Green Plains Inc (GPRE) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Green Plains Renewable Energy, Inc. first-quarter 2010 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions).

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jim Stark. Please go ahead.

Thanks, Allison. Good morning and welcome to our first-quarter earnings call. Todd Becker, President and Chief Executive Officer, Jerry Peters, our Chief Financial Officer, and Steve Bleyl, Executive Vice President of Ethanol Marketing are on the call today. We are here to discuss our first-quarter financial results and recent developments for Green Plains Renewable Energy.

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 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 this morning's -- or yesterday's earnings press release on page two and in our 10-K and other periodic 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.

Now I would like to turn the call over to Mr. Todd Becker.

Thanks, Jim, and thanks for joining us this morning. We are glad you could listen in today. We issued our first-quarter earnings after market close Wednesday, and we hope you all had a chance to read it.

Let me first start with an update on our safety programs. We've have no major safety incidents this quarter and we are continually focused on keeping our employees safe and are plants a safe place to work. In fact, we just celebrated the second anniversary of no lost-time accidents at our plant in Shenandoah, which is a testament to their focus on safety and security of the operation at that plant.

Operationally, we had a very solid performance from our Ethanol Production segment in the first quarter. We produced 124 million gallons, which exceeded our expected operating capacity during the quarter. We continue to make excellent progress on our debottlenecking program and believe that producing 500 million gallons of ethanol from our existing six plants is achievable in 2010.

The implementation of our Operational Excellence programs are in full swing. At any given time, the Company is evaluating five to 10 enhancement initiatives across the production platform. The value of a successful trial is maximized by our ability to immediately roll out the upgrade across our plants because of our consistent technology, with five of six being Fagen-inbuilt ICM technology.

This is one of the main reasons we are seeing the increase in production volumes. We are still focusing on the low-hanging fruit, as we had thought when we reached these volume levels, we would need to add additional fermentation capacity, which is relatively more expensive to complete, and have subsequently found that we can continue to produce at the higher levels with minimal capital expenditures.

We continually focus on controlling costs and managing the business as efficiently as possible. Being a low-cost producer is critically important in the commodity processing business.

We had good financial results for the quarter. Our consolidated revenues were $426 million and we reported net income of $15.6 million, or $0.58 per share, for the quarter. We had a very strong quarter again in the Ethanol Production segment; in fact, the operating income for this segment was better than last quarter, all while margins were contracting from 2009 highs. Jerry will go into more details on results later in the call, but I thought this was important to point out.

Our risk management strategy worked well for us in the quarter, as we had locked away a good portion of ethanol production for the first quarter by the end of 2009 and were successful in locking away the full quarter by the end of February. As a result, our Ethanol Production segment generated $29.2 million of operating income for the quarter, which was $0.5 million higher than the segment's operating income in the fourth quarter of 2009.

We ended the first quarter on March 31 with 67 million gallons, or 14% of expected production, locked in for the next 12 months, most of which is 2010 calendar volumes. I will discuss today's situation later in the call from a volumetric standpoint.

From an industry perspective, ethanol margins are down from the highs experienced in the fourth quarter, but margins are above where they were in the second quarter of 2009. Again, because of our hedging programs, we did not fully realize the peak margins available in the fourth quarter, but more importantly, avoided the valley during the recent downturn. Since the end of the quarter, we have seen margins start to recover for all of 2010, and I will discuss that later in the call as well.

Last week, we announced completing the acquisition of five grain elevators located in West Tennessee. Combined with our current Agribusiness operations, we now have 30.3 million bushels of grain storage in our platform. The majority of these elevators are located within 20 miles of our 110-million-gallon ethanol plant in Obion. The acquisition not only adds to the diversification of revenue and income streams, it also positions us strategically in the area as a long-term, viable partner to grain producers in Tennessee looking for a full-service Agribusiness operation to build a long-term relationship with.

I am pleased to announce that we were able to close a new credit facility for our Agribusiness segment while acquiring the grain elevators. The amended $85 million credit facility now in place was used to partially fund the purchase of the West Tennessee grain asset and provide working capital for the acquired operations.

The expanded credit facility is also being used to refinance our existing Agribusiness term loan and to refinance and expand an existing Agribusiness working capital facility that was due at the end of September this year. This expanded facility gives us the ability to grow our Agribusiness segment, which should have a positive impact to our bottom line in 2010.

Coming off the environment tight credit markets while closing this very important financing is a testament to our financial strength and the faith these first class financial institutions have in the Green Plains model.

We also successfully completed a follow-on offering during the quarter, raising approximately $80 million in net proceeds. We are working diligently to deploy this capital to grow our business.

We are a growth business. We plan on growing by acquiring more Agribusiness operations, ethanol production facilities and complementary businesses. We can also grow our diversified platform organically by continuing to debottleneck our plants, increasing ethanol production with our existing facilities.

I firmly believe that we can increase the financial performance of our Agribusiness segment by improving inventory turns at all of our elevators and expanding services at the grain operations just acquired in Tennessee.

