble representing Simmons & Company. Please proceed.

Good morning, guys.

Hey. How are you doing?

Doing well. Question, I guess just follow up on the previous question is your development of discussions with additional facilities, is there any to the total number of plants you are actually talking to, or number of plants or even just in the tone and discussions after you have gotten the first one rolling and now have the second LOI on board?

We know our strategy, and in fact during the road show I explained to folks that what I really want to do is before we close the first LOI was to make sure I had a second one in place. This is just a practical matter of negotiating properly without being held hostage by anybody. So we have done that.

And so now we will go ahead, and proceed and work to get these things closed. I like these plants a lot. These are good. These are very good plants, so contrary to what people would generally believe that Gevo must be working with the broken down, beat up distressed assets, not so. It's the best plant operators who want to work with us because they know how to make money and they know that ethanol had limited opportunity in upside. And they see our product as a great potential opportunity.

And so the amount of interest has actually increased. Part of that is spurred on by the fact that people see that we actually have money to do a retrofit, so that helps us as well.

When you are looking at these facilities and just from a geographical is there any hints to recognize any synergies from one plant to the other if they are in proximity as you move from retrofitting one or retrofitting the next?

There's a couple ways of having synergy. One of course is with the retrofits itself. Once we have done Luverne and have the whole engineering package, then it's tweaking the engineering package to take into additional plants. That's good.

And of course ethanol fermentations are the most straightforward type of fermentation. And so that also helps us. There's other synergies too that we do look at.

You should think of us as business system people. We pay attention to business systems. We like the opportunity to sell animal feed, right? We don't ferment corn. We ferment the cornstarch. We buy corn. We sell the protein. That's important.

And as we look at -- once you have already -- in a business like ours, once we have already achieved very, very high yields on the carbohydrates then the next best way to lower our cost is to make sure that we are very good at selling co-products. So that's in general how we think. And so for us, always included in our thinking is how we can have our plants work together to create additional value. We just have to unfold it, first steps first. We do Luverne.

Great, Pat. I appreciate it from your good quarter.

Thanks.

And our next question comes from the line of Tim Arcuri representing Citi. Please proceed.

Hi, guys, two things. With corn prices going higher and sort of continuing their upward trend, has there been any change in your hedgings or your thoughts around pricing there and your thoughts around how you might hedge that longer term? I know that production is still a ways away, but I wanted to get your thoughts on that.

And then, secondly, I wanted to ask about LANXESS, whether there is any final terms that have been fixed there. I don't believe that there final financial terms that were fixed and I am wondering whether you are any closer to that. Thanks.

Sure. So with our LOIs they -- so far they have all included the customer purchasing the corn and us being paid basically a tolling fee. That's all of the LOIs throughout all of our production through 2015 have been set up.

Now, what's interesting about that -- and of course the reason customers wanted to do that is that they recognized that the real game is the spread of the cost of oil versus the renewable carbohydrate. And, in general, people believe that that spread is going to increase. By putting us at a fixed margin, an attractive fixed margin mind you, they get to put that upside in their pocket.

Now as the game of corn and oil change a little bit we will revisit some of these things and look at them because we might want to have an opportunity to participate in some of that upside if oil is going to be high and we could be indexed to expensive propylene or oil, for instance, that might be interesting for us. In general, each of these contracts could be a little bit different.

So far it has been the customers who want to purchase the corn. So hedging isn't our issue per se, the customers'. The second --

Okay. Thanks. Yes, I guess, Pat, I was just wondering whether -- over time I would think that the customers in the sort of future discussions, I would think that given where oil is I would think that there could be some change in tone from them that they wouldn't be as willing to do that as they were before.

Well, you know what I think will happen is, well, it's the spread. So one of the things that is interesting is it's that ratio of the amount of the cost of oil per -- say you had a ton of oil compared to a ton of carbohydrates. It's that ratio that matters over time. And so we are finding that people are still pretty open minded about it.

Can we come up with more effective ways to create a better upside for ourselves? Yes, we could do that and we will, but so far we haven't had huge pushback, to answer your -- the specific is if you are asking have customers said, no, I don't want to take corn risk, no, we haven't heard that.

Great. Yes, that was the question. Thanks. And then can you answer the question on LANXESS, whether or not financial terms have been finalized there? Thanks.

