Gevo Inc (GEVO) 2020 Q2 法說會逐字稿

Welcome to Gevo's Second Quarter 2020 Earnings Conference Call. My name is Andrew, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Geoffrey Williams, Gevo's General Counsel and Secretary. Please go ahead, Mr. Williams.

Good afternoon, everyone, and thank you for joining Gevo's Second Quarter 2020 Earnings Conference Call. I would like to start by introducing today's participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer; Lynn Smull, Gevo's Chief Financial Officer; and Carolyn Romero, our Vice President, Controller.

Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public. A replay of today's call will be available on Gevo's website.

On the call today and on this webcast, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today, which is posted on our website.

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo's operating activities for the remainder of 2020 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission, and in subsequent reports and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10-Q.

Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date, and Gevo disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

On today's call, Pat will begin with a discussion of Gevo's business developments. Carolyn will then review Gevo's financial results for the second quarter of 2020. And following the presentation, we will open up the call for questions.

I'll now turn the call over to Pat.

Thanks, Geoff. We continue to produce and sell hydrocarbon products from the hydrocarbon plant in Texas. The interest in our products remain strong. And in fact, on the business development front, we continue to make progress on additional contracts and we'll get them done pretty soon, I expect. These contracts actually should be our biggest ever. Yes, they're taking a lot longer to get done than I wanted to, but we are focused on getting them completed in the near-term and so are the counterparties.

We believe that the size of these contracts collectively should enable us to change our business model to that of a developer. A project developer, a technology licensor and plant operator. To fulfill the demand from these contracts, we expect that we will need 3 plant sites, 2 more plant sites in addition to that at Luverne. In fact, we have 2 additional sites under LOI and are developing more options. As it turns out, it's a good time for acquiring ethanol plants given the duress they are under with COVID.

We plan on setting up special purpose entity whereby each plant build-out is a project and other people invest the capital, both debt and equity in the project while Gevo would retain a minority ownership interest. This would be -- and some people will talk about this as off-balance-sheet financing, it's project financing approach. On this project-based approach, we are working with Citigroup to raise the debt and equity needed to build these plants. So far, we are getting initial interest from several potential investors, having done management meetings, whereby we explain the details of our projects, including what appear to be attractive project returns.

Pro forma unlevered returns at the project level, accounting for all the construction, hard and soft costs, including the various fees paid to Gevo over the project construction and operating periods, are in excess of 15%. That's good. It could be higher depending upon financing and structure.

It makes the -- it's the returns that make us interesting for people. Especially combined with the potential for whole gallons of hydrocarbon fuels with net 0 greenhouse gas emissions.

We are getting good time and attention from prospective investors. The questions are good. We have lots of work to make it all come together. We need to bring it home and get it done. We are encouraged by the discussions. Citigroup tells me that they're encouraged. We have the numbers in a mix of financial groups and strategic investors that Citigroup expected to have when we began the process. So it looks to be on track.

At the Gevo, Inc. level, we are working on refinancing the Whitebox secured note. We have approximately $12.5 million of debt due on December 31. By having some cash on the balance sheet, it helps us create more options. We could partially pay white box down and gain an extension until April 1, 2021, which gives us a longer runway to secure debt from other potential vendors. We will develop the options over the next few months and choose a path.

I expect that we will have some significant announcements soon, both on the offtake side and for licensing. I would have liked to talk about them today, but the agreements need to be finalized completely, we're almost there.

Looking forward, we expect to get the contracts done, pin down our planned sites beyond Luverne, figure out who is partnering with us to build those assets and finish up on the refinancing of the Whitebox note.

Now I will turn the call over to Carolyn, who will take us through the financials. Carolyn?

Thank you, Pat. Gevo reported revenue in the second quarter of 2020 of $1 million, as compared to $5.1 million in the same period in 2019. During the second quarter of 2020, hydrocarbon revenue was $0.9 million compared to $0.1 million in the same period in 2019. Hydrocarbon sales increased because of higher shipments of finished products from our demonstration plant at the South Hampton Resources, Inc. facility in Silsbee, Texas.