We continue to look for opportunities to expand both our third-party ethanol marketing and launch new sites for our blending terminals through BlendStar. The opening of Collins, Mississippi and Bossier City, Louisiana are providing additional marketing opportunities for our own production, as well as production across the industry. BlendStar is more than just a terminal business. It is an enabler for us to open up new markets and increase plant profitability in the future.

Finally, we are still young company with an experienced and dedicated management team. Our core competency of managing risk continues to show our capability of managing through margin volatility while delivering solid results. Now I would like to turn the call over to Jerry to review our financials in more detail.

Thank you, Todd, and good morning, everyone. For the first quarter of 2010 we reported strong growth in our top line, with consolidated revenues of over $426 million, which is an increase of $205 million over the first quarter of 2009. The increase is driven by Ethanol Production assets added in July of 2009, as well as higher revenues from an expansion of our third-party marketing business.

Consolidated gross profit was $37.5 million for the quarter, which is $33.5 million improvement over the first quarter of 2009. This increase is primarily the result of higher Ethanol Production volumes and better ethanol margins realized in the first quarter of 2010 compared to 2009.

Consolidating selling, general and administrative expenses were $13 million in the first quarter, which is higher by about $3.9 million than the first quarter of 2009. Most of this increase was due to more ethanol plants in operation and, as a result, more administrative expenses in our business.

I would note, however, that our corporate overhead was $4.3 million for the first quarter, or about $0.034 per gallon. That is in line with the corporate SG&A targets we've stated previously.

In terms of our Business segment, segment operating income in total -- again that segment operating income is total operating income before corporate expenses -- was $28.8 million for the first quarter compared to a loss of $4.8 million last year. I will take a few minutes to briefly discuss the performance of each of our business segments.

Our Ethanol Production segment reported revenues of $250 million for the first quarter of 2010. That was a significant increase over the $137.5 million reported for the first quarter of 2009. The increase is driven primarily by producing approximately 51 million gallons more in 2010 compared to 2009. This is mainly attributable to the addition of the two Nebraska plants in the middle of 2009 and our initiatives to increase and streamline production within our existing plants.

Operating income for the Ethanol Production segment was $29.2 million for the current quarter versus a $4.3 million loss for the first quarter of 2009. If you remember, the first quarter of 2009 was impacted by a one-time charge of approximately $4.6 million related to the termination of legacy agreements with outside marketers and operational issues at our Superior and Bluffton facilities, which also affected operating income by approximately $4 million last year.

And again, so there is no misunderstanding, let me emphasize -- those charges occurred in the first quarter of last year. I only mention them because they affect the comparisons to this year.

Again, our operating income for the segment was up, mainly due to higher production volumes and better margins realized in the first quarter of 2010.

Our Agribusiness segment generated $42.3 million of revenue for the quarter compared to $46.2 million for the first quarter in 2009. Revenues were down slightly due to lower grain prices and fertilizer sales, but margins remained steady.

The overall increase in the operating loss in the Agribusiness segment is mainly due to added expenses related to utility costs and dryer fuel costs because of a wet crop that required additional drying carrying over into the first quarter. Again, due to the seasonality of this business, the small operating loss was not unexpected.

For the Marketing and Distribution segment, revenues were $388 million for the first quarter 2010 compared to approximately $178 million for the first quarter of 2009. Our third-party marketing activities were launched in the first quarter of 2009, and we've seen steady growth in this segment from our own production, as well as the production from four independently-owned plants.

In total, the segment sold 201 million gallons of ethanol during the first quarter. That compares to about 136 million gallons marketed in the first quarter of last year.

So consolidating operating income was $24.5 million in the first quarter of 2010 compared to a loss of $7.2 million in the first quarter of 2009. As you would expect, interest expense was higher than the first quarter of 2009, mainly due to the expanded scope of our operations.

Consolidated income before income taxes was $19.9 million for the first quarter of 2010. Income tax expense was $4.4 million, which is an effective tax rate of about 22%. Although we will need to continually reevaluate our tax calculations during 2010, currently, we anticipate a comparable effective tax rate for the balance of the year.

In summary, we are pleased with the first-quarter results, with net income attributable to Green Plains of $15.6 million, or $0.58 per share on a diluted basis, compared to a loss of $9.3 million, or $0.38 per share, in the first quarter of last year.

In terms of EBITDA, we generated $33.2 million, which was a significant increase over the slight negative EBITDA we had in the first quarter of 2009. And as a reminder, EBITDA is a non-GAAP financial measure, and I'd direct your attention to the information included in the news release, including reconciliation to our GAAP net income. In any event, this is certainly a solid start to 2010.

We ended the quarter with a strong liquidity position, with $190 million in cash and $38.7 million in available credit facilities, bringing our total available liquidity to nearly $230 million at the end of the quarter.

We continue to improve our balance sheet. During the quarter, we again added to our cash position while making all scheduled debt repayments. As a result, our total debt outstanding was reduced by $9.5 million during the quarter.