We have -- we are in the midst of doing that. LANXESS is -- they are a good partner for us and we like them a lot. And we will make progress with them and you will see the stuff as soon as it's appropriate.

Great. Thanks, guys.

And our next question comes from the line of Pavel Molchanov representing Raymond James. Please proceed.

Thanks for taking my question. On the two plant LOIs, can you just give a little color on geography, technology in the plants, anything else you can provide?

Sure. The way that we select plants is we look for corn, the low corn basis. Now, there is the Chicago Board price. That's one thing. And then what corn really costs at a local basis is something altogether different.

And of course these numbers if you were willing to do the work you can discover these things. And the local basis can be quite a lot cheaper than what the Chicago Board price is for corn.

So we take the basis into account. We look at the cost to serve the marketplace. What I mean by that is corn is one thing, but we also care about the transportation and shipping cost to key markets. There is two places where we think our product will get shipped. One of them is Sarnia for LANXESS. The other is down to Houston. Those are the two most likely candidates and so we always look at the outbound transportation as well, so that means we look carefully at rail, truck, and water and pipeline because of course butanol can be put into a pipeline.

So we take all of that factored into account and then we look for a very good plant to operate well, good operating history, low infections, profitable. We like those because that indicates they have a good management team, so we don't have to do anything to upgrade them. And so these are all in the Midwest in cheap corn country.

Are these ICM plants?

They are, so far, but there are -- Delta Ts now have been around long enough where people have fixed them. So where they -- Delta Ts, for people who aren't familiar with the industry, Delta Ts historically have had uptime problems. They have -- they don't run quite as well or quite have the efficiency that an ICM technology does.

However, the people who own them now and have been successful with them have fixed those plants, in general. So I would say two years ago it was a huge difference and as time goes on it becomes less and less of a difference between the two.

Okay, great. And then just follow up on your recent announcement with Mustang, can you kind of walk us through the road map to commercializing biojet?

I'll toss this over to Chris Ryan.

So the first step is to get our jet fuel commercialized. We are working with the Air Force Research Lab and ASTM to do that. We expect that that would be complete in 2013. So what you saw with our announcement with Mustang is the work that we are commencing to engineer that first commercial plan.

Okay. Thanks very much.

I'll add to that. One of the interesting things about making kerosene from isobutanol is there is no magic technology involved. It's straight off the shelf kind of stuff. It has got to be put together in a package and there is -- for doing seeding you need smaller quantities than what people are used to dealing with. So all of that comes into our thinking, but the techniques themselves people practice them. We have just got to get enough stuff out in the marketplace so we can do that at a large scale.

And our next question comes from the line of Jeff Birnbaum representing UBS. Please proceed.

Good morning, guys.

Hey, Jeff.

Hi, Jeff.

Congrats again on the IPO and your first quarter as a public company.

Thanks.

A couple of my questions have already been answered, so I would just say -- I'll ask this. We have heard a fair amount about the poor financial condition that a lot of ethanol plants are in today given breakeven cross rates and the increased balance sheet strength that they need with high and volatile corn prices, plus the blend wall issues that they are facing. So I guess what my question is if you could discuss to what extent that's affecting your conversations with plant owners. Are you seeing small owners willing to, more willing to sell, any increase in competition process from larger players? Thanks.

Yes. So I think if -- I'll take your question as a broad question about ethanol in general, first. And ethanol is a difficult business. And the reason it's difficult is that it's a -- the product is sold at a local spot basis.

Ethanol is up against the so-called blend wall. Now remember how that blend wall came to be. That blend wall is basically due to a regulatory requirement that we have to put a certain amount of oxygen in our gasoline because we all want clean air, so Clear Air Act related thing. And that is related to a specification of, what, 3.7% oxygen that translates to 10% ethanol.

So there's a real need -- there's a certain amount that's mandated. So far ethanol has been the only oxygenate available to put into gasoline.

Ethanol is not the perfect molecule for a gasoline blend stock. It has issues that it absorbs into water. The gasoline properties change as water hits gasoline. The ethanol actually washes out. It has low energy. It has a high, what they call vapor pressure, so that means you have got to formulate a little more expensive gasoline to accept the ethanol.

Ethanol of course is corrosive and that matters for some major manufacturers, not all, matters for some cars, not all. And it does matter for pipelines and reutilizing the existing infrastructure for the ethanol industry to grow. And they would need blenders, pumps, new pipelines, new tanks to have to -- it's quite a lot of capital infrastructure.