During the second quarter of 2020, revenue derived at the Luverne facility from ethanol sales and related product was $0.1 million compared to $5.0 million during the same period in 2019. As a result of COVID-19 and unfavorable commodity environment, we terminated our production of ethanol and distillers grains in March 2020, which resulted in lower sales for the second quarter.

Cost of goods sold was $2.6 million in the second quarter of 2020 versus $8.5 million in the same period in 2019. Cost of goods sold included approximately $1.0 million associated with the production of IBA and related products and maintenance of the Luverne Facility and approximately $1.6 million in depreciation expense.

Gross loss was $1.7 million for the second quarter of 2020 versus $3.3 million for the second quarter of 2019.

Research and development expense decreased by $0.3 million during the second quarter of 2020 compared to the same period in 2019 due primarily to a decrease in personnel and consulting expenses.

Selling, general and administrative expense increased $5.7 million during the second quarter of 2020 compared with the same period in 2019, due primarily to an increase in personnel, consulting and insurance expenses and professional fees.

For the second quarter of 2020, we reported a loss from operations of $5.3 million compared to $6.5 million for the same period in 2019.

In the second quarter of 2020, cash EBITDA loss, a non-GAAP measure that is calculated by adding back depreciation and noncash stock-based compensation to GAAP loss from operations was $3.1 million compared to $4.8 million in the same quarter of 2019.

Interest expense for the second quarter of 2020 was $0.5 million, a slight decrease compared to the same period in 2019 as a result of lower amortization of original issue discounts and debt issuance costs.

For the second quarter of 2020, we reported a net loss of $6.0 million or a loss of $0.40 per share based on weighted average shares outstanding of 15,071,105 shares. This compares to a loss of $7.1 million in the second quarter of 2019 or a loss of $0.60 per share.

In the second quarter of 2020, Gevo recognized net noncash loss totaling $0.2 million due to changes in fair value of certain of our financial instruments such as warrants and embedded derivatives. Adding back these noncash losses resulted in a non-GAAP adjusted net loss of $5.8 million in the second quarter of 2020 or a non-GAAP adjusted net loss per share of $0.39. This compares to a non-GAAP adjusted net loss of $7.2 million in the second quarter of 2019 or a non-GAAP adjusted net loss per share of $0.61.

Now I'll turn it back over to Pat to wrap things up. Pat?

Thanks, Carolyn. And with that, I think we can open it up for questions. Operator?

(Operator Instructions) And our first question comes from the line of Amit Dayal with H.C. Wainwright.

So Pat, any color on the 2 commercial agreements you highlighted in the press release? Does this relate to the offtake and the licensing agreements you touched on? Or is it something else?

It does, both of those. And what's happened is that as you look forward in the world of hydrocarbons, you have to step back. Everyone gets really focused on jet fuel. And jet fuel is good. But this year, everyone knows it takes a hit, it will be back and people need to be greening up their jet fuel still and they're going to never escape it, that's just reality, and it's being driven from pretty much most of the points of the world. And so that's important. Now with gasoline, and remember, we make renewable gasoline. It's high octane renewable gasoline. While the world has moved and is continuing to move towards higher compression engines. And that means that premium-grade gasoline are going to be in increased demand, and that's driving demand for our products. And so I think the agreements reflect that. And then you'd also -- we'll make progress and announce what we're doing on the licensing front, too.

Understood. Are these 3Q or 4Q-type cabins?

Man, these are ones we've been working on for months already. And I would love to say, I really did expect that we would've been done already, so we could say something about them today, but they just aren't ready yet. So I think they should be done soon rather than not far away. At least, the beginning of these. We have a series of them. And so sooner rather than later, but I hate to -- these days, it's a pain sometimes just to get a signature on a piece of paper properly.