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

Thanks, Jerry. I want to spend another minute or two on ethanol margins. As you know, our top priority is risk management. That puts our focus on minimizing the volatility of the commodities in our business flow. You've heard me say that our risk management practices would have us lag during a time of margin expansion for a brief period of time, but that we would outperform a margin contraction, like the one we experienced over the last couple of months.

To a degree, we are agnostic. Our total debt service runs $0.11 per gallon, and we locked away margins at or above that level to sustain our business over the long-term. Our strategy remains to stay balanced on our commodity position, so we will continue to work on locking away positive margins. In fact, we are seeing an upward sloping forward curve for margins in the third and fourth quarter of this year, and are having success in contracting, both on a flat price and index sales basis for those periods.

Earlier, we discussed our end-of-quarter volumes that were locked, but I wanted to expand on that and discuss where we are at as of this morning. We currently have approximately 20% of our production margins fully locked in for the remainder of 2010. That is the calendar year 2010. We had moved quickly to secure some sales for Q2 before margins compressed. Recently, we have been able to lock margins in for Q3 and Q4 production, as the forward curve has had a structural shift in comparison to 2009. Last year, it was more difficult to lock much away beyond a quarter or so.

More importantly, though, we have index sales in addition to our flat price sales, which takes our total volumetric volumes sold over 50% for the rest of 2010 production. Yet those additional sales have not been converted into flat price, and as we see opportunity to lock in physical corn, we will be able to move quickly to convert those ethanol index sales to flat price, locking in the EBITDA margins at that point.

We still see bullish -- we are still bullish on the ethanol fundamentals, favorable discretionary blending economics still exist and we believe that the upcoming June or July ruling from the EPA on E15 will have a positive impact on ethanol demand if they approve the additional blends.

We work every day to ensure that we are operating and managing the business as effectively as possible, always with the view of creating and protecting long-term shareholder value. Diversification adds to our sustainability, and we will continue to add to or move into business segments that continue to smooth out our earnings in the future.

Finally, with regard to our investment in BioProcessAlgae. I wanted to take some time to review the progress we made in Phase I. Our Phase I cultivators, or reactors as we call them, are tied directly into the CO2 scrubber lines from our Shenandoah ethanol plant. The technology has experienced 100% uptime in the pilot units since inoculation in October of 2009. Phase I was successful in demonstrating the scalability of the technology, with a 40 times increase in growing volume from the bench scale reactors to the photobioreactors in an industrial setting.

The current pilot consists of a skid-mounted system, including cultivators and associated hydraulics, nutrient delivery tanks, temperature and pH control, automated harvesting, settling tanks with decanting capability and algae storage. The plan is for BioProcessAlgae to break ground in the next 60 days on Phase II of its demonstration algae facility. We will provide a more detailed update on the results achieved from Phase I and the overall scope of Phase II in the near future.

Our vision for this project remains the same, providing a solution for sequestering industrial CO2 while producing a high-quality feedstock for fuel, feed and biomass to energy.

With that, I think we will end our call at -- or we will end our discussion at this point and open up the call for questions. Thanks for calling in today and I would like to ask Allison to start the question-and answer-session.

(Operator Instructions) Farha Aslam, Stephens, Inc.

Could you share with us a little more detail on how those index contracts work and what would allow you to lock in those profit levels?

Sure. What we do is part of our sales and marketing process, some customers want to -- only will lock in flat price sales, which we can immediately move to lock in our flat-price corn with farmers, producers and commercial sellers.

Some users like to lock in index, so it's a relation to the flat price at our ethanol plants. So for example, maybe in Iowa, it might be 10 under Chicago, and in Indiana, might be two over Chicago.

And what we do is we will sell the physical product to them in relation to the underlying financial contract. And then when we have the opportunity to buy the corn, we can either lock those in financially with hedges or we can call the customer that bought the index and convert them to a financial flat-price contract, then locking in a margin effectively as well.

What we've seen is when we use financial hedges during the quarter, there is about a 99% convergence between financial and physical settlement during that quarter, so we have no issue locking margins away using financial swaps during the quarter.

So what we've been able to do is -- and in fact, we did it in the first quarter as well, and why we were successful in being able to lock in margins is that when margins expanded and we were able to buy the corn, we locked in immediately with our end-user on the financial side, and were able to lock our margin away.

So we are seeing that as well for the rest of the year. Part of what we sell all the time are index sales, and then we convert those to physical flat-price sales when we can buy the corn. And it seems to be working for us for at least the last six to 12 months.

Okay. And when you look at the ethanol profitability that you have been able to lock in during the -- for the second and third quarter, could you just kind of give us some color how it is versus your first-quarter results in terms of EBITDA per gallon?

Sure. If you look at EBITDA per gallon, we are able to -- in the first quarter, it converts to about $0.30 a gallon or so EBITDA per gallon. The forward curve certainly doesn't show that right now, but what we locked in early on were similar to those to at least get started. Maybe a little bit less. And then the margins at that point compressed, and margins are not at the same levels as they were in the first quarter.

