Green Plains Inc (GPRE) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Green Plains Renewable Energy second-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, this conference call is being recorded. I would now like to hand the conference over to Mr. Jim Stark. Sir, you may begin.

Thanks. Good morning, and welcome to our second-quarter earnings call. Todd Becker, President and CEO; Jerry Peters, our Chief Financial Officer; and Steve Bleyl, our Executive VP of Ethanol Marketing are on the call today. We are here to discuss our second-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 fact. These forward-looking statement 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 earnings -- yesterday's earnings press release on page 2 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.

I will now turn the call over to Todd Becker.

Thanks, Jim, and thanks to everybody for joining us today. We have a lot of topics to cover with you, so we'll get started right away.

We are pleased to report our fifth consecutive quarter of profitable results and a strong finish to the first half of 2010. It's a great accomplishment for a young company and a management team that was formed about a year and a half or so ago.

A milestone achieved in the second quarter was producing over 129 million gallons of ethanol. This is the result of our operations team's continued effort, combined with the incremental investments we have made in process improvements, which are now paying off with higher baseline production capabilities.

e now have a six-plant platform capable of sustained production of over 500 million gallons annually. We continue to refine the production process with the goal of achieving more production from our plants in a safe operating manner.

A key benefit to achieving this increased production was the low capital investment required. The Company now has 20 million to 40 million gallons of additional annual production that costs pennies per gallon in relation to purchasing assets for a much higher cost.

We also made solid strides in our Agribusiness segment during the quarter as we completed the acquisition and integration of the five grain elevators in Tennessee, which expanded our grain storage capacity by 63%. We are glad to get this transaction wrapped up, and we expect a positive financial contribution from this acquisition beginning next quarter.

The retail fertilizer chemical business was impacted this quarter by lower prices, which translated into lower margins compared to 2009. We have seen a slight uptick in prices, which should translate into a slight recovery for the fall and spring sales margins as well.

It is still a critical piece of our Agribusiness strategy, giving the Company early access to origination of bushels for both our grain handling and ethanol production business. We are looking at our new Tennessee operations as well, as there is no agronomy business in place, and contemplating entering the market down there as well in 2011. We believe that every place [should] handle grain should have a full-service Agribusiness operation with multiple revenue and profitability streams.

As we indicated in the press release yesterday, we are also expanding our grain storage capacity in Iowa by adding another 1.1 million bushels of grain storage from new construction. Once completed this fall, we will have over 31 million bushels of storage to increase grain flows in our Agribusiness segment.

We are looking around all of our ethanol assets to buy or build additional grain storage tributaries to our production. The US farmer will continue to grow more grain on the same amount of land through the continued expansion of yields. We want to be part of that production expansion and increase our grain and agronomy business footprint.

Another key strategic step announced last week was the addition of corn oil extraction at our ethanol plants. We are very excited about this project and believe once the equipment is in place, it will enhance operating income by $15 million to $19 million annually, based on the production of 75 million to 90 million pounds of corn oil. This is a substantial recurring revenue and free cash flow stream to our business.

In all, the steps we have taken and the capital we have invested are focused on growing our Company and diversifying our revenues and income streams. We believe that we can best serve the interest of our shareholders by focusing on a long-term sustainable business model that includes all of the current elements of our business and will potentially include more growth in all segments, whether organic or acquired.

For the trailing 12 months, we have produced 483 million gallons of ethanol, generated $1.7 billion in revenues, $53 million of net income and over $117 million in EBITDA. These are strong results, and Jerry will go into more detail on the numbers later in the call.

Risk in margin management was an important factor for us again this quarter. We were successful in generating operating income in our ethanol production segment of approximately $16 million. Ethanol margins are still weaker than the previous two quarters, but we have continued to lock in margins at each of our plants. As of June 30, we had 71 million gallons of ethanol production for the last six months of 2010 locked in, and we expect to remain profitable for the balance of 2010 as well.

In addition to the production with margins locked in, we had an additional 48 million gallons of physical product sold based on index pricing. The importance of this total is the fact that we had about half of all of our remaining 2010 production physically placed. Since the end of the quarter, we have continued to make progress on both of those numbers as well.

The third quarter for us is typically weaker due to the Agribusiness segment seasonality, but we do anticipate good results from Agribusiness in the fourth quarter of this year.

In addition, we believe the higher mandates for renewable fuels next year, combined with the profitability of blending ethanol, should allow a margin recovery going into the fourth quarter of 2010 compared to where margins currently are in the third quarter. Over the past couple of weeks, we have seen a gradual improvement in margins in the third and fourth quarter as well.

There will be times when industry margins are tight, but even through the latest compression, our outperform model continued to generate margins and pay our bills and service our debt obligation. We have not experienced any cash burn from operations related to ethanol margins.

On the other hand, there will be times when margins expand and we will generate significant profits. We are managing this business for the long term, which is why it is important for us to be margin agnostic and execute our margin management policies to minimize the downturns and take advantage of the upswings to the market.

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

Thanks, Todd, and good morning, everyone. On a consolidated basis for the second quarter of 2010, we reported revenues of over $453 million, which is an increase of almost 60% over the second quarter of 2009. The increase is driven by ethanol production assets added in July of 2009, higher revenues from an expansion of our third-party marketing business and increased production from our existing plants.

Consolidated gross profit was $30.7 million for the quarter, which is a $16 million improvement over the second quarter of 2009. This increase is primarily the result of higher ethanol production volumes, as well as better ethanol margins realized in the second quarter 2010 compared to 2009.