Understood that. And then on the ethanol side, I mean your comments sort of alluded to it. A lot of distressed assets potentially in the market for you guys to look at as a part of your efforts to move into more of a project development type role. But then sort of a separate question on that front. Some ethanol companies have also shifted to producing high-quality alcohol or hand sanitizers, et cetera, are you looking into anything along those lines to support cash flows, et cetera?

Well, we've taken an investment at a plant like ours to do that. And it's not mainstream and it doesn't overlap -- mainstream of our strategy, and it doesn't overlap with production of isobutanol. So that would just be a capital outlay that it has to make to go do it. And the thing is that any company, any ethanol company on Earth, if they want to, could do that. So the guys who are giant ethanol players are way better positioned to do that because they could just add a small distillation column to get to the purity and the grades that they need to make that stuff for hand sanitizer. And we can't compete with them economically. And if the ethanol industry holds true, it will drive that price down as well. So we just look at it and say, yes, I can -- it's a great opportunity to spend a bunch of capital, by the time we get it installed and built, the margins will be gone, and we'll get -- we wouldn't make money. So it's just -- and it's not what we intend to do. We're going to use every bit of our capital to commercialize the hydrocarbons, the jet fuel and the renewable gasoline, that's our focus in life.

Understood. And then going back to sort of the Citigroup efforts. You highlighted Luverne plus 2 potentially additional plant sites.

That's right. So yes, we...

Is Citigroup working on like these 3 opportunities? Or is it just focused on maybe 1 or 2 of them? Any color on how they are thinking about sort of executing with what they have in front of them?

Yes. Yes, with the contracts we have line of sight so we can see that we're going to need 3 plants, and that results in about 70 million gallons of offtake demand on a take-or-pay basis, ballpark. And we see good contracts because we're doing this stuff and a confidentiality discussions. The players who are negotiating with us, they can see who they are, too, so they already know.

And Citigroup is working with us in all 3. So to fulfill that demand, we think we're going to need 3 plants. We would need -- we built out Luverne to something like 13 million gallons. And then we'd have 2 other 30 million-gallon hydrocarbon plants. Those -- so think of that as 50 million-gallon ethanol plants. But by the time we're done with them and we're making them into hydrocarbon plants, probably around 30 million gallons. That's the way to think of it.

And our next question comes from the line of Shawn Severson with Water Tower Research.

Pat, can you -- going back to your answer to Amit's question, can you expand a little bit on how the isooctane renewable gasoline is going to be used? I mean are you talking about blending or complete drop in fuel replacement? How do you see the reach -- reaches carbon reduction targets, but I'm still I'm unclear as to how that gets into the market and would be used?

Sure. So the thing with -- when we're talking about isooctane, it really is the basis of gasoline itself. Okay, yes, granted. When traditional gasoline and typical gasoline is made from fossil resources. Ours isn't. Ours is made from isooctane. There's a product that's in the petrochemical fuels industry called alkylate. It's the stuff that you use to make premium gasoline. Well, that's really what our stuff implies. We have no particulates, no sulfur, no nitrogen. That means we don't have -- it doesn't pollute the same way. And of course, it has potentially net zero. So octane is the major component of gasoline. It's upwards of 80%, 90% of gasoline. It's in that range. And then you put in other, like 10% ethanol and some other products to help start cold start and things like that. And so it's a pretty -- it's a really good product.

Now as the world marches forward and demand for higher mileage engines goes on, those are high compression engines. That is -- that needs high levels of octane, isooctane. Well, that's what we're making and selling. And so we fit perfectly with where that segment of the gasoline is.