What we are seeing in the third and fourth quarter, though, is that in some of our plants, margins are starting to creep back up towards those initial first-quarter levels that we have seen. So the curve is very interesting right now, where really our best margins that we can lock in, say, are in Q4. So in the market, it has a very different structure today than it had even a year ago or six months ago, where the best margins were always in the next two weeks.

And so that has kind of changed our view on how we market our ethanol, because we have to go much further out, find the bids for the ethanol, lock in third and fourth quarter volumes much quicker than we may even lock in next month volumes.

But we were successful in getting some stuff sold early in Q2, and then the rest of it is floating currently with the spot, which we've seen a nice recovery over the last couple of weeks in the spot margins as well. But they are not as robust as they were in Q4 or what we were able to do in Q1.

So just sort of spot margins, of kind of where you can realize -- is it around $0.10 a gallon in terms of EBITDA, $0.15 a gallon in EBITDA?

We typically -- when you look at it, it really just depends on how you look at our operating costs, which we really don't break out per gallon. So you'd have to look at the financial crush and then deduct our operating costs from there.

But I would say that in the mid-teens is not very far away for the absolute spot margin. But we really don't operate in the absolute spot. I would say some plants are seeing less than that because of their operating costs, but that is kind of where we are at in terms of the absolute spot and the rest of the quarter.

That's very helpful. And then can you just give some color around that 22% tax rate? What is allowing you to get to that level, and how sustainable is it into next year?

We had established a valuation allowance against some deferred tax assets in prior years, because basically we were coming off the period of our startup. And so we were generating tax losses that resulted in net operating losses that we have deferred tax assets on.

We set up a valuation allowance against that in prior years, and on the federal side, that was about -- a little over $5 million of valuation allowance. And so the guidance that we've given is that if you apply a tax rate against our full-year income -- apply a full tax rate against the income and then back off the $5 million of valuation allowance, you'd come pretty close to what would be today a 22% tax rate.

So for next year, would you have that allowance again, or does that end this year?

We would expect that that would be ending this year, that by the end of this year, we would have fully reversed the valuation allowance. And so we would be providing a full level of federal income taxes.

We do have various state income tax benefits that will probably cause our state rate to be somewhat modest.

Okay. My final question and I'll pass it on. The reason for the drop in the volume for fertilizer sales in the quarter, and how do you see results coming this quarter?

I'll comment on that. We don't really ever -- most of the fertilizer income and revenue comes in the second quarter. So we typically would not see very much of that fall into the first quarter.

I will give you just a little bit of color, though; we are seeing a very good planting season underway in the second quarter. We are seeing higher application rates from the retail level. We are seeing producers come back in and want to continue purchasing, as they are applying more and more to the more acres that they are planting. It was a wide-open planting season.

So our little microcosm of the world in northwest Iowa, if it gives you any indication, we are seeing a very robust planting season on corn and a very good application season on fertilizer.

That's very helpful. Thank you.

Mike Cox, Piper Jaffray.

Hi, guys. This is actually Alex Potter for Mike. I guess just one quick last comment here on the tax rate. So we are expecting a 22% tax rate for the remainder of 2010. Is that right?

Yes, that's true. I would caution you, though, it is dependent upon our full-year book income. So as you are modeling Green Plains, you should be working from that full-year book income that you come up with, and then account for that $5 million valuation allowance.

Okay. Fair enough.

The guidance we are giving, though, is 22%. But we will be adjusting it and reevaluating it each quarter.

Okay. And then, I guess, if you could just talk a little bit more about margins locked in. I know that you had mentioned this interesting dynamic now where you are able to lock in margins further out than you historically have been able to. Is it possible at this point to quantify, I guess, what percentage of your quarterly production is locked in for 2Q, 3Q and 4Q?

Yes. I mean, basically in terms of second quarter, we have, I would say, in the tune of 75% to 80% of our production locked in at this point. So we got ahead of it early.

Obviously, we didn't -- we are not going to hit the highest point of margins that everybody had seen during Q3 -- or Q4 or Q1, but we are still optimistic that with the small expansion here on the front end in the May and June period that we will have a chance to continue to lock the rest of our quarter away.

Then if you go further out on the curve, if you take a look at -- we have basically -- as we had just said earlier, we were able to lock in about 50% of our total volume for the rest of the year, in terms of just physical sales, of which not all of that is converted to flat-price and locked in yet. We do have small percentages of Q3 and Q4 locked in, but we are working very hard to look at our Q3 and Q4 production and move some of those volumes over the next couple of months.

So that is really -- a big focus of ours, really, is on the last half of the year, with what we see in terms of margin. But again, I will point out to you that our operating costs are different than others in the industry, and others may not see -- or they may see better or worse margins than we see on a daily basis. But it is a very interesting dynamic today that we see in the market.

And I think some of that is due to the potential for E15. Again, we are going to move through the year and move to expand and mandate in 2011. Blend economics are excellent. We are still at a big discount to gasoline from an ethanol standpoint.

