Green Plains Inc (GPRE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Green Plains Renewable Energy third quarter financial results call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions). As reminder, this conference call is being recorded. I would now like to reduce your host for today's conference, Jim Stark, Vice President of Investor Relations.

Good morning and welcome to our third quarter earnings call. Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; and Jeff Briggs, our Chief Operating Officer, are all on the call today. We're here to discuss our third 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 the third quarter earnings 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 the material. Now I would like to turn the call over to Todd Becker.

Thanks, Jim, and thanks for everybody joining us on the call this morning. Margin management and operational excellence are the driving forces behind Green Plains. Our organization continually focuses on what can be done to make us better from top to bottom. This focus is why we are successful in locking in margins that provide us with a consistent profitability and cash flow to sustain our low-cost platform for the long-term.

The third quarter results reported Thursday after market now makes for six consecutive profitable quarters and puts us in a position to finish 2010 on a very positive note. The sequential quarter accomplishment shows the sustainability of what we have created at Green Plains.

Our six plants again produced over 129 million gallons of ethanol, as the investments we have made in process improvements continue to provide returns through increased production capabilities. We remain optimistic that we can increase our production rates organically from our existing platform. but a lot of the low-hanging fruit has been harvested, and the next steps that we're focusing on are yield and plant efficiencies. Keep in mind, every 100th point of yield expansion -- for example, moving from 2.8 to 2.81 gallons per bushel -- generates approximately $3.5 million of additional margin annually at today's corn prices. And Jeff will be available to address any questions you have on operations during the question and answer session.

Our Agribusiness segment had a solid third quarter as we had good revenue growth and positive operating income in a quarter that normally generates a small loss for us. This is the result of the addition of the five grain elevators we recently bought in Tennessee, which doubled the bushels of grain sold in the quarter when compared to a year ago. We look forward to a strong contribution from this segment in the upcoming fourth quarter. The grain markets remain at a carry and we expect all of our elevators to be full following the completion of harvest in the fourth quarter.

We have focused on greater utilization of these assets and believe this segment still has room for improvement relative to its capabilities.

For the trailing 12 months we have produced 504 million gallons of ethanol. We generated $1.8 billion in revenues, $55 million of net income and over $123 million in EBITDA. Jerry will go into more detail on our numbers a little later in the call. As we noted in the earnings release, corn oil extraction has begun at our Obion, Tennessee ethanol plant. We are working to install the remaining five plants over the coming five to six months. This project, we believe, will have positive financial impact, generating operating income in the range of $15 million to $19 million annually, based on the production of 75 million to 90 million pounds of corn oil. The corn oil market remains very strong as well. The recent strength in soy and heating oil has been the main driver behind this.

We recently announced the acquisition of Global Ethanol, LLC. Global has two plants with annual capacity of approximately 157 million gallons. We are paying $0.94 on a per-gallon basis for the production assets plus working capital. This demonstrates our ability to make acquisitions at attractive valuations utilizing a combination of our strong balance sheet and our stock. That position allows us to meet our objectives of ethanol plant -- meet the objectives of ethanol plant owners, some who want to have a continued ownership interest in the industry and those who want immediate liquidity. This transaction lowers our average cost of ethanol production assets and enables us to achieve greater economies of scale in our risk management and back-office operations. We believe this acquisition will be accretive to 2011 earnings and we expect to complete this transaction in the near future.

In addition, we expect the integration to be seamless. We are ready to move these assets into our platform at any time without any loss production. We also believe there is further debottlenecking to do at these plants and they are capable of producing more than the stated capacity.

Risk management remains a critical piece of our business execution. We generated approximately $17 million of our operating income in our ethanol production segment. That is a $1.4 million improvement from the second quarter of 2010 and a $3 million improvement from the third quarter of 2009. The ethanol margin curve continues to be inverted, with the best margin currently in the nearby and 60-day markets. We have continued to lock in margins in each of our plants that will remain committed to this proven practice of being absolute price-agnostic.

As of September 30 we have locked in margins on 76.5 million gallons of ethanol production for the next 12 months. In addition, we have the physical index sales on for the fourth quarter. With our hedging program, this positions us to quickly lock in margins when appropriate. The combination of these two components has a large share of our production spoken for in the fourth quarter.

From a macro perspective, the first step to higher blends of ethanol in our fuel supply was taken on October 13, when the EPA granted a waiver request for E15 for 2007 and newer vehicles. We are optimistic that the EPA will reach a similar decision for 2001 through 2006 model vehicles in the near future. We are also excited to see that NASCAR has chosen to use E15 blended fuel for the 2011 racing season. The E15 planned will be American-made ethanol from corn grown by American farmers. This transition takes NASCAR's environmental commitment to the next level.

These steps by EPA and NASCAR further demonstrate that ethanol is a permanent and growing piece of our energy supply. Over the last several years producing ethanol has become much more modern and efficient, and we now compete on a global scale today as well. In fact, we anticipate US ethanol exports to reach an all-time high this year with over 300 million gallons shipped to foreign countries. These developments indicate to the world that this is an expanding sector of our economy and that the US renewable energy market, especially ethanol, is potentially an attractive investment opportunity for the long-term.

Now I'd 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 third quarter of 2010 we reported revenues of over $496 million, which is an increase of 37% over the third quarter of 2009. The increase was driven by ethanol production assets added in July of 2009, higher revenues from an expansion of our third-party marketing business, increased production from our existing plants and the acquisition of the Tennessee grain assets in the second quarter of this year.

Consolidated gross profit was $32 million for the quarter, which is almost an $11 million improvement over the third quarter of 2009. Again, this increase is attributable to higher ethanol production volumes, both organic and through acquisitions, as well as growth in profits from our Agribusiness segment. Ethanol margins realized per gallon in the third quarter of 2010 were approximately even with the third quarter of 2009.

Consolidating selling, general and administrative expenses were $15 million in the third quarter, which was $4.4 million higher than the third quarter of 2009. Most of this increase was due to the addition of the Tennessee Agribusiness assets along with slightly higher corporate overheads supporting a larger base of business compared to a year ago. Our corporate overhead, which is broken out in the release, was $3.8 million for the third quarter, or about $0.03 per gallon, which is on target with our expectations.

