Green Plains Inc (GPRE) 2009 Q2 法說會逐字稿

Greetings and welcome to the Green Plains Renewable Energy, Inc. second-quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) as a reminder, the conference is being recorded.

It's now my pleasure to introduce your host, Mr. Jim Stark, Vice President of Investor Relations for Green Plains Renewable Energy, Inc. Thank you. Mr. Stark, you may now begin.

Thanks, Jackie. Good morning and thanks for joining us. Todd Becker, President and Chief Executive Officer, and Jerry Peters, our Chief Financial Officer, are on the call today. Also joining us is Steve Bleyl, Executive Vice President of Ethanol Marketing, who will be available during the question-and-answer portion of this call.

We are here to discuss our second-quarter 2009 financial results. Please remember that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains' management, and there can be no assurance that any such expectations will prove to be correct.

Because forward-looking statements involve risks and uncertainties, Green Plains' actual results could differ materially from management's expectations. Information about factors that could cause such differences can be found in yesterday's earnings press release on page 2 and in our 10-K and other SEC filings.

The information presented today is time-sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Green Plains will not be reviewing or updating this material.

I would like to turn the call over to Todd Becker, our CEO.

Thanks, Jim. Good morning. I'm glad to have you all on the call today. We hope you all had a chance to read our second-quarter earnings release issued yesterday after the market closed. Briefly, our consolidated revenues for the second quarter were approximately $285 million. We reported net income of $627,000 or $0.03 per share. We are happy to report a profit in the quarter after navigating through an extended period of margin compression, which the industry has experienced over the last couple of quarters.

We are also very pleased with the performance of our Agribusiness Segment during the quarter. Segment operating income before corporate expenses was $7.3 million in the second quarter, which was a $12 million improvement compared to the first quarter of 2009. We saw an improvement in the margin environment during the second quarter, with our Ethanol Production Segment generating $2.6 million in operating income. We produced and sold 77.1 million gallons of ethanol from company-owned plants.

We should approach and could exceed 100 million gallons of company-owned ethanol production in the third quarter, with the addition of the two plants in Nebraska. We started production at these plants during July, and we expect to be producing at full capacity towards the end of August. As a result, we don't anticipate a significant contribution to earnings in the third quarter from these two plants.

We do look forward to the fourth quarter when we will see the full capability of our diversified platform, including the contribution from our Agribusiness Segment as a result of the fall harvest.

To recap a bit of our brief history, over the last 12 months Green Plains has gone from one 55 million gallon plant to a total of six plants capable of producing 480 million gallons of fuel grade ethanol, becoming the fourth largest producer in North America. Most recently in July, we completed the acquisition of Ord and Central City plants, which added 150 million gallons of production to our platform.

Combined with 305 million gallons we market for other ethanol producers, Green Plains markets and distributes 785 million gallons on an annual basis or proximally 7.5% of the US ethanol supply.

Our Agribusiness Segment turned in a strong performance in the second quarter, reporting an operating income of $4.1 million. This performance was the result of solid sales in fertilizer and agronomy services. We are pleased with the performance of this business segment and look forward to a solid contribution in the fourth quarter of this year. The contribution of this segment to the overall platform this quarter is a prime example of our strategy of having diversified income streams which has differentiated Green Plains from its heirs. We view this segment as the next area of growth, both organically and through targeted acquisitions.

Our Marketing and Distribution Segment also provided positive operating income of $587,000 in the second quarter. With the addition of a $30 million credit facility, we are looking to expand this segment and market more ethanol from additional third-party producers.

Our focus heading into and during the second quarter was process improvements and efficiency gains across the platform. While our management team has significant experience in their respective areas of responsibility, we as a team have been operating together for only 10 months since the completion of the merger October 15, 2008. We made excellent progress towards our goals of process improvement and efficiency gains at each of our plants. I strongly believe we can continue to improve going into the second half of 2009.

We are encouraged by many positive signs we are seeing in the biofuels industry today. Demand for ethanol is growing at favorable blending economics, and there are refiners and blenders using more ethanol for discretionary blending.

In addition, the renewable fuels mandate will rise to 12 billion gallons of ethanol in 2010. Currently, supply and demand is close to equilibrium. With a 1.5 billion gallon increase in demand coming, we are optimistic it will stay that way. This combined with favorable crop conditions should provide the industry with an opportunity to achieve reasonable operating margins, provided we remain focused on operational efficiencies and risk management.

While we are encouraged by the favorable trends in the industry, we continue to be diligent in our risk management program. Our focus remains on locking in margins on a per gallon basis for our ethanol production. As noted in our release yesterday, we had approximately 15% of our ethanol margins locked in. In volume terms, that's over 70 million gallons.