And as we move into the driving season, as we move through the -- out of winter, where we've built a lot of inventories up because of Eastern storms, what we are seeing is that the blend economics are very good, and we are seeing a lot of participants come back into the market that left, that were incremental blenders, that are fully looking out on the curve and saying it is too good for them to pass up.

Because between the tax credit that they get at the federal level and between the gain they get on the blend margin, it is at least -- around $0.10 a gasoline gallon in terms of a full blending economics that they are realizing. So that is why we are seeing the structural shift in the curve, but people not wanting to miss that opportunity.

Okay. And I wonder if you could touch on, too, just trying to quantify -- I know it might be somewhat difficult to do -- but quantify the potential impact that a move to E15 might have on ethanol prices and margins, just considering that current wide spread.

It is -- I think a move to E15, in terms of the ethanol price, would converge closer to gasoline pretty quickly, as we would see that where areas can blend 15% and where they want to blend 15% and the economics are there, they will go after that, as anybody would, aggressively. And I think that spread between gasoline and ethanol would converge, albeit corn would probably get dragged along with it if that happened.

But I think it's interesting, because we have such a potential for such a big corn crop, whether corn can decouple again from energy prices, like it had done last year for a little while.

In terms of the profitability levels, obviously, the demand would be very robust in certain areas because of the higher blends that people could lock in the margins. And it's interesting to look at how Q3 and Q4 are shaping up, and they feel similar to the feeling of where we were at last year at this time, looking at Q3 and Q4, when we gave you indications that we thought we were optimistic the last half of the year would continue to get better.

I think where we look at the forward curve today, we are optimistic again the last half of the year will get better, but we have to move through some of this front-end noise in terms of getting rid of some of these larger inventories that we've built over the winter because of the Eastern storms.

I think I will just finally say that what we are seeing in terms of demand at this point on a blending basis is that we have kind of fully moved right now from a demand standpoint towards the full mandate in terms of usage. And so we are seeing a very, very good return of players into the market on the front end of this. And as we indicated, and as we discussed in our own marketing meeting, we've seen more bids for ethanol in the last five to 10 days than we saw in the last three months. So we are starting to see the blender return to the market with these economics.

Okay. Then on the Ethanol Production side, have you started to see some of the, I guess, marginal producers go back off-line or go idle, given the compression in EBITDA margins recently, or --?

Yes, we saw some of that. We saw some plants go down fully, and we saw some plants scale back. And I think that helped as well, which kind of put the bottom into the market.

I will say from our models, though, in terms of margin compression, we -- I think when we looked at it, we never got below debt service, at least for very long, on our models, in terms of just looking at the absolute spot. Albeit, remember, we locked margins away early.

So we did see some plants scale back. We saw some plants go down. I think the market is getting -- becoming disciplined to scale back in times of margin compression. And I think we are becoming much more disciplined as an industry, albeit we still have production that came on during the quarter and we still have some more production to come on for the rest of the year. But I think as we move in and we look at blending economics and we look at the expanded mandate and the potential for E15, as well as, again, the great profitability for the blender to gain from using ethanol, I think we will be able to absorb that extra capacity if it comes on in 2010.

Okay. That does it for me. Thanks a lot.

Laurence Alexander, Jefferies.

This is Lucy Watson on for Laurence today. My first question is on capital deployment. Given the choice between scaling up your green handling business and adding more ethanol assets, which would be more attractive to you right now?

It actually just depends on the situation that we encounter. The Agribusiness assets that we bought in Tennessee were very appealing from a strategic standpoint, local origination standpoint and a business standpoint. And we felt that it was the right time to make that acquisition, which (inaudible) was basically fully funded with the revolvers and the term loan put in place.

We are seeing several opportunities to look at Ethanol Production acquisitions. Obviously, we kind of rank them very similarly. We want to expand more grain elevators in Agribusiness, and we want to expand more Ethanol Production. At any given time, we are seeing a lot of -- or some opportunities in terms of plants, acquisitions from the Ethanol Production side, and we are focused on really both of these segments.

The acquisitions take quite a long time, and we are seeing that in Ethanol Production assets. And we are working on several different fronts right now, and if any of those get closed, we will be very happy to report that. But at this point, we will be looking at both of those equally.

Okay. Would you mind discussing the synergies that you might get from the new assets in Tennessee, and possibly a longer-term green turnover target?

Yes, basically, what we see is -- the strategic reason we Botha's assets is, number one, we have a production asset that uses around 40 million bushels of corn in Tennessee. And we also have some space at that plant. We've done a lot of business with a lot of the local elevators in Tennessee, and we saw the opportunity to purchase these assets, and not just because some of them feed our ethanol plant, but also because they are good business.

In fact, I would say four of the five of those assets have not shipped much corn into the ethanol plant and actually supply the Southeast poultry market more than they actually supply our ethanol plant. So I think from the standpoint, it is a very good business. They are complementary assets. We serve a lot of the same producers. They are profitable assets that we had the chance to acquire. And it just gives us a better position in Tennessee overall.