Consolidated SG&A expenses were $13.6 million in the second quarter, which is $2.9 million higher than the second quarter of 2009. But again, most of that increase was a result of the addition of the Nebraska ethanol plants, as well as the recently acquired Agribusiness assets in western Tennessee.

Our corporate overhead, which we break out in the release, was $3.4 million in the second quarter of 2010, or about $0.026 per gallon, which is consistent with our goal to tightly manage our cost structure.

Segment operating income, which is total operating income before corporate expenses, was $20.5 million for the second quarter compared to $7.4 million last year. This improvement is largely attributable to the Ethanol Production segment.

I will now take a few minutes to drill down into each of our business segments. Our Ethanol Production segment reported revenues of $241 million for the second quarter of 2010. That was an increase of about $88 million versus the second quarter of 2009. The increase was driven by an increase in ethanol sold of 53 million gallons in 2010 compared to 2009. Again, that was mainly due to the addition of the two Nebraska plants in July of last year, as well as our process improvement projects across our six plants.

To isolate the impact of the process improvements, I can tell you that the ethanol sales from what I will call our legacy plants, which basically is our four plants excluding the Ord and Central City, Nebraska plants, in the second quarter of 2010 was over 92 million gallons, which is a 20% increase over the 77.1 million gallons sold in the comparable quarter of 2009.

Operating income for the Ethanol Production segment was $15.8 million for the current quarter versus an operating income of $2.6 million for the second quarter of 2009.

We incurred approximately $7.9 million in depreciation and amortization in the second quarter for the segment compared to $5.5 million for the second quarter of 2009. So for the second quarter of 2010, operating income before depreciation expense was $23.7 million, or about $0.18 per gallon of ethanol sold.

Our Agribusiness segment generated $62.6 million of revenue for the quarter compared to $58.8 million for the second quarter of 2009. Revenues were higher as a result of the addition of the five grain elevators in western Tennessee, which was offset by lower grain prices and fertilizer prices when compared to last year. Lower prices for fertilizer resulted in somewhat lower gross margins in the current quarter. So in spite of nice increases in grain and fertilizer volumes, gross profit for the Agribusiness segment declined by $1.7 million to $5.7 million for the second quarter of 2010.

Operating expenses for the segment increased by $1.5 million, primarily related to the acquisition of the Tennessee assets. The combined effect was lower operating income for the segment in the second quarter of 2010 compared to the same period in 2009.

For the Marketing and Distribution segment, revenues were $397 million for the second quarter compared to approximately $231 million for the second quarter of last year. Our volumes in this segment increased by about 90%, or nearly 108 million gallons, to a total this year of approximately 228 million gallons for the quarter. The volume increase is split fairly evenly between the third-party marketing and our own internal production, with 55 million of the 108 million gallon increase due to third-party marketing and the balance caused by increases in our internal production.

This increased volume resulted in a nice increase in operating income for the segment to $2.4 million for the quarter.

With a solid performance from each of our segments, consolidated operating income was $17.1 million in the second quarter of 2010 compared to $4.2 million in the second quarter of 2009.

As expected, interest expense was $1.8 million higher in the second quarter 2010, and that was due to the expanded scope of our operations. Consolidated income before income taxes was $11.4 million, and we continue to provide income tax expense at an effective tax rate of 22% for the quarter.

As I mentioned on our first-quarter conference call, our effective tax rate may change during the year, depending on the timing of the recognition of valuation allowance for certain tax assets. We will be monitoring that closely as we move through the year.

In summary, we are pleased with the second-quarter results, with net income attributable to Green Plains of $8.7 million, or $0.27 per share on a diluted basis, compared to net income of $627,000, or $0.03 per share, in the second quarter of last year.

In terms of EBITDA, we generated $26.3 million of EBITDA, which was a $16 million increase over EBITDA last year. As Todd mentioned earlier in the call, on a trailing 12 month basis, we've generated $117 million of EBITDA, and that is against a total ethanol production for that period of 483 million gallons.

As a reminder, EBITDA is a non-GAAP financial measure, and I would direct your attention to additional information on the news release and on our website, including reconciliations to our GAAP net income.

So we ended the second quarter with a strong liquidity position of $181 million in total cash and $43 million available under our committed loan agreements, bringing our total available liquidity to nearly $224 million at the end of the quarter. Our total cash is down slightly from where we were at the end of the first quarter because we repaid $21 million in debt and, net of financing, expended some of our cash on our Tennessee acquisition, as well as a small amount on process improvements.

We've continued to strengthen our balance sheet, with our total debt related to our ethanol plants down to under $390 million, or about $0.78 per gallon of capacity. With our focus on operational efficiency and risk management, combined with our strong liquidity position, we believe we are well-positioned to manage through tight margin environments, such as we experienced this quarter.

I will now turn the call back over to Todd for his closing comments.

Thanks, Jerry. I want to reiterate the point that although margins have compressed, we expect to remain profitable for the last half of the year based on current business conditions. As I stated earlier, over the last couple of weeks, we have seen an improvement in forward margins through the fourth quarter of this year.

When you look at 2011, mandated gallons will increase another 5% to 12.6 billion of corn-based ethanol, and the forward price of ethanol is still discounted to gasoline between $0.30 to $0.40 per gallon.

We are optimistic the obligated parties will blend the required amounts and the discretionary blender will continue to blend as well, which should be positive for the margin environment, even with some additional production expected.

There continues to be a fair amount of discussion around the status of E15 -- or the status of the E15 Green Jobs Waiver before the EPA. We believe that the EP will come out with a ruling on E15 this fall, and instead of speculating on what that ruling is and the timing of it, we will just say that increased blending levels of ethanol in our nation's fuel supply is a positive step in the right direction for our industry.