Companies like us, and I am generalizing now beyond Gevo, companies like us or have a different alterative, whether it's isobutanol, or whether it's hydrocarbons made from isobutanol or whether there will be some future technology that makes hydrocarbons, all of these have in common that it maps to existing infrastructure, in other words can be put into pipelines, higher energy, better fuel properties. The idea would be to deliver a better quality product straightaway down, so (inaudible) into first of all sell our stuff into refiner, make them fully, full gasoline, send it through pipelines and off to customers. So that's the game afoot.

The ethanol industry itself recognizes that there's a change coming and it's a question of what makes sense where. The ethanol industry, there are lots of plant owners that struggle. There is usually two reasons. They have inordinate debt, a high corn basis or very, very poor access to an ethanol market. Those are really the reasons. Or they could have some fluky problem on their capital equipment.

So what we have is that people kind of hover. They are hovering around breakeven, up and down right around breakeven. Some are doing quite -- some are actually doing quite well. Some of our partners have done quite well.

So it totally depends. What I see is an overall uptick in interest across the board from players of all types. This does include people wanting to do joint ventures or people have approached us to acquire them. We generally have no interest in a broken down plant. There's too many good ones to choose from.

So it's a, I don't know, I guess a target-rich environment for us so far. Now, we have proceeds to do three retrofits. I am keen on entering this marketplace correctly. The steps to do that are get that Luverne plant up and running, make and sell isobutanol, establish the businesses and the price points.

I need that second plant online by the end of 2012. Once we do those things it will be interesting to see and make the decisions about how we should grow, how fast and where we should push more chemicals, more fuels. Along the way we will of course keep developing the relationships with these ethanol plant partners, but with the proceeds from this IPO I can do three retrofits.

Thanks. And I guess recognizing that it's just -- these are still only LOIs, I -- with this second LOI that are announcing today, is it anything you can comment on with regard to whether the economics are roughly in line with what you would expect for a 50 million gallon a year joint venture?

It is absolutely in line. You guys -- we have caught onto you all. You expect us to do that and we are going to deliver.

Okay, great. And then the last question, with regards to the Butamax suit I think you said that the initial court date was about two years away.

Right.

Any possibility of that coming to foot earlier?

Unlikely. This judge is a two-year kind of judge.

Okay. Thanks.

(Operator Instructions). And our next question comes from the line of Rob Stone representing Cowen and Company. Please proceed.

Hi, guys. Thanks for taking my questions. First of all, just following up on that last discussion about the state of play in the industry and your three plan. What might accelerate the plan to retrofit a third plant? And given the size of the opportunity, do you see any potential perhaps for as capital in collaboration with an off taker?

So I will talk through the first steps first. We are going to do this Luverne plant first to get to the second plant. Once we are there, you are right. We will have opportunity to decide how big, how fast we should grow.

Remember, these retrofits are relatively low cost. For 50 million gallons they are somewhere right around $30 million and it takes about 12 months to deploy. These are not giant capital projects. They are truly incremental capital on existing plants.

So we could grow faster. That potential exists. This is not -- this is well within the realm of straightforward management.

The -- what would have to happen for us to grow faster is have a good look at how the chemicals markets are going to unfold, how big, where, how much is moving into butenes. And then of course the fuel market opportunities are immense.

To put this in perspective, for a decent size refiner they might need at one refinery 200 million gallons of isobutanol all at once. Doing a partial increment doesn't necessarily help them. So you will see us -- we have to overcome. A guy who needs 200 million gallons he's looking at us and going, yes, show me you can make it. And we will have a discussion.

Now, there's fuel guys who say I need a specialty product and they will take the stuff straight away from our Luverne plant or our second plant, but to get to these big guys they have got to see that it can be done reliably before they take a bet. And that's the reality in the game we are in, in dealing with fuels. It's big.

Okay. Kind of a housekeeping question for Mark, you mentioned the impact of a milestone payment on expenses for this quarter. Any color you can provide on the expense run rate for Q2 and the rest of the year?

I think the -- I think, well, you see a fairly consistent expense pattern for the rest of the year from what we saw in Q1. There's a couple of increments that you will see that may occur in quarters as we use our demo plant a little more or a little less. That's a fairly, for us, a fairly expensive undertaking and that might bump it up, call it $1 million in the quarter that we run the plant.