Segment operating income, which is total operating income before corporate expenses, was $20.8 million for the third quarter compared to $13.6 million last year. This improvement is largely driven by the results from our ethanol production and marketing and distribution segments.

Taking a little more detailed look at each of our segments, first the ethanol production segment, we reported revenues of $250 million for the third quarter of 2010, which was an increase of almost $45 million versus the third quarter of 2009. The increase was driven by an increase in ethanol sold of almost 22 million gallons this quarter compared to 2009. Operating income for the ethanol production segment was $17.2 million for the quarter versus $14.2 million for the third quarter of last year. We incurred approximately $7.9 million in depreciation and amortization in the third quarter for ethanol production compared to $7.5 million for the third quarter of 2009. So for the third quarter of 2010 operating income before depreciation expense was $25.1 million for the segment, which equates to about $0.195 per gallon sold.

Our Agribusiness segment generated $98.5 million of revenue for the quarter compared to $44.6 million for the third quarter in 2009. Revenues were higher as a result of the addition of the five grain elevators in western Tennessee.

Just a quick note here -- harvest around our Tennessee elevators starts about a month to 45 days earlier than harvest in Iowa, so we had a nice pickup of harvest activity during this quarter. That helps to temper the typically lower third-quarter results we've seen in this segment. Gross profit for the Agribusiness segment increased $4.2 million to $6.1 million for the third quarter of 2010 while operating expenses for the segment increased by $2.6 million. Both of these increases were related to the acquisition, again, of the Tennessee assets. Operating income for Agribusiness for the third quarter of 2010 increased $1.6 million, resulting in positive operating income of about $500,000 for the quarter. For the

Marketing and Distribution segment revenues were $420 million for the third quarter compared to $318 million for the third quarter of 2009. Our volumes in this segment increased by 60 million gallons or about 37% to approximately 222 million gallons for the quarter compared to the third quarter of last year. As our margins earned per gallon were consistent between the periods, these volume increases drove the increase in revenues, gross profit and operating income for the segment. We also were pleased to enter a multi-year renewal of one of our large third-party marketing contracts earlier this month.

With a good performance from each of our segments, consolidated operating income was $17 million in the third quarter of 2010 compared to $10.8 million in the third quarter of 2009. Interest expense was $6.2 million in the third quarter of 2010, which is about $500,000 higher compared to the same period of 2009. The increase in interest expense is the result of higher short-term debt used to finance our receivables and commodity inventories, both in our Agribusiness and our Marketing segments.

Consolidated income before income taxes was $10.5 million for the third quarter of 2010, and our income tax expense was higher in the quarter as we made year-to-date adjustments for an effective tax rate of 24% as our outlook for 2010 has improved from the start of the year, when we were using a 22% rate for income taxes. The third quarter finished on a much stronger note than the quarter began, as ethanol margins expanded during the quarter. As reported in our release yesterday, net income attributable to Green Plains was $7.4 million or $0.23 or share a diluted basis compared to $5.5 million or $0.22 per diluted share in the third quarter a year ago. Our share count increased mainly as a result of our 6.3 million share offering in March, when we raised approximately $80 million.

In terms of EBITDA, we generated $26.1 million, which was nearly a $7 million increase over the third quarter of 2009. For the last 12 months, and as Todd mentioned earlier in the call, we generated $123 million of EBITDA. Again, I would remind you that EBITDA is a non-GAAP financial measure and direct your attention to additional information in the news release and on our website, including reconciliations to our GAAP net income.

Our liquidity position remains strong with $177 million in total cash and $18 million available under committed loan agreements, bringing our total available liquidity to approximately $195 million at the end of the quarter. We're pleased to have substantial liquidity available to us, as we have seen increased commodity prices, higher volumes in each of our businesses and acquisition opportunities. Currently, we are utilizing some of this liquidity for investments in the corn oil extraction project, which should total about $18 million, as well as the Global acquisition, where we will invest about $32 million of our cash for the assets we are acquiring as well as the working capital.

Our total debt at quarter end was $470 million including about $64 million used to finance commodity and trade receivables. Total debt related to the ethanol plants was reduced during the $378 million, which equates to about $0.76 per gallon of capacity. Now, when we close the Global acquisition we will add about $98 million of ethanol plant debt to our balance sheet, but that will actually lower our average ethanol plant debt per gallon to about $0.72, based on the capacity that we are adding.

So our balance sheet remains intact and we're committed to maintaining a strong financial position as we grow our business. And with that, I'd like to turn the call back over to Todd.

Thanks, Jerry. I wanted to provide a little more color on our current margin outlook. We experienced an expansion in the margin environment in the past few months. With corn rallying, ethanol prices rallied faster, expanding ethanol crush margins during the quarter, and margins have remained steady to slightly better into the fourth quarter. As we have generally seen in the past, the forward curve does not provide a realistic look into the future of this industry. From time to time we're successful in locking away acceptable margins beyond 90 days, but over the last year this has been the exception instead of the rule. It is important to note that, as we approached every quarter over the last two years, the forward curve was similarly undefined but always came together to provide opportunities to lock margins away.

2011 is shaping up to be a solid demand year with mandated gallons of 12.6 billion gallons of corn-based ethanol. E15 should be in the marketplace in the first half of next year, and forward prices of ethanol are still discounted to gasoline, reaching $0.10 and $0.20 per gallon on the forward curve. In addition, we expect exports to continue, as American ethanol is the most price-competitive clean fuel in the global markets today.

We will continue to watch Washington closely on the extension of the VEETC, or blender's tax credit. But, more importantly, we are pleased that Growth Energy's Fueling Freedom Plan is gaining traction, especially with the administration. The EPA decision on E15 now starts to give certainty around the infrastructure and investment that needs to be made to allow consumer access to higher blends of ethanol. The biggest challenge we have faced as an industry is market access, which is controlled by big oil. Consumers should be allowed to make a choice when they fill up their tanks, which we believe will drive more demand for US-made fuel versus foreign-sourced oil-based gasoline. Ethanol today remains the cheapest alternative to motor fuel in the world.