We also support the Growth Energy Fueling Freedom Plan. It is not prudent to expect the blender's credits will last forever. The key is equal access to the consumer, and we believe a redirection of this credit over time to help build infrastructure, such as blender pumps and additional E85 automobile supplies, is the best and most responsible plan out there today.

I also wanted to spend a few minutes discussing our announcement on Phase II of our BioProcess Algae's Grower Harvester technology. We announced the groundbreaking on Phase II last week and we are excited about the prospects of this project. We continue to experience 100% uptime since inoculation in October 2009, and we continue to harvest algae on a daily basis.

Our vision remains the same of providing a solution to sequestering industrial carbon dioxide, while producing a high-quality feedstock for fuel and feed. We are pleased that the Iowa Power Fund has given preliminary approval for an additional $2 million matching grant for Phase II, which we estimate will cost around $4.5 million. We will keep you updated on our progress as we move forward on the launch of our Grower Harvester technology Phase II.

In closing, Green Plains is in the best shape it ever has been in. We have a strong balance sheet, an operating platform that is sustainably producing over 500 million gallons of ethanol per year, one of the lowest operating costs per gallon in the industry, a low debt service per gallon and a more diversified earnings portfolio in Agribusiness on the front end and Marketing and Distribution and terminals on the backend.

Despite all that, our stock value is often looked at as a proxy for current margins in the industry. We do not believe this valuation reflects the quality of our assets or the sum of the parts value equation. We plan to continually prove we have built an outperform model that is capable of maintaining positive cash flows even during cyclical downturns, as we believe the longer-term view of our performance is warranted.

Thanks for calling in today, and we would ask to start the question-and-answer session.

(Operator Instructions) Farha Aslam, Stevens.

A couple questions. Starting with your smallest division, Marketing and Distribution, the gallons sold were maybe 10 million more than what we had estimated from your current four outside plants, plus what you produced. Did you sell stuff out of storage or have you added a new plant?

There would been some that was in transit at the end of the first quarter, that would have come through in our volume. So it increased our volumes sold in the segment.

And then in addition, I believe our third-party plants were producing above their stated 360 million gallons of capacity.

And then on Agribusiness, the decline in profitability, would you be able to break it out between what portion was due to costs related to the Tennessee acquisition and kind of what portion was due to lower profitability in the fertilizer business?

In agronomy, we saw somewhere between $1.5 million and $2 million of lower margins, some of that based on -- most of that, actually, based on the price difference between 2009 and 2010 on the retail and the wholesale level. And so a lot of that was on the potash side drop in price and the nitrogen drop in price, both on the wholesale and the retail level.

We've seen a stability of price here as of late, and in fact, a small increase of price coming into the 2010/2011 kind of season. And so we expect some recovery there as well.

But when you go back to 2009 and you had potash at $800 and DAP at $1000, margins were very robust back then, and they came down significantly in 2010.

But overall, I mean, basically what we are doing is we are not just focused on the margin. We are focused on growing our volumes. So for the long-term -- and we've seen a growth in our volumes and our sales volumes. We are opening up a new site in Gruver, Iowa, as well. So we expect in 2011, we will see a continued growth in those volumes. So hopefully, that will offset some of that going forward in terms of the total gross margins because of price.

So when you look at possibility for the second half of the year in Agribusiness, would you think it is kind of similar to last year, or should we be more conservative?

I'll have to look at the year-over-year comparisons, and we typically don't give guidance. We have basically said in the past we believe that our Agribusiness operation, with the addition of the Tennessee assets, will be capable of producing somewhere between $10 million and $15 million of EBITDA.

And I would stick with that number, looking at obviously the weaker first -- second quarter of 2010. So this year, it will probably be on the lower side of that. But when we look at recovering in 2011 in both volumes and potentially margins, I would say we would still be towards those numbers, between $10 million and $15 million of EBITDA.

We are expecting a pretty good fourth quarter because of the addition of the Tennessee assets. The crop has held pretty well. We have handled soft wheat down there, and the margins in soft wheat and the carries in soft wheat have held pretty well for us. And then we expect that we will handle our normal amount of corn.

So overall, I don't think that the fourth quarter will be lower than last year, because of the addition of Tennessee, and in fact could, depending on how the Tennessee assets perform, whether they realize the margin in Q4 or Q1, it would be a bit of a -- still bit of a number that we are waiting to see. But I don't expect it to be lower than what we are expecting.

That's helpful. And then just on Ethanol, you were really helpful in giving us kind of natural gas year-over-year. Would you be able to give us what DDGs in ethanol pricing you've realized versus the year-ago period, just how much up or down it was?

No, actually I don't know that we can give that right in this phone call. We can look at it and get back to you on that.

As we always say, I don't actually -- maybe in our Q -- ?Q, we gave (multiple speakers). So we haven't given any real guidance on natural gas or any of the prices. What we look at is more on the margin side of the business. But -- so, we can look at that year-over-year and get back to you.

Okay. That would be great. Thank you.

Michael Cox, Piper Jaffray.

In terms of your comments, I just want to clarify about the profitable in the back half of the year. Is that for each quarter, or would that be cumulatively for the back half of the year?

As of right now, it is both. So where margins are standing, what we've been able to do, we feel like we can be profitable in both Q3 and Q4. And it is still -- obviously, we still have some margin volatility. Margins have held pretty well with this recent corn rally, maybe dropped $0.01, but they were up pretty well from a week ago or 10 days ago. So at this point, our models would show us profitable in both Q3 and Q4.

Okay, that's great. In terms of internal expansion plans, you've made really nice progress on that to this point. Is there still room to go of expanding within the six plants?