The other variable you will see is our Luverne operations. As I mentioned, they did contribute a small amount of EBITDA in Q1. Frankly, if you look back to the fourth quarter of 2010 they contributed $1.5 million of EBITDA. As the seasonality of that market between the cost of corn and the price of fuel changes you may -- we will see a little bit of I think tend to be positive or exactly the same results from our Luverne operation, but the run rate you saw for the first quarter with those couple of variables is consistent with what we have projected for 2010, 2011, excuse.

Okay. And one more question for Pat, you talked about besides production of isobutanol managing cost through doing, being smart about the co-products. In your discussions with joint venture partners where presumably these plants are already managing co-product sales alongside ethanol, who is going to do that? Will it continue to be the existing plant management or would you take that on as well?

Well, we do it jointly with in the joint venture would sell the co-product and book that revenue as the joint venture. And we have just, again, we are talking about longer run views, but there's opportunities here. That protein is really, really important, using, generating. It's interesting in that the protein that's generated from one of these plants is the same level of protein and nutrition that you get from the corn itself, a big deal.

And as protein becomes more valuable it will become more important. So we are going to -- we think in terms of big business, bigger business systems where Cargill trained people, and Cargill got good by managing all the core products well. So without disclosing how exactly we will do it, it's on -- it's in my mind on how to approach that and we are paying attention to it.

Well, if I can tease out one more detail, does that mean you are talking about different markets besides where just those grains are used for feed today?

I can't comment.

Okay. But I just at least tried. Thank you.

And our next question comes from the line of Eric Wistrand representing Think Green Tech. Please proceed.

Hi, gentlemen. How are you doing this morning?

Good. Thank you very much.

Good. I have a quick question here on if you guys have explored joint ventures in the European Union. And the question should be framed by this EU carbon tax on airline flights. I have been running some numbers and the willingness to pay for clean jet fuel in the EU is about 20% higher than they are paying for jet fuel now. I see that as a tremendous market for you guys and I was just wondering if you have explored that possibility.

Chris is going to be at the Paris Air Show next week.

Next month.

Next month. And but there is interest. And, again, we are not in a position where we can comment on what we will do, how we will do it, but we -- our analysis would be similar to yours.

Okay. Thank you.

And our next question comes from the line of [Mike Bahil] representing [Christian Capital]. Please proceed.

Pat, how are you doing? Great job on progress on the first quarter. Just a quick question on the PET market because you scoped out the size of your solvent in biojet and some of the markets. I'm just wondering how big that PET opportunity might be and what does para-xylene trade at on a per gallon basis?

Well, you know what, PET is a -- well, Chris, you have the numbers off the top of your head. I'll then toss this over to you, would you mind? By the way this keeps him on his toes too. Go ahead.

So that's roughly, if memory serves, 30 million metric ton market. And with respect -- so it's extremely large. With respect to the value, the way to think about this is recycled PET, which is positioned as an environmentally superior material, versus virgin PET, prices at a premium to virgin PET. That's what the market is willing to pay if you were to look at that. So I would say that our route to make biobased para-xylene to be converted into PET that is potentially competitive with kind of the recycled PET prices today.

And you know what's interesting about that is the way someone might think of it is, one, making a fully plant-based, no petroleum containing PET is a big deal, but you -- that still is the same PET that can be recycled. So if you have done this well and you can put then, you can green up a whole recycling stream besides. And that's I think why, one of the reasons why people are interested in it. It's a fundamental solution to displace petroleum over the long run across a great big system.

The other way to think about value here is that if somebody wants additional para-xylene that's petroleum-based, you are looking at an incremental increase in a refining operation, which means you are getting a lot of other co-products along with that para-xylene. The approach that we have outlined to make biobased para-xylene has, is a targeted approach that could get somewhat additional para-xylene without all of the accompanying co-products, the capital cost associated with handling those co-products and the operating costs.

Great. Okay, thank you very much.

With no further questions in the queue, I would now like to turn the call back over to management for closing remarks. You may proceed.

Well, since there is no other questions I want to thank you all for participating in this morning's call. We look forward to updating you and working with you in the coming months on our progress, wish you a great day. Have a good weekend. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.