Over the past several weeks, we have seen a rapid rise in the grain prices. This is due to several factors, all of which are not market-based realities. We are currently harvesting one of the largest crops in history. While we may have tighter ending stocks than expected, the USDA still reported over 900 million bushels of carry-out in their last report, which is adequate after feeding our animals, producing food and producing fuel. All of this is while we are still exporting over 2 billion bushels of corn to foreign countries, which, by the way, is the equivalent of 5.5 billion gallons of ethanol.

A troubling fact in the current agricultural markets is the record speculative length. This is grain ownership by various investment entities, such as commodity index funds, pension plans and large speculators. These parties now hold 4.5 times our current US ending stocks, or almost equivalent to all the corn used for ethanol production this year. These groups will never consume or take delivery of any agricultural products and have no incentive to do anything but push prices even higher. This needs to be reconciled at some point, as the transfer of this ownership can be very disruptive to orderly markets for users and producers.

Now I'd like to give a quick update on our BioProcess Algae project. As we indicated in our earnings release, we have received final approval of the $2 million grant from the Iowa Power Fund for phase two of BioProcess Algae Grower Harvester technology. Construction is on schedule, and we plan on having phase two operational before the end of 2010.

Before we open it up for questions, I'd like to leave you with this thought. We are a growth company. We take the task of investing our capital wisely and accretive transactions very seriously, and we believe we have proven we can execute on this strategy. We expand our agribusiness operations 63% in the second quarter of this year, and once we close the Global Ethanol transaction we will have expanded our ethanol production capacity by 31% this year. We have grown our Company while expanding our production capacity organically through our operational excellence program and process improvement programs. This was possible because the team of employees which, once the Global transaction is completed, will have grown itself by 37% from the start of this year.

With this growth it is most important than ever that we stay focused on margin and risk management, operational excellence and efficient back-office operations, all with safety as the number one priority. We're not done growing. We want to continue to utilize our strong balance sheet and operating platform to consistently improve our business model.

As I mentioned last quarter, 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 longer-term prospects for all of our stakeholders are very exciting.

I want to thank everybody for calling in today, and now I would ask the moderator to start your question-and-answer session.

(Operator instructions) Michael Cox, Piper Jaffray.

Congratulations on a nice quarter, guys. My first question is on, I guess, on the forward curve. Judging by your comments, it sounds like the majority of what you have locked in of this 15% of your production over the next 12 months is here in the fourth quarter. I just wanted to clarify that and just get your thinking on the potential to be locking in Q1 margins now. Are you just shying away from that at this point because of the tighter structure in the forward curve?

Most of the production that we have locked in is weighted heavily towards the fourth quarter, but we do have production in the first quarter of next year locked in as well as the fourth quarter of next year locked in. And in fact, the margin is V-shaped, the curve is V-shaped today. We have really good margins on the front end of the business and really good margins on the back end of the curve. In fact, Q4 2011 topped out and we were able to lock some margins away in there as well. So, while most of it is heavily weighted towards the front end of the curve, we still have some work to do this quarter, and we are starting to look at Q1 much more seriously now.

And how do you think about the -- you had mentioned that ethanol prices are below that of conventional gasoline, as you look out to next year. But if you look just the next few months, we have a situation where ethanol prices are more expensive. Have you seen any implications to demand associated with that?

No, not really, actually. It's very interesting because, as we talked about on the last call, the spot market is what it is, but a lot of ethanol users don't really operate in the spot market, so it's a very small percentage of the 12 billion bushels of domestic -- or 12 billion gallons of domestic demand. A lot of the users operate in the 60- to 90-day to 120-day markets out forward, and they look at the curve based on that.

So what you're seeing on the front end is really only affecting spot gallons out of the terminals, and it really doesn't impact a lot of the customers that we deal with. What was the second question, Michael?

That answers it perfectly. My last question, if I could, on the acquisition environment -- first, what work will need to be done to the Delta-T facility to get it up to the operating level that you guys are accustomed to? And then, second, how does the recent improvement in ethanol margins impact sellers' willingness to sell?

Well, to address the acquisition, in terms of the Delta-T -- actually both of their plants, they have done a lot of work over the last 12 months in debottlenecking and getting to a much more consistent plant operation. And so, while we are walking in, they are pretty good plants from an operating perspective. The Delta-T plant is actually a very well-built plant out in Michigan. We do have some work to do, but not a lot, to make some capital investment to get more volume out of there and operate a little bit cheaper.

I think what's interesting about that plant and what we really liked about it -- because we typically don't look at Delta-T plants -- is the economics. The economics of that plant make up for the operating differential between a Delta-T and ICM. And that's one of those unique opportunities because of the corn basis in Michigan and the ethanol basis in Michigan.

So when we looked at Global, albeit it was a little bit away from our strategy of staying away from Delta-T's, this was a Delta-T plant that was pretty interesting from a profit respective. And actually, it is right up there with the ICM profit model. So from that standpoint, we are very happy with that.

And then, just on the second part of the question, on the sellers' willingness to sell in an environment where ethanol margins have popped up a little bit (multiple speakers) you are starting to continue to talk to potential prospects?

Is, there are still opportunities out there. Obviously, the industry is still extremely fragmented. There is still over 50% or 60% of this industry in either single or two plant owners' hands. And we still believe that they are looking for the same opportunity that the Global Ethanol investors were looking for, which is partial liquidity with cash and the ability to stay in the market with stock. These guys have seen the cycles, the up and down cycles, and we are in about a mid-pricing cycle in terms of the cost of assets. And we still believe that there's plenty of opportunities left, and we continue to focus our efforts on that. What makes us unique is that the Global Ethanol investors really like getting Green Plains stock as well as like getting cash. And that was very appealing to them, and we think there's more deals to do that way. And we think we are really one of the only companies out there that can offer such a compelling opportunity for plants like this, which is a stock that trades, a stock that has value and a company that's profitable and the ability to get some liquidity as well as using our balance sheet.

Farha Aslam, Stephens.

Congratulations on a great quarter. In your opinion, what was the factor that allowed ethanol prices to keep up with the price of corn over the last few weeks?