But albeit, they are not -- as we always said and we always will say, our grain elevators are required only to sell to the best market. If our ethanol plant is the best market, they sell there; if there's another market better than that, they sell there. So we buy Agribusiness assets because we like it. We also buy them because they are strategic.

Okay. And do you have any major investments underway to debottleneck at your current ethanol plants, or are you just evaluating a handful of them at this point?

I would say we are evaluating more than a handful, but none of those would be of any major sort of investment at this point. A lot of them are continued debottlenecking. What you saw this quarter was a result of our continuing to become better operators and understand where the bottlenecks are in the plant.

We've seen -- we are seeing even more positive results from our process, but none of them are very large in nature, and they continue to have very quick paybacks. There are some other bigger opportunities that are out there. But as we've always said, we wanted to make sure we maxed out the low-hanging fruit before we made any major investment into our existing infrastructure.

Thank you.

Ian Horowitz, Rafferty Capital.

I guess I got a bunch of questions. And I guess to go right off of Lucy's in the debottlenecking, conversion rates continue to kind of tick up overall, at your plants for sure. And it sounds to me like this is just kind of at the margins, tweaking rather than something majorly structural. Do you have some sort of target conversion that we can look at for these plants, without making any drastic changes to the facility?

I think if you annualized the 124 and consider that we are probably doing better than that today, we are over 500 million gallons of production, as we indicated earlier, when we were out raising capital, that we thought the plants had the capability to get up to 500 without any major investments. And I would indicate to you we think the plant has now -- or production now has the capability to get into that 520 range without any major capital investments. And we are working hard to try to get to those numbers, and we've made very good progress, as you've seen from our results.

In terms of conversion rates, we are still seeing good yields. We are not seeing any impact on yield through our expanded production. We are just getting more throughput through the same asset while yields are staying the same. And we think we still have some upside to go from the levels we are at today.

So are you still running the plants kind of -- nameplate's kind of an old term -- but kind of running it at this kind of 124 run rate in this current quarter?

We are running as hard as we can run. We have not slowed down our plants at all. And as I indicated, we think we will make progress over the next couple of quarters, even potentially above the 124. So we have not slowed down our plants at all.

As we were able to log some margins in early and with what we locked in early and some of the current spots that we were able to realize and some of the other sales we were able to make, we had no financial reason to slow down our production at all.

DDG volumes came in just slightly below our expectations. Was that an issue of a mix between wet and dry, or was that just a timing issue in terms of selling through to the market?

I would expect that it was a mixture between wet and dry, because again, our Nebraska plants are a little heavier weighted toward wet. And so that would affect the numbers that you were looking at.

Okay. And then, Jerry --

We had actually built some inventory at the end of the quarter, so that didn't get shipped (multiple speakers) -- or it didn't get sold. So it wasn't anything systemic.

Okay. Jerry, in previous releases, we've seen some pricing. Is kind of the thought process now that we are not going to focus on prices for ethanol, DDG or corn at this point?

Right. Again, we are managing a margin, so we are going to be focusing more on talking about margin levels rather than individual commodity prices.

Totally understand the focus of the business. Just from a modeling standpoint, we are not going to go over any of those numbers anymore?

That's right. Again, the commodity prices are readily available in the public. I think you have a reasonable idea of what our basis levels are against those.

Sure. Okay. I kind of came onto the call late. I'm not sure if Steve is around, but --

He is here.

Okay. Finally seeing a little bit of improvement in utilization rates at the alliance level. Can you just talk about how it is going there in terms of the production that you have? And then also, just kind of talk about any opportunities to be padding on to the marketing pool.

I think similar to us, you saw some of the third-party plants, they also are going to debottlenecking. And you saw their run rates coming out of them. Specifically, one plant made a large improvement, and you saw the effect of it, and it trickled to us, what we marketed for them. So that was just a direct effect of the plants running better and making their own debottlenecking and running --. They saw the same margins we did and they wanted to run as hard as you could to capture those margins.

As far as on the future ones -- I'm sorry, go ahead, Ian.

So was there an issue with one of your -- and no need to name names -- but is there a specific partner or a specific asset that is dragging the utilization down? Or is it kind of endemic across the board, with your partners running at a lower rate?

We had one of the plants that we market for -- this is Todd -- they wanted to actually change out their dryer systems. So they actually took their plant down and they brought their plant back up in the quarter with a whole new dryer system. So that is where we will start seeing the increase, and now they are fully running at capacity, and we will see them increase going forward.

It really came out of that one situation, where they wanted to make that capital improvement to their dryer system.

Understood.

As far as some of the additional ones, there are additional plants out that where you look at and we've talked to over the last two quarters, that we will be looking for for the rest of the year trying to bring into our third-party marketing.

But currently, we are still running at 90 million gallons, correct?

Yes, that's correct.

Okay. Todd, any color commentary on bid/ask spreads for ethanol assets kind of right now?