Yes, we actually believe there is still room to go. If you look at it, what we are saying is our platform is a 500-million-gallons sustainable platform. If you annualize the quarter, we're running more towards that 520 rate. We are starting -- the low-hanging fruit is much harder to find. So now, it may take a little more capital investment. It has literally been pennies on the gallon to get to this point. And I think if we improve from here, it will be a little more expensive, but it is still a lot cheaper than acquisition costs.

So I think we still have the possibility of upside, but as we run towards that 520 -- and really, what we've seen is over the summer, we actually ran it at a reduced rate to what we actually thought we were capable of at 129 because of the hot weather this summer. We feel like when it cools off, potentially we could actually get higher than that, but it's a wait-and-see and see what some of -- when some of our projects come to fruition.

All right. That sounds good. I guess then on the M&A side, how are those discussions progressing, and any thoughts on timing of convincing one of these guys to sell?

We are in constant talks with lots of people on lots of different projects. The harder part is exactly what you said, which is convincing somebody to sell. And we think we provided -- continue to provide a path to liquidity, an ability to go into the public markets so you can determine when you want to stay in and when you want to get out of the ethanol investment. We are looking at a lot of different options right now. We are in discussions with several different parties on acquisitions, and we'll just have to wait and see what comes.

It is easy to get in discussions and a lot harder to close. So in the current margin environment, we've seen a little more activity pick up. We've seen some plants that are still under distress, even in kind of the first six months of the year's results. And we will have to just wait and see if we can get something done in 2010. We are optimistic we will get something done in 2010. I just can't tell you size or scope at this point.

Okay. And then my last question on the algae technology, now that you've broken ground on the second phase, have you started to formulate a plan for commercialization or what that might look like?

Yes, we are looking at that now. What Phase II will tell us is do we have a path to commercialization or not, which we feel like what we've seen so far, there is a path. The question will be kind of cost -- will be cost and then operating cost per ton as well.

And we're doing a lot more work around that. The technology is improving. We are looking at different types of uses of our Grower Harvester systems. We have interest in the algae from everywhere from high-value pharmaceutical nutraceuticals, all the way down to -- into the biodiesel space, once we could grow significant amounts. And all of those will be positive relative to operating costs. But again, we have to make sure that we can -- the CapEx is something that is controllable and that we can build these things out efficiently and at some cost that makes sense relative to CapEx and OpEx.

But what we've seen so far, we are very optimistic. In Phase II that we've announced here, it is going to be 20 times larger than Phase I. It will be in its own building outside of the plant. It will be, again, taking the industrial CO2 off the stack, which we again think is one of the only places in the world where that is happening. And overall, everything we've seen is optimistic or we wouldn't continue to invest. I can assure you of that.

All right. Very good. Thanks a lot, guys.

Laurence Alexander, Jefferies.

This is [Lucy Watson] on for Laurence today. I just wanted to clarify some of your comments between spot and contracted volumes. Of the ethanol volumes that you've locked in for the back half of the year, are those margins above Q2 levels?

As we indicated, Q3 and Q4 margins are weaker than Q2, so it wouldn't be any better than that, but they aren't significantly worse than that, either. The 71 million gallons at the end of the quarter that were locked in were basically locked in at a full crush margin or the full margin for the plant. The rest of the gallons we sold are not locked in, that were indexed gallants. But then since the end of the quarter, we moved to lock some of those in, as we saw margins expand.

So as we kind of moved since the end of the quarter, we've actually had a larger percentage of our (inaudible) locked in. But again, we haven't seen as robust margins as there are in Q1 and Q2.

Okay. And then moving to the corn oil extraction technology, how quickly do you think this will ramp up as an earnings contribution?

We are hoping that the first plant will come on within 90 days or at the beginning of the fourth quarter, with the second and third plant not too long after that in the fourth quarter. We might see a slight contribution in the fourth quarter, but then we would expect by the end of the fourth quarter, we could have a fourth plant running. And then by the end of the first quarter of 2011, we should have all six plants running.

We have immediately started to deploy resources. We have construction crews that are right now getting ready to start. And I think that we should see some progress. But we would expect a minimum contribution in the fourth quarter. Then you will start to see a better contribution in first quarter 2011.

Okay. And then what was your net debt at the end of the quarter?

Our net debt at the end of the quarter was $450 million less $180 million or approximately $270 million of net debt. But in that $450 million is included a lot of revolvers that are backed by inventories and receivables. And when you look at just our Ethanol debt, we are now at $390 million. And if you took the cash related to that, then we are down to around $200 million of net Ethanol debt, not including revolvers, which then is about $0.40 a gallon. We feel like that is a great position to be in, with a very low risk profile at that point.

Okay. And just to follow up on that if I may, with $180 million in cash, just wondering how you balance M&A against deleveraging going forward. Thank you.

In terms of deleveraging, our intent is to pay our debt down under normal terms that we have with the banks. Because we were profitable and because we had a successful last 12 months and 2009, we were subject to sweeps in our loan documents. Jerry, maybe you want to just talk a little bit more about how we got to the $21 million.

Yes, roughly about $7 million of that represented sweeps under our loan documents related to 2009 profitability. And then in addition, some of the revolvers [at our plants] expired for another $6 million or so. So in total, we had $21 million during the quarter of reductions against that debt.

But I think going forward, we are very, very focused on liquidity and maintaining that liquidity position and maintaining that cash balance. So we are paying our debt down, delevering, as you say, as we need to, but at the same time, maintaining that liquidity position in a very strong way.