Well, it's really not the last few weeks; it's really like the last six weeks. When we came out of the midsummer doldrums, ethanol was sitting around $0.60 under gasoline. So we always felt and we've always indicated to the market that corn could still rally and ethanol will rally with it because of the incredible blend economics that are still available in the market today to the end-user. And so, sitting at $0.60 under gasoline was about $1.80 in corn, roughly -- you just use a three-to-one conversion, even though it's a little bit worse than that. And so what we've seen is about $1.80 in a corn rally to where we are at today and ethanol trading at even money to gasoline in the spot market.

And that's really what enabled ethanol margins to hold and actually even expand. And when they expanded, it was on the days that the ethanol was very sticky and corn started to set back. And on those days we moved very quickly. Corn didn't go straight up; there were days of up and there were some days where it went down. And on those days when we saw margins expand, we just continued to lock more of our quarter away as well as what we had open for the third quarter.

But overall, it was just basically a price differential. And if you look out on the forward curve with ethanol sitting at $0.10 to $0.20 under gasoline, we believe that even on the forward curve, if corn rallied another $0.50 or $0.60, the margins would hang intact and then we would have to see what happens after that.

But in a lot of these Eastern markets -- they will use ethanol all the way to even money to plus $0.45 over corn, and a lot -- $0.45 over gasoline -- throughout -- through the whole blenders credit. And a lot of that is because of the [CBOP] component, as we've talked about in the past, where [CBOP] is getting shipped into terminals and you need ethanol to leave, as well as just the overall blend economics on the octane as well.

And talking about the tax credit, it's set to expire at December 31. The likelihood of it getting extended this year -- how do you think that will work out?

I think there's a lot of momentum in the lame-duck, if we have a lame-duck session, there's a lot of momentum on all of these tax extenders. And we're still optimistic that with the White House support and with bipartisan support for the tax credit, we will make some progress on getting an extension. If it's not by the end of 2010, we hope that it will be early 2011, when the new Congress comes in. But I think overall we still have very broad administration support, and we have broad support, bipartisan, in the Senate and the House. And I think we can get something done; we just need a vehicle to get it done. And hopefully, the lame-duck will provide us with that vehicle.

My final question is on your Agribusiness segment. What kind of demand are you seeing for fertilizer out of those businesses?

Well, we've had very good nitrogen demand for next year. The demand is very good. Prices have rallied significantly, and the farmers moved to lock in during the rally. So we saw great demand for nitrogen. We've seen good demand for dry fertilizer at the end of this harvest season as well. So obviously, that is not a huge business for us but we do get to see in a very dense production area what the farmers are doing, and we are seeing a very heavy investment in corn for next year.

Laurence Alexander, Jefferies.

Good morning. This is Lucy Watson on for Laurence today. You mentioned earlier that you are moving more towards achieving yield gains in your plants and discussed the margin improvement that a 100-basis-point yield improvement would offer. Do you have an estimate for what the capital requirement would be to achieve 100 basis points in yield improvement?

I'll let Jeff address that, and I'll follow up with my answer as well.

It's tough to pinpoint exact requirements. A lot of the yield projects that we'll do could revolve around different enzymes to be using, different process technology in terms of heat recovery, optimization of some of the ethanol vapors that are running through the process as well. Some of it depends on the corn crop quality as well. One of the things that we are finding out very early on in this year's corn crop quality is good test weight and very low moisture. And so the ability of the corn crop to produce better ethanol for us -- or not produce better ethanol for us, but higher ethanol rates, better DDG yields as a percentage of the overall crush margin, will also be a positive factor as well.

And so when we look at capital, the productivity improvements and the throughput improvements that we've done over the last year are very easy to identify in terms of capital expenditures. Some of the yield improvements are much more focused around operating processes, our operating excellence program, benchmarking, standardizing our, quote-unquote, recipes and figuring out how to get the most out of the biological processes in the ethanol plant.

And just to follow up, just when you look at the corn test weight this year, when you have -- last year you were grinding 52 or 54 pounds test weight and this year you are grinding 58 pound test weight, just the fiber in that kernel is more, and now we are going to get more DDG's this year than we would have last year. And so that we are optimistic about. We don't really know what the impact of that is, if anything, just yet. But we wanted at least to point out that there is some potential for that. But we'll have to wait and see if it plays through our process.

And moving to the Agribusiness, how much green did the new assets add to sales volumes this quarter?

What was the gain in sales volume?

Well, the total sales volumes nearly doubled, and I would say that that's approximately -- most of that is due to the addition of the Tennessee assets. I wouldn't say every bushel is, but a good -- probably the vast majority, 75% or 80% of that is due to the Tennessee assets.

And given the, I guess, shift in the regional mix of those assets, how should we be thinking about seasonality in Q4 of this year versus last year?

Well, actually, they will give us a contribution in Q4 as well because the harvest ended early in Q4 down there on corn, wheat and beans. In fact, beans are just ending now, as we speak. So we handled all -- we start harvest down there early with soft wheat, and then we move to corn, and we end in beans. So it's a longer harvest season because we handle three commodities through the cycle. And so it will have some impact, some positive impact to Q4.

And just one more question -- what are your expectations for operating margins, once the Global Ethanol acquisition is completed and integrated?

Well, the Global assets fall very nicely into our model. In fact, they are not our best margins but they're not our worst margins for our plants. And so it's right into the mid range, and so we would expect them to stay consistent with the overall average of our full platform and not to have any negative impact to the overall average as people think about how we manage margins.

Ian Horowitz, Rafferty Capital.

Congratulations. Just to go off Lucy's last question with the Global assets, when should we start seeing these hit the income statement?

We are moving very quickly to get these closed. Jerry, do you want to make a comment on that?

Yes, I think, once they are closed, they will be fully contributing, as Todd said, on a basis that's very close to our average overall existing platform. We will have a small amount of closing costs that we will have to expense, but that should affect the fourth quarter some. But basically, otherwise, they are contributing immediately.

So if we plug them in halfway through the quarter, would that be too presumptuous, or is that a fairly good estimate of when we will see them?

Well, we haven't closed at this point, and we are basically halfway through the quarter. So I think you've got to put your own date on there as far as when we'll close. And like I say, then once we close, then they should be fully contributing to the quarter.

Yes, less a small amount of closing costs.