You know, I think we are still in that range of people would like to buy them for $1.00, but I don't think you can do that anymore -- a gallon. I think that the range is going to be probably $1.10 to $1.30 a gallon, if I had to put a range on the ability to acquire. And even then, that is only an estimate (technical difficulty).

People have come off of two quarters of -- at least one (technical difficulty), a good quarter of profitability and potentially a good quarter. Some of them had a good quarter in Q1. And I think that people are feeling better about the situation they are in. Some of them have cleaned up some of their balance sheet issues.

But I think there are still some great plants out there that are looking for consolidation opportunities, looking for liquidity opportunities. And that $1.10 to $1.30 level, in our mind, needs to include working capital to become very interesting. And I think the right plant in the right location might bring something better than that, but I don't think much higher than that at all at this point.

Okay. And to go back to Farha's question on the fertilizer tons, I think the question is we saw in 2009 656 tons and 126 tons here in the first quarter, with what seems to be a better planting environment this year than it was last year. So it is kind of a challenge at this point to still try to model this business segment.

Is there any color, any additional color you could give us on kind of why we saw that year-over-year decline in volume?

Ian, the only thing I could give you there is it was an extremely cold winter. And so the first quarter in northern Iowa, you know, there wasn't a lot of fertilizer application going on. Maybe colder than normal, which would cause the strange comparison between the two years.

But again, the second quarter is really the quarter where you have the activity, and we are seeing strong demand in the second quarter.

Hard to really look at the first quarter and gauge that that is the business, because it's really not. If we get any fertilizer sales in the first quarter, it is only because we had an early season because of the temperature. That's about it.

No, understood. Jerry, what do you sell in the second quarter of 2009?

I don't have those numbers here, Ian. We will have to dig those out and get those to you.

Okay. And then lastly, and I'll get back in queue, this is kind of putting the cart way ahead of the horse, but have you guys thought at all about the LCFS calculations with regard to this algae and the CO2 sequestering, and how that may impact your overall natural gas dry scores if this LCFS comes into play?

We are looking at that, looking at the calculation. The first thing we looked at is if -- corn will not qualify as an advanced biofuel, really, in any way, shape or form under the new RFS. So that -- you're not going to get that credit.

But in terms of lifecycle analysis, if you sequester the CO2 at an ethanol plant, and then you can potentially show that in a lifecycle analysis under low carbon fuel standard, you actually may get some credit for that. But we haven't done any kind of real calculations around that, except to say that we continue to make great progress on the algae front. We are going to hopefully get Phase II started, and we will give more color around that. But we are very excited about what we've seen so far from our Phase I project, and we think that we will just continue on and see what the next set of results are.

What do you think the odds are for selling kind of a boutique ethanol, selling kind of California-ready ethanol versus the rest of the country ethanol? Do you think that's going to happen?

I think the co-question is whether the legal challenges will stop the California ethanol flavor debate, or at least delay it. And that is kind of what I think, between us as an industry, individual companies, and even the petroleum industry as well -- it is affecting them -- I think there is plenty of legal fights and challenges going on to low carbon fuel standard in California.

But if it ever happened down the road, you'd definitely have to figure out how are you going to make their spec. Steve, you got a comment on that?

There is just a lot of noise still around it, getting final definitions and getting everything in place to how we truly define it. So it is a -- it changes constantly, Ian, as we are looking at it. So the definitive answer is not there yet.

Okay. All right, guys. Congratulations on a very solid quarter.

Evan Fox, Olympia Capital Markets.

I'm on for Paul Resnik. Production of ethanol in the first quarter was 100,000 gallons more than sales. I was wondering what sort of ethanol inventory level you guys have, and what is the target, and is it marked-to-market?

The ethanol inventory that -- you did see a slight build in inventory, and some of that is caused by ethanol that is actually in transit, where the title of the ethanol doesn't transfer until delivery. So that is included in our ethanol, in what accounts for the difference between volumes produced versus volumes sold. So we did have a slight increase there.

We are also using our BlendStar space to hold some ethanol closer to the market.

And as far is your question about mark to market, no, that is all valued at cost, at production cost.

Great. Appreciate it.

Matt Farwell, Imperial Capital.

Great quarter. I would like to discuss the higher throughput levels. You have not given us data on the cost of purchased corn, but in general, did conversion costs increase as a result of the capacity re-rating? In other words, is the production capacity improvement at all offset by higher conversion costs?

Not beyond your cost of your raw materials. In fact, we actually get the benefit of the higher run rates in terms of our overall production cost per gallon after the four basic commodities. So it actually helps our overall conversion costs.

Okay. Now the SG&A line was up, but it was flat on a per-gallon basis. So is there an intuitive reason for the correlation, or was that a result of higher non-cash compensation or new hiring, or in general do you expect SG&A to scale with production overall?

We did have slightly higher non-cash compensation recorded in the first quarter of 2010, and of course, that is in our corporate SG&A primarily. So that is that $0.034 that we talked about.

But at the plant level, no, the SG&A is a pretty fixed number at the plant, and so it's really just driven by how many plants are you operating. So we had -- in the comparisons, we had two additional ethanol plants in the numbers.