Now when you look out to the future, and this is an amazing thing. If you look out for the future. Well, first look at today, you look at how much fossil fuels are being burned, it's 955 billion gallons sold today. And you look out to 2050, you know what, it's in the same order of magnitude of fuels being sold even with EV, which is astounding. So that always shocks people because everyone says, well, we're just going to use EV to solve the problem. Well, you know what, if new EVs, we've got to retool and redo all fleets everywhere, all people have to have new cars, and we have to have new infrastructure and new electricity. So it's a not -- yes, in the fullness of time, sure, we'll make progress. But you know what, here's a product that doesn't require a change by consumer behavior, they just buy it. It doesn't require -- it just goes into the -- it drops into the system. You can blend it to whatever level you want. You can make it complete gasoline, to your point that you asked about. You could, if someone wants to do that. Or blend it, you still get a carbon reduction because the carbon footprint is so low. So it's a very different kind of a paradigm to solve that problem. And even in 2050, it's gasoline is the major contributor to greenhouse gas. It's not jet fuel, jet fuel is minor. And it's not even the diesel fuel. That's minor compared to gasoline, even out in 2050. So it's one of these things, and that's pretty astounding. Now we've been proving out our performance for years, working with Haltermann Carless and the European F1 racing circuit. And so our stuff is -- it's a really good product. And so that's why there's interest. And does that answer your question?

Yes. No. But how does the cost curve work on this, too? So let's say volume as your plants get up and running? I mean, is this something that becomes, again, like you mentioned, a blend-in opportunity? Or how would it be used? And how would it be from a cost, competitive basis, say, oil at $50 or $60 a gallon?

Yes. I think it would be is that we could deliver up -- we're using carbon value. And let me say it differently. When you think of our product, it's a premium gasoline product. So it's at the high end of what would normally price, even if you could make it from fossil-based. So it's -- there's an underlying price, though, that's based on gasoline. Premium gasoline, like a carbon. And we have green value. So now there's enough reliable mechanisms, low carbon fuel standard in California or European RED R-E-D policies where carbon can be valued. And so enough so that customers believe that it's going to be there. Investors believe it's going to be there. And that's a change over what we had just even a few years ago. So what we do then is from the cost of our manufacturing, plus the returns we need, we take and look at the carbon value, and we share that with a customer. And that brings that cost to their gate, their plant, their facility down to be near or not too far away from the petroleum-based product. And it gives us enough money to make for attractive returns. That's how the business system works. Then they can blend it at whatever level, wherever they want because they usually have to do something to account for their carbon to reduce it. They're obligated parties frequently.

Okay. And just another question on Praj. Any update there? Where things at and I know they've been in the works in a long-time partner of yours, where do things stand?

We're plugging along. We're going to get it done. I can see it and taste it. It's a matter of getting it done. And it's going to be interesting. It will surprise people what we're doing. And it's good because India is a place with a tremendous amount of agricultural resource. You don't think of it that way, but it does. People don't think of it, but it does. They also have no oil. So as a strategic thing for India, as the country having the ability to make renewable research base hydrocarbons is a good thing. And I'll be able to talk more about that in -- soon.

Understood. Just my last question is back to the airlines. Obviously, under quite a bit of duress. I mean if you -- and I haven't seen anything out in the marketplace anything specific, but have they backed off of those objectives that they set out, I believe, for 2025 or -- and sort of changed their posturing as you see it out there in regards to emissions targets and carbon goals?

You know what, they're definitely discussing them and change -- talking about it. They aren't going to be able to get away from though because as companies get bailout money, there's going to be prerequirements, particularly in Europe.

And so -- and then I don't think at a -- there's a real fundamentally interesting thing going on. And that is -- I think we've crossed the tipping point where shareholders at large, they're -- you can't get away from greenhouse gases. You got to do something about it. You can't do business as usual and pollute the earth as usual. And people have realized, they're starting to realize, and companies have been held accountable for their greenhouse gas emissions even with activists, shareholder activists. And it isn't just the airline companies, it's the customers of the airline companies who are held accountable. And so there's this movement afoot that's pretty big. And I think that's probably what drives some of the behavior of airlines. So while I think that the airlines are going to try to find a way to buy themselves more time. And after 2020, it's been so bad for them. I can certainly understand it, it makes sense. As things come back, there would be practical products like ours that should give them fuels that are in the right price hunt so that they can get it done. And that wasn't available before. So that's part of the story. You have to have an alternative to turn to. But I think the pressure will continue to increase because just imagine, it's what I said before, we're planning on burning all these fossil fuels for the next 50 years. And even with bringing on electric vehicles, there's still a huge amount. So I can say with confidence that we're going to see significant increases in greenhouse gases, and that's going to cause additional pressure to occur. So it's a megatrend and isn't going to go away.