I think an important point is that at the corporate level, where we raised the additional $80 million of cash in our offering in Q2, after the investments, but yet, then add back in the added profitability of what we've been able to achieve, we actually have more unrestricted cash at the corporate level than we had even after the offering. So net of the offering, we've actually achieved better results.

Matt Farwell, Imperial Capital.

I am curious, on the M&A front, given the operating of the plants of your fleet above nameplate and working capital requirements, do you have a modified view of how we should be thinking about valuations per gallon and the value that Green Plains may be able to extract once plants are added to the platform?

We feel like if you actually go back to the history of this business, the purchased amount of capacity is 430 million gallons. We are running at above 500 million gallons right now. And we've run it on an average run rate of 520 in the quarter.

We feel like when we purchase a plant, if it hasn't had a lot of recent improvements done to it, i.e. being a very good operator who does some of the same things we do, we feel like even above the plant capacity, especially on the ICM -- Fagen-built ICM technologies, by making these small capital expenditures, we get -- we think we could add another 5% to 10% of production, if not more at some times, depending on how the plant is operating.

I think a key to this is that because of the tight margin environment that the industry experienced off and on over the last year and a half, they've been very reluctant to spend over and above their normal R&M and spend into CapEx to improve their production capabilities. Yes, some plants have, but I would say on the most part, a lot of plants have not.

We have been very willing to do that and have seen great returns from that. So I think overall in the acquisition mode that we are in, especially on the ICM technology, we feel like what we do on a daily basis can enhance any of the acquisitions we make.

In addition, as of right now and most days, we have somewhere between 10 and 12 type of process enhancement things going on at the plant. And as we always have said, once we find one that works, we will roll it out to the other plants. So there might be two enhancement experiments or things like that going on, and if it works, we roll it out quickly and it becomes a very low-cost improvement. We've seen very quick paybacks on most of our investments, if not -- some as quickly as 30 days and not much longer than six months on anything we've done in process improvement.

Would you say a majority of the plants you've evaluated have had the potential for a 5% to 10% capacity increase?

I would say if we make the proper CapEx, the majority of the plants we evaluate would have that potential. And that is mainly around the ICM technology. On the Delta-T technology, we don't feel like -- well, it depends on the plant. We think we are running our Delta-T plant very well. We are running that -- we have kind of figured that out. It took about a year, and it took a lot more CapEx per gallon to get that done versus an ICM technology.

But I think if we looked at the Delta-T plants, if there is one or two out there that have special characteristics of location, or maybe possibly some other things that we like about it, we will look at that. But overall, we are not actively looking for anything but an ICM technology, but we have seen some interesting Delta-Ts in interesting locations with interesting economics around them. But in general, most of them don't shoot what we are looking for.

I think the other benefit that we have really is with the scale of our operations, it is a scalable platform at this point, where, depending on who we are looking at, a single plant is obviously going to have higher operating costs just for their administration, than we would have bringing it into our platform, so that we should be able to see some advantages there as well.

Okay. And on the production yields, I calculate 2.8 gallons per bushel in the quarter. Is that a seasonal issue or is that something that may continue in the future?

Actually, we were a little bit lower than that, but right into that range. No, I don't think there is a seasonal issue. In fact, I think between kind of 2.75 and 2.85 in our business, we feel like that is a sustainable number at this point, without any additional improvements to yield or yielding technology. So from that standpoint, we expect that we will continue to be in that range.

I think that there is this view of low test weight in the United States today caused a lower yield, but we didn't really see that fall through because the starch held in the corn kernel. So from that standpoint, our yields held even on probably two pounds of lower test weight this year.

My final question is regarding the Clean Air Act. And I've written about this, but I'm wondering if you have any opinion on whether or not an additional amendment to the Clean Air Act would be required in order to accommodate the revapor pressure issues with ethanol blended gasoline, once E15 is hopefully allowed by the EPA.

Do you have a comment? And then I will make a comment after you.

No, I don't think so. I mean, YOU are looking at different grades of CBOB that are coming out now for blending. You should start to see some of those for September, that -- incremental markets, where they are going to start blending ethanol. But it is a different refined gasoline to accommodate the different RVPs.

What we have seen in the past -- and we've talked about this through growth energy -- when the DOE or the EPA changes a grade or changes the fuel, from 10 to 12 or 12 to 15 or even 8 to 10 in the past, most of the automakers have responded and have not fought against that. There is a lot of legalities to saying that E10 or E12 has impacted or avoided a warranty. But once DOE or EPA makes that shift, typically, most of the downstream falls in line pretty quick.

So I think overall, when we look at the Clean Air Act, I think it will come through -- most of it will come through the RFS and then just the expanded blends, and then it will be just a new fuel grade that is added to the market.

Great.

Great. Well, congratulations again.

Paul Resnik, Olympia Capital Markets.

Good morning. One of the advantages of being late on the list, everybody asked your questions. But there was one question with regard to the Ag business and the costs, particularly of the increased costs from the Tennessee acquisition.

I was just wondering whether there were any costs in the quarter that you'd say were part of a one-time integration of those assets, or is what we are looking at what we got?

I think there is a small cost in relation to integration of the assets, but I would say that because of the way that purchase accounting works, and we bought inventories and other things like that, there was a sense -- since it was a startup at a certain point, there wasn't a lot of profitability in Tennessee in the second quarter relative to cost. But we would expect that to change then going forward. So it was pretty equal between probability and cost. But we would expect under those costs, in Q2 of next year, there would be added profitability because of the timing of the acquisition.

And with regard to timing, the transition [way] in your mind from a blender's tax credit, I mean that's -- would you be in favor of, for instance, the discussion of the $0.36 level for a tax credit if that was in conjunction with the additional funds available for some of the projects for the infrastructure? Or exactly how is this going to work, in your mind?