Closing costs, right.

And we have been hearing a lot from people throughout the industry about the huge, seemingly huge discrepancy right now between -- and you kind of mentioned it -- between the financial side of corn and the cash side of corn. Can you give us a little bit of color on what you are seeing locally around your facilities as basis, as wide as it seems in the rest of the markets?

Yes. The Iowa truck corn basis is sitting in the 50 to 60 under range for spot corn in the grain elevators. Ethanol plants haven't been able to quite buy it that cheap, but there is definitely, somewhat similar to the wheat industry, there is a small disconnect between financial and physical, and that correlation. But overall, what we have -- the structural issue with the corn market that I mentioned is last week there were 840,000 contracts, that were either index or large, speculative lengths in the market. And if you look at that against -- that's basically -- the other side of that is all the short hedges from the commercials, because the commercials are net short that much. That's really what we are talking about is that has to get reconciled.

The users are not -- the length in the corn market in the United States, in fact, transferring that ownership to users will be very, very difficult at these levels. So we'll have to wait and see how that reconciles itself. But we will see if we can get the convergence that these markets are supposed to have between physical and financial this year, and we will have to wait and see on that one.

We also saw a slight sequential decline in gallons. Is that just a calendar issue, or is there anything going on there?

Well, actually, part of it, Ian, is the fact that the summer months are a little bit tighter on our capacity just because of heat exchange. Jeff, maybe you want to comment about that?

Yes, I mean two things. Number one, you've got to look at the seasonality of some of our shutdowns that are always planned in various quarters; we try and balance those out between first, second, third and fourth quarters to do it a little bit smoother. But they are kind of chunky sometimes. Specifically in the summer, you have high heat indexes in places like Tennessee and Nebraska and Iowa. It takes a significant amount of the cooling capacity, which does affect some capacity. Having said that, July was a record month for us platform-wide. And so you take some of the good with the bad and trying to manage through that process. You go into September, October, and you see an immediate cool-down and an immediate return to capacity. But there is a little bit of seasonality and capacity driven by that heat index and some of the load on the plan.

And then, let's see -- the Marketing and Distribution margins, operating margins have just continued to clip along and increase sequentially as well as year-over-year, as well as just the overall profitability of that segment. But what's the true -- A, what are we seeing? Why is the margin doing as well as it is? And what should we be looking at on a steady state basis for this business? And when will we see that steady state?

Well, the plants that are signed up as marketing agreements with us have produced more. And as we debottleneck like our plants, they have done a very good job of debottlenecking their plants. So we've seen a growth in their production, which we think they are hitting the same kind of point where we are, where a lot of low-hanging fruit was taken care of. So we think we will get more to a steady state here on that. The Blendstar assets continue to perform well for us. In fact, one of the reasons we are able to attain margins better at our ethanol plants is because we have really utilized that platform much better than we have in the past to move our own gallons through there. And that was really the ultimate goal of that platform, which was to provide a third-party service to the industry but also utilize those to get to markets that increase our margins at our own plants. And that worked very well for us in the quarter as well.

So a little bit of both, but I don't know that you will see significant upside in that segment from these type of numbers.

Again, the only exception to that would be the fact that, once we close Global, then we will be paying -- Global will be paying our Marketing Group a marketing fee. So you will see some profit reported there, but of course it's eliminated in consolidation.

Right, and that's the cash number, it's not a -- you're not going to see a different margin profile?

No.

No, that's right. Just higher volumes.

Okay. And last question, and I'll get back in queue -- Todd, I think you asked -- Farha asked the question about the VEETC, and you seemed pretty optimistic. But a little bit more color on that? Do you see this as a one-year extension and then a total look, re-look at the policy on the growth energy philosophy? Or are you hearing -- feeling that this is going to be more of a multi-year extension? And do you have any guesses as to the cents per gallon we're looking at?

Yes, I don't think the immediate extension will be a multi-year extension, and I think the cents per gallon will be lower. But basically, we have very good administration support for the Fueling Freedom Plan. The White House has met with the industry, as has been reported. They are very focused and committed to the industry to try and have a program in place that just -- that builds out infrastructure for more blender pumps, more flex fuel vehicles. The USDA just had their press conference yesterday, and the Secretary announced a $250 million initiative to build out blender pumps across the United States, which I think is a step, as -- also came out in favor of an extended tax credit in 2011. And, as well as, you've seen some things about direct producer payments beyond that for a multiple-year period, and then that's the end of it; it will phase out.

So I think it could be any and all of the above. We still have to wait and see, but we are optimistic it will get done. But we've got a lot of wood to chop just get to that point.

Great, guys. Congratulations again.

Matt Farwell, Imperial Capital.

Good morning and great quarter. I just wondered if you could discuss the -- you talked about the buying and the futures of institutions. But there was a marked decline in the expected yield by the USDA. And I just wonder if you can give some more color on that. And do you think that what we're looking at now in corn can be seen as somewhat of a new normal in terms of prices being significantly higher than they were last year, given the higher input costs farmers are seeing with fertilizer and the like?

Yes. Basically, I could answer yes to all of that. Obviously, yield had an impact. And the ending stocks, the use ratio has an impact. And we've seen a massive buying program out of that sector of speculative money into the market. And if you overlay price over index fund positions, you would say there is a direct correlation between high and low prices and high and low positions. And we can get you those charts as we have them and we've studied them.

But yes; you're absolutely right. There's still fundamental issues around this market. We've got to get through the next corn yield number and seek what that is. And I think that is making everybody a bit nervous to see this corn market break. But I also think that there's basically -- when you get to prices like this, you always have to look at replacements in the world. And when we got to those high wheat prices, the world starts to decide, do they really need all that wheat, what do they need to eat, what are my replacements, what can I do, can I grind a little extra wheat and not buy anything? And we saw a pretty good price decline in wheat since the highs, and that's a more tenuous situation, I think, than even corn. But wheat is a feed grain around the world; it's really not a food grain, in general.

And so I think corn is going to have to deal with the same thing. It's going to have to ration something here, and the question is what. Is the easiest thing to go after the ethanol bushel? Because not it's hard to find a couple of hundred million bushels of extra supply in ethanol, if you wanted to really push and rationalize the industry and take the marginal production out. They might go after that.