We are proud of this accomplishment as our traders and risk managers remain very active on a daily basis, looking for opportunities to lock more margins away. Our liquidity position improved in the second quarter with cash on hand of $55.3 million, up from $53.5 million at the end of the first quarter.

On July 30, we entered into a $30 million revolving credit facility with PNC Bank to fund working capital and ongoing operations in Green Plains Trade Group. This line of credit increases our flexibility to take advantage of opportunities as they arise.

Now I would like to turn the call over to Jerry to review the second-quarter financials in more detail.

Thanks, Todd. Good morning, everybody. I would like to again remind you -- remind everyone that Green Plains in the fourth quarter of 2008 completed a significant merger with VBV that was accounted for as a reverse acquisition. Since VBV was engaged in the construction of this ethanol plant during most of last year, we have no significant operating history to compare with from 2008. As a result, our comparisons will be to the prior sequential quarter and not to our results for the second quarter of 2008.

We reported revenues of $285 million in the second quarter of 2009. That is a 29% increase over the first quarter of 2009, when revenues were $221 million. For the first half of 2009, we reported total revenues of just over $0.5 billion. As I will discuss in a few minutes, revenues in the quarter were higher in each of our three business segments.

Consolidated gross profit was $14.9 million for the second quarter, which is a $13 million improvement over the first quarter of 2009. The increase is attributable to margin improvements in ethanol production, margins on agronomy products sold during the second-quarter planting season, and the charges totaling $8.6 million that we took in the first quarter related to legacy contracts and operational issues at our Bluffton and Superior plants.

Total operating expenses were $10.7 million in the second quarter, compared to $9.1 million for the first quarter of 2009. Most of the increase in operating expenses related to higher depreciation and amortization expense on our Blendstar business, as well as higher labor costs due primarily to increased seasonal activity in Agribusiness.

Looking briefly at our business segments. For the second quarter we reported revenue in the Ethanol Production Segment of $152 million. That was an increase of 10.6% over the previous quarter. Ethanol volumes in the segment increased 5.3% over last quarter to 77.1 million gallons.

Our Agribusiness Segment generated $58.8 million of revenue for the quarter, compared to $46.2 million for the previous quarter. We had anticipated an increase as we indicated on our last earnings call. The quarterly performance of our Agribusiness Segment fluctuates on a seasonal basis, with the second and fourth quarters being stronger when compared to the first and third quarters of the fiscal year.

Marketing and Distribution Segment revenues were $231.2 million for the second-quarter 2009, compared to $178.4 million for the March 2009 quarter, representing an increase of nearly $53 million. This increase is the result of a full quarter of marketing ethanol for third-party producers and all of the Company's ethanol production, beginning in the second quarter of 2009.

As shown in the segment tables, each of our business segments recorded positive operating income for the quarter. Segment operating income or total operating income before corporate, general, and administrative expenses was $7.3 million in the second quarter compared to an operating loss of $4.8 million in the first quarter of this year.

Beginning this quarter and going forward, we are reporting our corporate operating expenses as a separate line item in our segment reporting. Our objective is to provide greater transparency and show the numbers to you as we look at them.

Our corporate operating expenses increased from $2.4 million to $3.2 million between the two quarters, which reflects the increased scope of our activities with expanded production, marketing, and distribution operations. But if you spread the current run rate across the platform, our corporate expenses should be in the $0.027 per gallon range.

To maintain our position as a low-cost producer, we target holding these expenses to about $0.03 per gallon or less. So again, to summarize, our net income for the second quarter was $627,000 or $0.03 per share on a diluted basis.

EBITDA during the quarter or earnings before interest, income taxes, depreciation, and amortization was $11.2 million, which was a significant improvement over the first quarter of 2009. EBITDA on a year-to-date basis was $10.6 million.

We continually focus on cash flow and use EBITDA to manage each of our business segments. I would like to remind you, though, that EBITDA is a non-GAAP financial measure and would direct your attention to information included in the news release, including a reconciliation to our GAAP net income.

Our liquidity position is strong, with $55 million in cash at the end of the period. As Todd mentioned earlier in the call, we finalized a $30 million credit facility within the Marketing and Distribution Segment, which will expand our ability to fund working capital needs associated with our ethanol and distillers grains marketing.

As you might imagine, securing incremental financing in this industry at this time was no easy task. Our finances and billing processes were subject to rigorous scrutiny by the lender, and we are pleased to report this passing grade.

Also, I would like to point out that the closing in early July of the acquisitions of the two Nebraska plants will not be reflected on our balance sheet until the third-quarter 2009.