And our next question comes from the line of Poe Fratt with NOBLE Capital Markets.

Could you talk about the project financing, whether you've changed the total amount that you're looking for? I think, previously, you talked about potentially project financing in the $700 million range. And then so...

Yes. So the way to think of that is it's about, yes, in that range. And that's a fully baked, fully loaded, fully packed on, fully everything delivered project basis. So that's -- as compared to if I had the balance sheet, I was just spending them on myself, I'd save a lot of money, right? But because you have to do all the reserves and all the other stuff with it. And so it's a typical project finance type of a situation. And the way it works is that you do 20% or 30% equity, 70% debt, and it looks like we have good opportunities there. And then we wind up with a retained interest. We also get paid the development fees, the licensing fees, et cetera. So there's pretty good cash flow coming out of those projects towards Gevo. And make sure -- we would expect it to make us a profitable company. And so it's a -- it looks like it could work because it gives these attractive returns for people who like big infrastructure.

And then looking at your next set of commercial agreements, whether it's on the renewable gasoline or the licensing agreement or even you talked about Praj. Are any of these potential agreements going to generate any cash when they're signed or is everything on the come still?

No, Poe, it's always with the delivery. So the -- we have some contracts, of course, already that as we make product out of our Silsbee plant, they do continue. But we got to get to larger quantities. And so these are -- these take-or-pay contracts. The way they're set up is that the companies are promising something on their balance sheet. If we make it, they're buying, that's that kind of an approach that we're taking. And there's nuances and flavors, but that's, in essence, the basic concept underneath. And so -- and the question of, are they putting anything up? Yes, they're putting up the most important thing of all is derisking for an investor that there'll be someone on the other end if the plant gets built.

Okay. Great. And then could you do a cash walk on -- as a matter -- you ended the quarter with about $6.3 million of cash. You gave an end of the July number of $21.4 million. That implies that, at least from what I can tell that you might not have burned much cash in July. Is that fair?

Right.

Or can you just sort of give us an idea of sort of where you stand right now from a cash burn standpoint, I guess?

Yes, to do what we're doing right today, we're in that range of about $1 million a month or so. $1 million -- and it can go up. It might be $1.2 million, but we don't have -- when we were producing ethanol, there was like automatically a $500,000 extra hit. So you're $1.5 million. And then if the ethanol margin is really bad, it'd be higher. So we saved money by not producing ethanol. And we have project-related expenses that we'll have to spend eventually, but we'll time those as we get better clarity on the timing of the projects and when people pay us back. So it's a -- we're doing a balancing act game right now. Executing the business, executing the plans, executing -- getting more contracts, bringing home, getting the financial projects baked and all that.

Great. And then when you -- I should have asked before, but on the project financing, I think previously you talked about a financial close in the first quarter of 2021, is that still a target? Or do you think that might be -- well, is that still a target?

I think it's -- yes, I mean like if -- well, it was a dream target, given the way things have gone slower with the COVID stuff. But I think it's midyear, next year, mid- to third -- maybe third quarter. It's something like that. That's what I would say. But I think that I don't have great line of sight to it until we have the parties pin down exactly what they're willing to do, how they're going to do it acceptable to us. And we're in the midst of those discussions.

Okay. And then can we just talk about your current shares outstanding and just whether I'm looking at this the right way. At the end of the quarter, you had $15.5 million. You issued 30 million in the equity offering to raise $18 million gross. And then you have the debt conversion of -- into $2 million goes into 4.2 million common shares. Anything else I'm missing as far as is your current shares outstanding should be close to, what, 50 million right now?