Do we just export less? Our export grow ground is -- a lot of people are -- over 2 billion bushels, still? Two years ago we exported 1.8 billion, or two or three years ago. And maybe you could find a couple of hundred million bushels there, in fact exports this week were much lower than the market expected, and they were very disappointing. And so the role of price is to find that point where you have step-by-step rationing of some of these programs. And I think exports is the first place they go after.

Do I believe it's the new normal? Yes, I think it is partially the new normal. I'm a commodity mean reverting guy, as I've said on many conference calls, but this one might take a little bit longer to play out. We've got to get through this yield report, we've got to get through the final crop report in January, we've got to get the crop planted, and we've got to get the world producing a lot more wheat. And, remember, it takes -- a wheat crop disaster can be healed in about eight months. There's two more harvests around -- we harvest wheat around the world every four months. Corn crop tightness takes a little bit longer, but the high prices in the world today will prompt a lot of planning around the globe, especially in wheat. And that could temper, ultimately, the corn demand around the world and drive our exports lower.

But for awhile here I would say, we are not going to have a significant break in corn until we see some systemic change around the world on feed grain supplies. Which, by the way, world feed grain supplies today are adequate. And so that's the thing we have to deal with. We'll have to deal with our domestic situation first.

Has the overall increase in commodity prices weakened some of the smaller players, ethanol players, in your opinion, given the higher working capital needs?

You know, it's interesting because higher corn prices have led to higher ethanol prices. So your cash flows, if you have -- depending on what your cash conversion cycle is -- ours is very quick. As we mentioned, we convert in about seven days in our collection period, while others in the industry is 25 days plus. So for us, high prices really haven't -- our ethanol production segment has not stressed has not been at all, from a working capital perspective. But I do think there are others out there that, with the longer cycles of collection times, have a little bit of stress right now and are considering what are their options. But today, from our standpoint, we haven't had any stress in our ethanol production segment. Would that be correct, Jerry?

Yes, that's absolutely right.

Well, thanks for the color. And great quarter again.

Paul Resnik, Olympia Capital Markets Group.

Good morning; it is a good morning. I'd like to go back to the Marketing and Distribution profitability because those numbers really did change. At basically the same volume from the second quarter to the third quarter, the operating income in Marketing and Distribution went from about $2.4 million to $3.25 million. So going out to, should I guess -- I can accept this is, again, the new normal, as it were, for margins. And do you see any further expansion in margins, in Marketing and Distribution?

Well, the only expansion will be from volume, a bit on volume, in terms of the global assets that we acquire, and then that will lead to maybe possibly a little more in terms of EBITDA. But I think that this is a good number to key off of. I wouldn't get too optimistic from here, unless we had more marketing plans or we see some big change in the Blendstar business. And in fact, from the standpoint of the $3.2 million in operating income, we basically think that is a pretty stable, solid number. But that could be high or low, just depending on how plants operate in any certain quarter.

So I would say, plus or minus $500,000-$700,000, in that segment, and I want to be on the optimistic side of that.

Yes, again, all volume-driven, primarily.

Yes, but from here on volume-driven?

Right.

Okay. Just so that I heard it right, you're looking for a 24% tax rate this year?

Right. We've adjusted to 24% through the year-to-date numbers. And so that's our look right now. Again, the tax rate is driven by the ultimate level of profitability, Paul. I don't know if you recall the conversations we've had about that in the past, but as our profitability goes up, because we are reversing valuation allowances, our tax rate will also go up. And the converse is true, of course, as well.

But for at least the end of this year, we're going to stay at, it looks like, 24%?

And lastly, on E15, there's a lot of controversy regarding what level of approval is required before there is a substantial adoption among the distributors of E15. And I know we've talked a little bit about that in the past, but if you could just go over that again, what you think is going to happen. Let's assume we go to the 2001 and newer, which is coming up soon. What do you think are the prospects for adoption?

Well, we believe the prospects for adoption are very high. 2001 and newer represents about two-thirds of our US gas demand yearly. And at that point it's a real market. There's a few things that have to happen around the -- on waiver, around some state licensing requirements and regulations and registrations. And all that has to kind of happen, but we believe that -- we're optimistic we'll see a positive result in December. And then, remember, the car -- the fleet changes 14 million cars every year. So in two or three years, 2001 and newer should be about 80% to 90% of our fleet, anyway.

So it's going to be a multi-year adoption. We think it will start in 2011, as soon as we get through the 2001 and then get through the states and then get through the 1 pound waiver, and then I think we have a market. I'm confident that we will get all of those things done. Then it's going to be fighting for the island. And today, some of the challenges we face is that a lot of retailers don't control the island. Big oil controls the island. And in most of these retailers' arrangements, they've got to fight to get a blender pump up. And we're going to work very hard to try and get that situation remedied because big oil won't allow access to the blender pumps. And so -- but there's a lot of independents today that are standing by and waiting for all of these things to happen, to put in the E15 blend. And we are very, very optimistic that that will happen. But that's a long-term benefit to our industry. It's not an immediate demand uptick, it is a long-term ability to get 7 billion more gallons of ethanol onto the market and cut out another foreign import of oil out of our fuel supply.

And as with anything, it just takes time. But there has been more testing done on vehicles for E15 than there ever has been in the history of any fuel additive in the United States. And so we are very confident that those tests will hold.

Any thoughts about testing for the older car fleet, or any possibilities there?

I think we're going to continue to push for that. But as I said, this -- if we get to 2001 it's about two thirds of the US gas supply, and the fleet turns 14 million cars a year. And so, with that said, in two or three years it really won't be necessary to do. So from that standpoint, I think the key is that when you have two-thirds of the US car fleet that can take E15, the market's big enough at that point to start re-stickering pumps.

Gabe Kim, Wellington Management.

I jumped on the call a little bit late. Can you just run through how much of your forward production you have sold forward?