I think we have to be realistic that the tax credit continues to be under pressure. So the question is what can we do as an industry to make sure that we still get access to those funds and to those tax credits, yet stop incenting the downstream blender -- or stop giving them a direct tax credit. Because the real -- quite frankly, that is just not in vogue in Washington at this point.

So we think a continued reduction of the tax credit over time, the blender's credit, and then a redirect of that credit into infrastructure is a prudent strategy. We are not saying as [growth] or as Green Plains that it should go away tomorrow. What we are saying is that we support a phaseout, as long as it is redirected.

If it is not redirected, then it becomes about equal access. And the question is does ethanol have equal access to gas as well as -- or does ethanol have access in comparison to gasoline to the consumer. And today, I would say we don't. And yet we have the cheapest motor fuel in the world today. We are $0.40 to $0.50 under RBOB on a wholesale ethanol to gasoline.

And even if somebody wants to make the argument that there is a BTU adjustment, the discount to gasoline today without the blender's tax credit takes all of that into account. And today, ethanol is the cheapest motor fuel in the world, yet access to the consumer is something we are fighting for, and that is why the E15 initiative is so important.

Thank you.

[Latias Etter], Goldman Sachs.

Thanks very much for the overview. I just wanted to clarify one point, and apologies if it's been asked before. But on the 71 million gallons that you said are locked in, I assume that corresponds to what you report as 15% of Ethanol Production in your 8-K being at 15% of fixed-price contracts.

What -- in conjunction with that, you said that 50% for the rest of the year is locked in. How -- can you just walk me through the math here?

Basically what we said is that when you look at the 71 million gallons, and then you add in the indexed gallons that we have sold of around 48 million gallons, that would get you to close to 125 or so -- 120 million gallons. And that is approximately somewhere in the 50 -- a little less than 50% of what we expect to produce in the last half of the year. So we have the sales on. Some are priced and margin is locked in. Some are indexed and the margin wasn't locked (technical difficulty).

But we have made significant progress since the end of the quarter continuing to lock away our margins, as we've seen the recent margin expansion to a full margin lock, not just an indexed sale.

The importance is not just a lock in the margins, but also having the [homes] on. And we look at that a lot as well. And so -- and then once we have the homes on and we can buy the corn, we have the ability then to convert those both to fixed-price contracts and lock our margin away, and move very fast to do that.

And that is why we've had the -- during a certain quarter, by having enough indexed on -- enough corn [basis] on when the margins expand, we will move instantly to lock those margins away and not wait to buy one or the other side. I think that is the importance of having 48 million gallons additional index on, because we do have corn basis, as well, bought against that.

That's helpful. And then the second question, you mentioned that your debottlenecking, you managed to really generate additional gallons of ethanol at -- I think what you mentioned was pennies per gallon. Can you give us a little bit of sense for how much was spent in total on the CapEx program of ramping up your plants from call it 480 to now 500 or maybe even as high as 520?

Really, on a year-to-date basis, our total capital expenditures is about just over $4 million. Now that would be all segments, so that would include some maintenance capital and some small capital in the Grain segment, as well. So it is probably less than about $3.5 million was spent to ramp up that production.

Surely, you already incurred some costs for that debottlenecking project the previous year.

In the previous year, there could be a small amount, but on the other hand, the $3.5 million is all of our CapEx, so that would include other projects as well.

Okay. Thank you very much.

[Anna Pena], T.A. McKay & Company.

This is Tom McKay from Simplon Partners. On the subject of CapEx, could you just provide the actual numbers for the quarter and the half year? Thank you.

Sure. Again, for the half year was $4,037,000, and that would exclude the acquisition CapEx. And for the first quarter, it was $2.3 million -- $2,300,000 of CapEx. So we had about $1.7 million of CapEx in the second quarter.

Right. Okay, thanks very much.

Brent Rystrom, Feltl & Company.

Good morning. I just had a couple of quick questions on the fertilizer business. I'm hearing from a lot of the dealers out there that the inventories going into the fall application season are historically light. Are you seeing that?

Inventories at the retail level or at the wholesale level?

At the retail level.

Yes, we have seen some of that. I think people are starting to, as we are -- and we had as well -- buying some of their needs into inventory now (multiple speakers). What's that?

I was going to say, do you think that is why we are kind of seeing urea tick up a little bit and kind of DAP holding in there?

I think that's part of it. I think people are -- and as well as I think the wholesalers are trying to do everything they can to hold off the market or send their product to other markets around the world. And -- because I think there is still enough supply in the world of everything we need, but I think that they are doing everything they can to keep the US market a very high-value market.

In addition, I think from a standpoint of getting your nitrogen, potash or DAP in place, you've got to take into consideration transportation. So I think what we've seen here is to make sure that you get it in in time for spring and fall -- or fall and spring, you want to make sure you start to buy it. And I think we've seen that as well, and I think people are a little nervous that they can't get it in on time. That is where we've seen the improvement, I think, both at the wholesale and the retail level as well.

We haven't seen the farmer yet make big purchases for his needs for spring and fall yet, but they are starting definitely to nose around. Especially with these higher corn prices, they want to make sure that they make the investment not just for after harvest, but for planting next year, because of the forward curve.

So I think overall, you are probably right on what you are thinking.

When you look at the stalk dieback, if you go through Iowa, look at the fields, seeing a lot of stalk dieback in the first couple of feet of the plant, assuming that is really related to the nitrogen leaching. That's got to be a big opportunity for your Iowa operations, I would guess, over the next year, is just that massive leaching of nitrogen with all the moisture.