Okay. Could you provide any color on the process areas where engineering efforts have been focused? For example, did the higher throughput result from shifting the mix of nitrogen input in the firms, or was it more a result of enhancements to the distillation columns or the molecular [seeds]?

Listen -- actually what we have, we actually have Jeff Briggs in the room, who is our Chief Operating Officer. And he'd maybe just give some color. Because we don't want to give the whole shop away on what we do and how we do it. Maybe Jeff can kind of give you a high-level view on some of the things we are doing.

A lot of it comes down to improving our hydraulic capacity. It might be changing out certain pump impellers, changing out mol sieve timers. It could be some grind capacity increases. Sometimes we look at different enzymes in terms of a way of getting our production out and improving that in the front end.

And so it's really kind front to back end and just looking at where your bottleneck is at any given time, whether it could be at the distillation process. Once you get that tackled, then sometimes you got to go to the front end and do some additional things up there in terms of your grind or your slurry mix.

A lot of things across the process come into play, as in any continuous flow production process. It is just breaking down, seeing where your valves or settings are maxed out, where your pump speeds are maxed out, and attacking those one by one.

And as Todd said, our goal is to continue to increase our throughput organically, because it is a lot cheaper for us to organically improve our capacity output than having to go out and actually buy additional capacity, if we can do it for cents per gallon rather than dollars per gallon, so to speak.

Would you characterize these enhancements as being made -- as being isolated in one or two of the six plants, or were they implemented across (technical difficulty) during the quarter?

No, that's one of the great things about our platform, because five of our six plants are already (technical difficulty). We might try something different at several plants and then, based on the success, we can roll that out to the other facilities.

One of the plant operations will become a subject matter expert in one of the projects. They get the results, we get the learnings there, have the learning curve, and then roll that out to the other operations. So it is nice in that you've got $0.05 of Tinker Toys and labs to go figure out how to make it better (inaudible). And then once you get it done at one place, you roll it out everywhere. And that's really what we've done.

So what you see -- in fact, I looked at a statistical process control of our production for the last year, and we have these step changes at each of our facilities, to where we put these processes in place, we make the changes, we do them, and then it takes the plant to a new level of operating capacity.

And that is what you've seen. Last year, we talked about 480. Todd has already talked about 500, and going beyond that. And we are getting these step changes, once we are able to figure out how to run these new levels, and that is what we focus on.

Now, you mentioned 500. I guess does the Company expect to take any plants down for maintenance in upcoming quarters? Or -- I mean, the 500 is a run rate, but can we expect that for the year?

Basically, when we give a number, even when we gave 480, that included our downtime that we do twice a year. So all of our numbers include planned and scheduled downtimes.

And my last -- go ahead.

No, that's okay.

My last question is what was CapEx in the quarter?

It was about $2.3 million total for the quarter, and that would include the grain company as well.

Okay. Well, thank you very much, and good luck in the next quarter.

Anand Shahi, Atlas Capital Partners.

Most of my questions were already answered, but I had a question about your use of cash. I understand you are looking to expand capacity. Do you have plans to pay down debt and at what rate?

Really, our debt service, we focus on making our scheduled debt repayments and really staying at that position. For us, it is all about maintaining really healthy liquidity, because that gives us plenty of options in the market as far as managing our margins, as well as making growth acquisitions.

Okay. Thank you.

Luke Beltnick, TPG Credit.

Just a couple of quick questions. One, understand that a lot of the production for Q2 is locked in. To the extent that it's not, what are you currently seeing in spot margins on an EBITDA per gallon basis?

We gave a little guidance earlier, but, we typically don't give any kind of margins that we are locking in. We are seeing in our platform still in the mid-teens for -- and some high teens and low 20s, depending on the plant, for the next couple of months' margins. So it really just kind of depends on the geographics, but overall, mid to high teens on average. But I don't know that the industry sees it the same way; it is just how our plants operate.

Got it, thanks. And then Jerry, do you have a breakout of the depreciation and amortization expense by segment?

Yes, we gave the Ethanol Production segment depreciation was $7.7 million out of a total of about $8.7 million. So about $1 million on everything other than Ethanol Production; $7.7 million for the quarter on Ethanol Production.

Got it. That's it. Thanks.

And I would now like to turn the call back to Todd Becker for closing comments.

Thank you, and thank you, everybody, for coming on to our call today. We are still very excited about the Company that we are growing on behalf of our shareholders, stakeholders and employees. I think, as we know, this is a cyclical business, and over the last year, we've seen cyclical upturns and cyclical downturns.

We are experiencing somewhat of a downturn at this point in the industry, but based on the forward curve that we see today, we are optimistic for the remainder of the year, as we see margins getting better all throughout the year. And we will continue to focus on our core competencies of risk management and operational excellence.

And as we say, we are here every day to manage risk and do the best job we can for our shareholders. And we look forward to talking with you next quarter. Thanks, everybody, for coming on today.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.