Yeah. What we said is, we had 75 million gallons locked in at the beginning of the quarter. Most of it was heavily weighted towards the fourth quarter of 2010, but we do have some locked in, in the first quarter of 2011. And the fourth quarter of 2011, as what we saw was a V-shaped margin curve, and we were able to lock in some Q4 2011 margin similar to Q4 2010. So we were able to do some of that. We also have a large amount of just our physical production sold in total for the fourth quarter, just waiting to price, and when margins pop, then what we do is we immediately price the index sales using hedges in corn and ethanol.

So, the EBITDA per gallon is what on this forward stuff?

We don't typically give that out.

Then, the other question is the margin opportunity that you got, right, to sell into Q4 of 2011 -- why do you think you got that opportunity? Because I normally think that if you are lucky you will be able to get some stuff out maybe one or two quarters forward. How are you able -- what do you think changed this quarter that you were able to get some stuff locked out all the way out to Q4 of 2011?

It's the structure of the corn curve. You have an inverted corn curve between now -- now through July is at a carry, and from July forward its inverted. So you've got nearby corn at, call it $5.60 or $5.70, and you've got deferred corn at $5.10 to $5.20. And ethanol is flat throughout 2011. So it provided some opportunities to lock them in. It's not like we did a huge amount, but it was nice to see. And there actually still is opportunities in Q4 2011 to lock some margins away. But again, you've got to be able to find the physical demand out there first. And we have this; we can buy the physical corn and then as well as after that look at the index sales. But we continue to focus on that quarter.

And my other question was just, on the export of ethanol, given the competitiveness of the US stuff relative to the other stuff out there, it was actually very competitive earlier in the year. And we did export a lot, but I'm wondering, why didn't we export more? What's holding up the export?

Well, what you have in the export market is a market that's about 1 billion to 1.5 billion gallons, somewhere in that range today. And it's going to grow every year. We are starting to see adoption around the world. And in that 1 billion or 1.5 billion, I don't know the exact number, we can get that for you, though, 0.5 billion is committed already out of Brazil, which is on long-term supply contracts to Asia and other places around the world. And the other 0.5 billion is open.

And so what we go after, what the US has gone after, are those open, uncommitted countries that can go to the cheapest source. And that cheapest source is ethanol, was ethanol, American ethanol, as well as it looks like that on the curve all the way through 2011 today. It is still the cheapest source, based on the high prices of sugar, even with corn at the prices that we're at.

So that is really what drove it. There is a nice export market available, and at $0.30 sugar and plus, $0.35 sugar, we are more competitive around the world using corn than Brazilian ethanol in the world markets today.

Doug Millett, Perella Weinberg.

Question was just answered, thank you.

Dan Chandra, DW Investment Management.

Maybe feeding onto what you were just talking about, obviously we are in a great position vis-a-vis Brazil in the global ethanol market right now. But a lot of that is because Brazilian ethanol producers are shifting over production to sugar, right, given the high prices. And so what are your thoughts on whether that will normalize and sugar will go down and then they'll come back onto the market?

And then likewise, can you -- I guess that feeds into my next question, which is there has been talk about moving the blenders credit to a production credit, which is great for you guys. But I guess to a certain degree that might go hand-in-hand with removing tariffs. And if so, do you feel that down the road we might see a competitive threat from Brazilian ethanol coming into this country?

Let's first talk a little bit about the Brazilian competitiveness based on price. Basically, over about $0.15 or $0.16 a pound on sugar, the mills start to take the cane and produce sugar. And the Ethanol Production does not compete very well, and now we are sitting at $0.30 plus -- I haven't looked at the sugar market in the last day or two, but we're sitting at much higher levels than that. So we've got a ways to go before we believe sugar could be competitive, sugar-based ethanol will be ultra-competitive to US-based ethanol in the world market. So you've just got to kind of watch that sugar price and see if it breaks very hard.

In addition, one thing you've got to keep in mind is that when we produce 700 million gallons or 670 million gallons of ethanol next year as Green Plains, we are actually larger than any combined ethanol producer in Brazil today. So if you think the US industry is fragmented, the Brazilian industry is extremely fragmented as well. And a lot of their ethanol really can't move anything but domestic, for a lot of reasons including their price supports on gasoline that they keep in place.

And so from that standpoint, I don't think that we have a huge worry that they're going to go after -- because they don't have an exportable surplus today, unlike they had years ago, because their own internal demand is growing, and they can't even service that with what they have today. And it's all because of the high price of sugar and the ability of the internal demand for ethanol.

When we look at the blenders credit moving into a production credit, we don't know if that's going to happen or not. We are really not -- it's not what we prefer as an industry or as a company, is to go to a direct producer credit. But if that's the case, then we'll have to deal with that, obviously. But if that takes away the import tariff, we don't actually believe there is an exportable surplus that can hit the United States market big enough that it will have an impact, especially since what we will see by the time that happens is next you year go into to 12-6 on a mandate, and the year after that we're going to 13 billion on a mandate, and E15 is coming on and Brazil doesn't have a huge exportable surplus to send to United States over and above what the world needs.

So from that -- and they don't also have the ability to expand their production significantly at this point in any kind of fast time frame. So it really doesn't impact my thought process around 2011 or 2012.

So, from that perspective, given that the RFS 2 is going up each year, obviously there is a lot of capacity coming on. We have a lot of capacity now, and we are meeting that through additional exports above our domestic consumption. But obviously, new capacity is being built. Can you talk about how you see supply-demand over the next six to 12 months?

Yes. There's definitely some new capacity that will still come on, but it's not hugely significant anymore. There's a few plants that are remaining to get started here. And we think that there's demand is good for those plants with the expanded 12-6 mandate next year and exports. And then after that, we don't see a huge amount of new builds coming on. A lot of the improvement to meet the 15 billion gallons will come from situations like we've done here, which is increase our production both through debottlenecking and then next through process improvements.

And so, no, I don't think we are too worried about oversupply this point, especially since we're still at a discount to gasoline.

Thanks for very much and congratulations again.

Brent Rystrom, Feltl.

A couple of quick things -- the really robust pricing of nitrogen right now would imply that people might be doing more applications this fall than next spring. Are you seeing that in your business?

No; it's really focused on next spring. It's -- the farmer has bought far ahead, has bought ahead, took advantage of some of these lower prices. I'd say the farmer in Iowa bought most of his hydrogen before we moved into the 300s, and albeit mid-250s to 260 to 270s is still high, but relative to what the replacement is today or what the nitrogen producers are trying to get, I think the farmer is pretty well covered for spring. But no, it's not really a nearby demand.