Overall, we are pleased with the improvement in our financial performance in the second quarter. We will continue to lock in favorable margins when available, and our focus is on process improvements and controlling costs at every level to improve our bottom line.

Now I would like to turn the call back over to Todd for his closing comments.

Thanks, Jerry. Ethanol has started to turn the corner. Where ethanol is currently priced versus gasoline, blenders and refiners are incentivized to find more ethanol. We are hopeful that the Environmental Protection Agency in early December will see its way clear to grant a waiver to all ethanol blending up to 15%. The E15 waiver initiated by Growth Energy would continue to increase demand for ethanol in 2010.

Our Blendstar investment continues to be focused on building out their geographical platform. They expect a seventh terminal location in Collins, Mississippi to be operational by the end of October. In addition, we are now handling biodiesel in three of our terminal locations -- Nashville, Louisville, and Oklahoma City. This is an exciting development within that business.

Blendstar continues with the development of several additional locations, and we believe that favorable blend economics, the potential for an EPA waiver, and the growth in the mandate for 2010 solidifies the need for additional blending solutions in underserved markets, and Blendstar is well-positioned to capitalize on this opportunity. This is another area of the platform where we are focused on expanding our footprint.

Construction is underway for the Bioprocess Algae project for our Shenandoah facility. We are hopeful to have everything completed and to be producing algae by the end of September. Our technology focuses on growing and harvesting the algae. It is as much about harvest sequestration as it is about advanced biofuels production capability.

We have a solid diversified platform which we believe puts us in a good position to finish out the rest of 2009 on a positive note. Our focus remains on margin management and operational excellence, with safety being a top priority. We believe by executing our business strategy with the platform we have assembled, we will continue to create long-term shareholder value.

I would like to thank anybody for calling in today. Now I would like to ask Jackie to direct a question-and-answer session.

(Operator Instructions) [Matt Farlow], Imperial Capital.

Good morning, guys. I see you had some nice growth in the Agribusiness Segment, and I'm wondering if you can provide some more color on what's driving some of the top-line growth. And also I see the margins are improving. Is this a seasonal change or should we expect them to remain this high going forward?

Well, with regard to the Agribusiness Segment, that is -- we completed the acquisition of that company in early 2008. We've really been focusing on improving that business overall. We focused on going out and getting new customers, making more sales, and really expanding that business. We see a lot of organic growth there from volumes, both in agronomy as well as grain handling, and that for us is a segment that we continue to focus on every day.

And we think overall, we still haven't seen the full capability of that segment yet, and that will come in the next couple of quarters during these seasonal quarters that are most important to them.

With regard to the margin environment, we have seen an improvement in ethanol margins overall, and that improvement continues to roll forward here. And we really don't operate in the spot market. It's really not where Green Plains operates. We continue to try to lock margins in two to three to six months out, and we've been successful in doing some of that.

The margins today, from our standpoint, are adequate to continue to move to lock margins in, and hopefully, we're able to do that. It's always difficult to go a quarter or two out in this industry to put a lot of -- to lock a lot of the margins away, but we have been making progress. As you see, we came into the third quarter -- or coming into this quarter currently with 70 million gallons locked in, and we continue to make progress from there.

So we are optimistic that the current margin environment based on supply and demand equilibrium in ethanol will continue to roll forward.

Another question, you mentioned that the amount of production in sales hedged over the next 12 months is roughly 15% on both sides. How much of that is exposure in the current quarter versus hedges that will fall into future quarters? I guess another question is do you plan to ever separate out hedging gains or losses on the income statement?

Well, let me answer the first question and then I'll let Jerry answer the second question. Of the 70 million gallons that we have locked in, most of that is heavily weighted towards the third quarter. We try to come into each of the quarter with a large percentage of our gallons locked in, as we don't want to operate in the spot market. And that's kind of always been our focus.

So I would say that it's heavily weighted towards Q3, and now we're focusing today on locking in Q4 as well. Jerry, I'll let you comment on the hedge gains and losses.

In terms of the potential to break that out on the income statement, it's just fundamentally not the way we view the business; that we are working with fixed-price contracts for corn, fixed-price contracts for ethanol, times these derivatives to put those hedges in place. So it's so much embedded in all of our ethanol marketing and corn procurement and natural gas and DDG activities that it's just integral to all of that.

So we don't really see that it would make sense to break that out separately in terms of what's coming from the derivative accounts versus what we are doing directly in fixed-price contracts.

And I think, Matt, just to follow up, most of those 70 million gallons were locked in just on fixed-price contracts without derivatives embedded into those contracts. So we actually have the physical corn bought and the physical ethanol sold, all flat price.

Okay, good. I guess last question is I see you recently took out another term loan. What is the interest rate on that loan, and are there any other relative terms; in particular, which assets secure that loan?