Yes, it's in that range, Carolyn, Are you there?

They are 53.8 million.

There you go.

Carolyn, 53.8 million as of today?

Correct.

And does that mean that any of the warrants have been exercised? Or does that include -- I guess, could you give me an idea of -- if any warrants have been exercised yet?

None of the A warrants have been exercised.

None. Okay. So it looks -- is there something I'm missing? If I go 15.5, plus 30, plus 4.2; 53.8. So a lot higher than that. Is there another component that...

We had some restricted stock issuances inside the business.

Okay. Great. And then I noticed that you got SBA loans of about $1 million. Are those -- can you just describe what those loans are? And if any of them or potentially forgivable or outright grant?

They are part of the PPP loan process. They are forgivable, and we're going through the calculations currently to determine how much of it can be forgiven and then we will apply for those forgivenesses along the way. We've got until November to get it done.

Your next question comes from the line of Shawn Severson with Water Tower Research.

I just had a quick follow-up on Citi. I know you said things are progressing there, but can you help me understand what that means? I mean how do you quantify, I guess or -- and qualify the interest in this as you've been in the process now for a while? And is there any particular pushbacks or anything or things that are really liked about? I'm trying to understand how the pipeline looks and how you judge the progress of it?

Yes. So good question. Yes, that's -- we ask ourselves the same thing all the time is how do you know we're making progress. So when we started off on this, you wind up putting together a really detailed management deck. It's like a confidential memorandum, but it's in the form of a PowerPoint presentation. What we're doing is unusual in that, we're doing this renewable gasoline, it's jet fuel, it's made from carbohydrates, and technology has been scaled up. So we're a little different beast than what most people have seen before. Because normally, they think right away, oh, ethanol or biodiesel or redoable diesel. Well, we aren't any of those things. We're a supplement to a higher-performing product and it's economical, and it gives good returns and all the rest. And so it's all -- and it's done a sustainable way that can get to extremely low or even negative greenhouse gas course, which is astounding. That's not in -- the whole gallon's then zero emissions. That's not a concept people heard before. And so what Citi has done is gone through the process of -- they sent a teaser out to a bunch of people, followed up with them, had like half-hour discussions, maybe longer with them and screened them all. And then found people who want to learn more. And then screen them again. And then we bring them in for management meetings. We've had now lots of management meetings. So it's in the -- way more than a dozen. So 16. So 16, it's a split between, call it, 2/3 financially-oriented people who invest in big budgets like this, the rest are strategics. And strategics should be people interested in investing in the business or in the fuels business or whatever they're already players there.

And so it's interesting. And the amount of time that these meetings take with them to do the management presentation is a couple of hours of the top management. And then it's also following up in other discussions. And so the time and attention that we're getting, having -- it's really good. I mean it's really quite impressive. So we'll see. It's a -- everybody is waiting to see a little bit, I think, on are we getting the second wave of COVID. And so I think that people were more robust prior to the 4th of July. And after the 4th of July, everyone was like, wait a second here, is the world changing? Or is it stabling? What's going on? So all that stuff is in the background happening. We get people are still working on it. And we've got a lot of interest. So it looks like it's good. And it is what we set out to do so far. So it's meeting those kind of milestones that we had set up of having this kind of mix, this kind of numbers to get to where we want to be. So we just got to go through it. And the question will be that we'll have to sort out is how they actually want to do this. So if someone is interested and they want to step up and put money in, how will that equity deal be done? How would it exactly work? And of course, in an ideal world where we have multiple people involved so that we can make sure that we have options.

Thank you. I would now like to turn the conference back over to Director and CEO, Pat Gruber, for closing remarks.

Thank you all for joining us, and I appreciate your support. I look forward to the progress you're going to make even after these announcements. Thank you.

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