One of the things I've seen suggests that in Iowa one of the major issues with the yields there may be continuous cover corn. Do you have any thoughts on that? It may have ramifications both positive and negative for both the ethanol and agronomy businesses. Any thought on that?

You mean the double -- when they follow up year after (multiple speakers) --

Well, when basically you plant corn year after year after year. So when you look at the yields this year, they were about 20 to 25 bushels lower in Iowa on continuous cover corn than non-continuous cover corn.

Yes. They did very well on that for the last couple years, and they probably got hit a little bit this year on that, and we are seeing that. And then they will flip those probably into soybeans next year, but ultimately we think that the acreage will still expand for next year, for corn, based on the current economics. But that won't necessarily be a corn-on-corn issue.

Do you have a sense for how much you think the acreage might expand? Do you think it's a couple million? Do you think it's 5 million?

I think it's towards the higher end of your range.

Matthias Ederer, Goldman Sachs.

Thanks for taking my question, and great quarter. I had a question in relation to the $98.5 million of debt you are assuming as part of the Global transaction. What's the duration on that debt? And, also, can you give us some guidance on the pricing and whether it's in line with the existing, clearly very attractive debt that you have on your existing plants?

Sure. The overall term of it -- it extends out into about six years, probably, average. There is some maturity in 2013, in particular. But otherwise, it's a fairly level amortizing stream on that debt. The rates are pretty comparable to our existing portfolio overall. Most of the debt is LIBOR-based. I think there's about $17 million or so that is fixed-rate. Of course, that's a little higher rate, but it's good to have a little bit of that locked in. But I think overall, in total, the average cost should be very close to our existing portfolio.

Okay, that's helpful. And then in relation to your forward hedging, if I remember correctly, came September this year, you pretty much had your Q3 dominant and didn't have much left to do in terms of getting ethanol out of the door. Now, clearly, September was the month with the strongest margins. Is it fair to assume that we can expect those margins to come through in the fourth quarter?

Actually, margins expanded from early in the third quarter. And we always have a little bit of production to sell. When margins expand like they did, it's meaningful for us as well as were able to achieve a better margin in our plant utilizing our Blendstar platform that we have investments in. And so we actually saw the expansion earlier than September, but margins didn't really go hard in late August and September. The markets are still inverted. The best margin is still in the spot, and those margins are not that much different than what we saw kind of mid-range, quarter that we just came out of. And we still see November as a good margins as well. And that that inverse continues to roll forward.

You've got ethanol at basically a $0.10 conversion from Oc. to No. and another $0.08 conversion from Nov. to Dec. And so that's the -- well, corn is flat during the quarter, except maybe some basis strength at each of the plants. And so that's why the market remains inverted. But what we've seen over the last year is that front continues to roll forward because the market needs the ethanol because it needs this fuel supply in the United States.

Understood, very helpful, thanks a lot.

Michael Cox, Piper Jaffray.

Just one quick follow-up question. As it pertains to your comments on the price of corn and market realities, which I don't disagree with, one question. From the release, you outline your forward contracting, and corn is 19%, ethanol 15%. I'd just be curious how that fits into your thought process of where you view these commodities moving over the next few months.

Well, yes, you've seen that. That's not that uncommon, to have 2% or 3% deviation in those numbers. But it's not really reflective of any significant risks that we take. It still stays under the VAR limits that are established, and so from that standpoint that is just a picture in time, and it might be even on that day that we bought a lot of corn from the farmer, and the next day we sold the ethanol. So some of that is even day-to-day movements just because we may sell ethanol that night and not buy the corn, or we might have bought corn that night and not sold ethanol until the next day. And it really just does fluctuate by a percent or 2, but that is not a significant risk. That percent -- that number represents less than a $500,000 daily VAR movement, value-risk move, in our business. And that is a very conservative view or a conservative limit for a business the size.

Okay, that sounds good, thanks.

Laurence Alexander, Jefferies.

This is Lucy Watson again. Just another quick follow-up -- how much of your ethanol volumes are exported, or do you have a way to track that?

Not very much, actually. We have one plant -- see, you have to be able to make the specification. Today we have one plant that can make this specification, and that's in Superior, Iowa. The plant in Riga, Michigan that we are purchasing -- we will be able to make the specification there, and we are converting Bluffton, Indiana, for 2011 to make the specification. Whether the opportunity continues for us to ship, we are not sure, but we've seen a lot of -- basically, when you make this spec, sometimes you have to slow the plant down to produce less ethanol, and you've got to get paid for that. So there is a net gain to the export specification, but the way that we have been hedging our margins out, sometimes we aren't able to take the opportunity of that. But we are set up to increase our volumes. But it's de minimis compared to our total production.

Paul Resnik, Olympia Capital Markets Group.

Just a quick follow-up. There's a lot of talk about the corn crop. While everybody was talking about the weather, there was also kind of a secondary story this year with Monsanto's hybrid corn. They said they've got the -- I hope they do -- they say they have that fixed. Do you basically expect that we're going to get back to the trend of trending higher corn yields pretty quick here?

Yes, I think so. I think this was an off year. We had very hot weather in the late summer and a little bit, almost too much rain in the early summer. And that really just did not give us an optimal growing season. I can't comment on Monsanto's impact to its corn crop because I really don't know. But I would tell you that we would expect the up trend to continue in corn yields for the next several years.

And I'm showing no further questions in the queue, and I would like to turn the call back over to Todd.

I want to thank everybody for coming on the call today. Obviously, we are very happy with the quarter we just completed, and we are very optimistic about the business that we are running today. We are excited about closing our transaction soon on the global Business, which solidly positions us as one of the major players in the US ethanol market. We are optimistic on the demand side of the business and getting this fuel into wider reaches of the gasoline pool and the motor fuel pool, and we are excited about the positions that we are in today in terms of a business. And we think we have great opportunities ahead of us and we'll continue to, hopefully, continue to grow this business and go from there. So we appreciate you guys coming on the call today, and we will talk to you next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.