That's all within Green Plains Trade Group, so that's secured by the working capital and the assets of Green Plains Trade Group. The interest rate is about 5.5% currently. It's a floating rate financing.

We have outlined that rate in our Q as well, and as well -- what it really does is position Green Plains Trade Group to have the ability to grow now, even beyond what we had earlier expected. We've been funding a lot of our growth with our own cash position. So we think we have better uses for cash, and the ability to take that -- get that term loan and help fund the growth in Green Plains Trade Group was a big opportunity for our business going forward.

Great. Well, thanks and congratulations on a successful quarter.

Paul Resnick, Olympia Asset Management.

Good morning. Just a couple of small questions. The 100 million gallon target for the third quarter. In the fourth quarter, you will have everything up and running. What do you think it will be in production in the fourth quarter? Anywhere near -- well, anywhere near 100% of rated capacity, or do we even have the potential to do a little better?

Our goal is really to get to our rated capacity of 120 million gallons a quarter. That's what we're going to shoot for in the fourth quarter. We have some plants that operate over that, with some plants that operate under that. And then the different margin environments we could scale back or actually push harder.

So we are highly focused on making sure that we at least get to 120 million gallons, and then in different environments we could exceed that as well. But right now, we're not focused on exceeding those numbers.

Then I have a question about the blend ratio. I know there is the effort to get 15%, the waiver to 15%. There's been talk of an interim target of 12%. On the other hand, there's also been talk that since that's not an official request, you can't just arbitrarily make it a 12% to 15% request.

In any event, all of this, I believe there's supposed to be some decision by December 1. Do you have any thoughts about 12% as a possibility?

Well, we are hoping for a decision by December 1, but I think the key point is that as part of Growth Energy, and we were a founding member of Growth Energy which was the main driver behind the process of getting a waiver. Our program and our goal has always been 15%. There's some other groups that came in at lower numbers and thinking that there is a middle ground there, but I think from our standpoint the goal is 15%.

We hope that the EPA approves that. I think there is enough proof that that's the right number to start, and that's the number we're shooting for. So in terms of the 12%, we don't really focus on that number at all.

Very good. That's all I have.

(Operator Instructions) [Richard Genelle], First Midwest.

Hey, Todd, good quarter. Hey, a quick question. Regarding the corn, the crop, does it matter if you have a light season, a big season? How does that bear on you guys?

Actually, what we are anticipating right now is a very good corn crop in the US. All the evidence there is that we are going to have potentially the second largest crop in history. Obviously, having plenty of inputs is a good thing for ethanol, so a large amount of inputs with a good demand base, we actually think sets ethanol up to hopefully continue to see an improved environment.

All right, thank you.

(Operator Instructions) [Hersch Setton], a private investor.

Good morning. The margins began improving late in the second quarter. What is your current profit per gallon for ethanol?

That's not really a number that we can give. We don't give any guidance on current margins or our current profit for ethanol, as we are in the middle of the third quarter and those reports will be -- those will be reported, obviously, early in the fourth quarter. Except to say that even from May and June, we have seen the profit improve -- or we've seen margin improvements, but it continues to be a floating number. So we don't ever give guidance on the current profitability.

But the profits have improved since the second quarter; is that correct?

We've seen a -- yes, we have seen a slight margin improvement from the second to the third quarter, in terms of the opportunity to lock margins away.

Also, the addition of the two plants in Nebraska, has startup gone smoothly, and what was the approximate cost in startup for the two plants?

Well, yes, startup has actually been going well. We just literally started up Central City about a week ago, and before that we started Ord two weeks earlier than that. And we're very happy with the way the startup has been going, and we will have gallons from those plants reflective in the third quarter, and as well margins from those plants.

But we will only say that during startup, there are additional costs in the current quarter that kind of hit you in terms of just normal startup costs. But in general, these are very -- this startup process has gone very, very well.

Well, thank you. That's all of my questions.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Todd Becker for any closing comments.

Listen, everybody, I'd like to thank everybody for coming on today to the Green Plains Renewable Energy conference call. We continue to be very excited about the platform that we are developing here at the Company. We think it's sustainable over the long term.

We want to continue to grow all of the different pieces of our business from agronomy through grain handling through ethanol production, marketing and distribution, as well as we're excited about the potential for the BioProcess Algae project to be deployed in Shenandoah over the next coming months.

In general, we are enthusiastic about where ethanol is today. We think we've become a permanent part of the fuel supply, and we're looking forward to 2010 with the increased mandates and the continued support from the administration in Washington for biofuels and advanced biofuels and renewable energy.

We would like to thank everybody for coming on today, and we hope you a nice day. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.