Yes, I mean, the moisture is definitely something that -- grain is good. Mother nature is great. But too much of it is sometimes annoying. And I think that is probably what we are working through in Iowa right now. Nebraska looks incredible right now, in terms of quality of the crop. Iowa still has some work to do.

Even around our area, northwest Iowa, which is around our assets, there's about a billion bushels of production. We haven't quite seen the same thing happen up there. That's in great shape right now. But if you kind of drive -- as you probably have now -- as you drive through the rest of the state, there are definitely some issues brewing, but I think overall, the crop is still in very good shape.

How about in Tennessee, any particular ramifications we should think about with what is to be -- that Eastern Arkansas/Western Tennessee weakness in the crop, is that going to entail possibly higher transportation costs as far as servicing that plant?

No, I mean, I think -- here is the deal about Tennessee, which I tell people, is the corn crop is probably down 10% this year, I would say. But last year was so exceptional that I don't know that that would've been sustainable two years in a row. And we got that jolt of hot weather. Now, we did get some timely rains after that. We also saw the downtick on the soft wheat crop down there as well, down about 10%. But we did get our share from that standpoint.

I don't think necessarily that it will increase our transportation costs greatly, only because Tennessee produces a lot more than it consumes. Storage is being built there at a rapid pace. We'll look to add more storage in 2011 in Tennessee as well, both at the plant or around the plant at our assets there.

And I think overall, we basically, besides what we buy out of Illinois on trains, we are trying to get as much into our Tennessee plant as we can from local production, both in Arkansas, Missouri and Tennessee. And there seems to be enough of that to continue to ramp up from the lower levels we were at when we started.

When we started production in Tennessee, we were probably on 80% rail in from Illinois and 20% local. And I would say we are going to move into that 50% to 60% local and 40% rail, if not even greater than that now. So our commercial replacement of grain is much more local than it ever has been with regard to train replacement.

From the perspective of corn pricing in the current price environment for ethanol and your production costs, where kind of is that magic price where corn kind of gets pricing your ethanol more towards breakeven? Is that $4.00 a bushel?

There's a magic price of corn and a magic price of ethanol. I mean, right (multiple speakers).

And I am just -- static ethanol price, corn would be where that you would kind of see that?

Breakeven EBITDA?

Yes.

A static ethanol price, without giving too much away, it is $0.50 to $1.00, somewhere in that range, depending on -- but you've got to remember, the problem with that is if it is just static ethanol, you're going to get a big uplift from a dollar rally on corn to your distillers' grains. And so you have to have the offset of that.

So somewhere in that $0.40 to $1.00 up is when you -- without any movement in ethanol. But if you look at ethanol today, it is $0.40 under gasoline; that would be about $1.20 move before you even get to a breakeven price versus RBOB, not taking into consideration the tax credit.

So as we've always said, it takes about six month or -- three months to go EBITDA negative as an industry, and about six days to correct. And basically, it is basically what we saw in the last two weeks. Margins went and got pretty tight. We never saw negative EBITDA margins in our model in any one of our plants, but I would imagine the industry did. And it took about seven days to correct.

So now we are seeing margins that are generating not just positive EBITDA, but positive net income. And so it is -- we don't ever take the view that corn moves in a single form against ethanol.

From the corn oil project that you are doing as far as your CapEx investment, can you give us some thoughts on, again, once you reach full capacity, how that will come into the model from both the revenue -- and obviously you guided to the $15 million to $18 million in operating profit from EBITDA from a revenue perspective -- can you kind of give us a sense on a quarterly basis how that would look right now in current pricing?

On a revenue -- the costs against revenues are very low. We are expecting a very low percentage of our revenues to be actual real costs, because it is so value-add. So the numbers we have guided are based on current market and a bit of the forward curve out through 2011. But other than that, we don't expect anything much different than that today.

But when you look at the 75 million to 90 million -- I believe that was the number -- gallons, how does that translate into revenue? (multiple speakers) to 90 million pounds.

Well, we translate it into operating income. If you look at it, it's $0.20 of operating income per pound, 15 to 19 million gallons -- $15 million to $19 million against 75 million to 90 million gallons (multiple speakers).

Final question. Any particular thoughts on the potential for a lower carryout in corn and how that might impact your green storage processing handling business, particularly late part of 2Q and 3Q next year?

Depending on what we see in terms of the carryout, right now it is still a very robust carryout, still more than 2005 or '06, when we started this whole ethanol rally or the whole ethanol buildout.

When we look at production where it is at, the carryout at $1.4 billion on a 163.5 yield, which could then still increase and increase our carryout, we have still a good export program in place. I don't feel like that the crop today in the shape it is in, with the carryout that is being projected and the yield that is being projected, which we still think is a little low for our area, we should have any trouble with handling volumes.

Thank you.

Ian Horowitz, Rafferty Capital.

Better late than never, I guess. Good morning, guys. I am not going to take it personally, okay?

You guys are always pretty good at this versus what we can kind of look at from outside in. Do you mind just giving us what you think the macro ethanol market looks like, kind of capacity idle production? I know your numbers sometimes are a little different from what we can see.

I think the industry today is producing somewhere between 12.5 and 12.7 on a run rate. It probably went down a little bit, only because there was some slowdown and maybe a little bit of downtime taken in the quarter.

Demand, though, we've seen an uptick in demand again towards that 13 billion gallon run rate, because we still have a very nice export program and blend margins are still very good and we are still continuing to open up new markets.

So what we have -- and that was my point in the call earlier -- which was if we go next year to a 12.6 mandate with the margins that are available for blending, the exports that are still out there, because we are the place in the world for ethanol exports, the incremental blending margin and profitability, and you look at all of that and potentially you are at a 13 to 13.5 billion gallon demand base for 2011.

And I don't know that production will necessarily be there, unless you ramp up some of the marginal plants. But that again takes time, and you have at these EBITDA rates -- or EBITDA margins, I'm not sure that they are ramping up marginal production at this point. They might be ramping it down.

So we just have to kind of get through the last half of the year. And then the other impetus is we see the expanded blend rate, what that would really do. But I think between all of that, I don't know how you can't look at 2011 and think that it could be a very favorable environment, much like late 2009, early 2010.

No, I agree with you, but I guess what I was trying to kind of go through again, Todd, -- and maybe both you and Steve can comment -- you were talking about the EBITDA margin affording these guys the ability to turn back on. What do you think is idle right now? And maybe, Steve, you talk a lot to the third parties. Kind of what is the general sentiment for these guys that can't kind of convert quite as well as you can?

The ones we are working with, they are running flat out -- above or at their nameplate; they are running well within like we are. You see some out in the industry that aren't; they've made some calls based on their OpEx. But other than that, they are still running.

One of the things I talked about, and Todd mentioned it, was the demand side. There is demand that we can't touch right now just due to some of the CBOB constraints. That was the question that was being asked earlier. So that is one of the things Todd talked about going into 2011 -- or even into the Winter blending season -- is their CBOB cocktails, the formula that will come out in the marketplace will enable some of this pent-up demand that we could still touch.

So there is still demand out there that we are not touching that we can get to as the year goes on.

I think in terms of total production, our model is capable of production right now. And then with -- obviously, we've got a couple of bigger plants coming on, the Cedar Rapids plant and then the couple of -- the one in Indiana -- and then another plant in Indiana and another one in Nebraska -- I think overall probably pushes you to a 13 billion production pace at the end of the year against probably a 13 billion demand pace.

And I don't know that there is ability to bring a lot more of these plants under construction online beyond that. And then if export continues, it should be an interesting start to 2011. But I think overall, if you built every single thing that's out there and actually got funding and ramped up and did everything, it's probably closer to 14 billion-ish -- what's that?

14.1.

14.1 capable, but it takes a lot of money, I think, to get between 13 and 14.

That's kind of what I was looking for. Great.

And then the corn oil business. I mean this is backend, so this isn't food grade. What would the offtake -- kind of typical offtake customer look like? Where is this product going to be going?

There are really three different streams for this offtake. The first stream is the high-value industrial user, that if he can get this oil in a sustainable quantity, we might see -- whether it is plastics or things like that, just resin -- those type of things that need an additional oil, we have seen some of that demand that is very high-value. But they are not willing to take it yet unless you can see a sustainable supply.

The second part of that is the feeder that understands how to use this oil, and that is really a good market as well. And then kind of the lowest end market is biodiesel in relation to heating oil. This is still a very cheap input to biodiesel, and I think at the $0.23, $.24 a pound, a biodiesel buyer can still make money or generate positive cash flow at his plant in relation to soy oil, which is significantly higher, but we've seen the fats market come down. though, here recently to compete.

So I think those are the three markets. We will focus on all of them. Some of it will probably end up going to commodity. If we see a positive biodiesel outcome, then it definitely takes the value of its oil up even more. And if not, it is just used in the production that is in place today, and then the feeder likes the oil a lot.

So I think the key here is that what you are taking is you are taking what today is a $0.05 a pound DDG and converting it into a $0.20 to $0.25 a pound value-added product. So when we reported the $15 million to $19 million of operating income, that was taking into consideration the fact that we will take some reduction on our DDGs, and then the net number will be that relative to oil.

Okay. All right, great. And then I think last question, the fixed -- the locked-in volumes and the index volumes, I would assume that is primarily weighted into the third quarter.

No, not really. It is weighted into more third and forth a bit equally. We got on the fourth quarter early -- earlier in the year, when we saw those margins expand out. And so I would say that this time it is not quite as equally weighted -- or not as front-end weighted as we typically have been. And we've made a lot of progress at the end of the quarter, though.

So it is already almost August 1 here. And you know, so obviously June and July, July/August are done. And then we look at just finishing up Sep. So we've made a lot -- our quarter here is pretty well getting close to being done. Third quarter getting locked in, but we still have some open in Sep that we need to get done, so that we can be profitable in the third.

And then obviously in the fourth, we've got a nice start there as well and where margins are on the forward curve. As well as the Agribusiness segment, market and distribution, we expect a profitable quarter in the fourth quarter, as of right now.

Any talk of first-quarter product yet?

Yes, we have actually a little bit of product sold for the first quarter. The curve expanded out a little bit and we sold some, but at this point, it is a little bit of a discount to the fourth quarter, and nobody is really talking about first quarter right now. We're still sitting at a $0.40 discount to RBOB in the first quarter on ethanol, and I think that with the expanded mandates and the blend margin, I will be surprised if at some point here we don't start to see first-quarter activity very quickly.

Great. Congratulations, guys.

I would now like to turn the conference back over to Mr. Todd Becker for closing remarks.

Thank you, and thank you everybody for coming on today. We are still very excited about the business that we are running. We think we've performed very well over the last 12 months. We think our business is set up to perform very well in the future.

We have one of the most efficient operating platforms in the industry today. We have a great, diversified earnings stream that we are going to continue to work on in the future and continue to grow in the future. And once again, we think that there are a lot of great things to come out of this Company going forward.

So we appreciate all your support and coming onto the call today. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.