Green Plains Inc (GPRE) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Green Plains Renewable Energy, Inc. second-quarter 2011 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Jim Stark. Please go ahead, sir.

Thanks, Jay. Welcome to our second-quarter 2011 earnings call. On the call today is Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; and Jeff Briggs, our Chief Operating Officer. We are here to discuss our second-quarter 2011 financial results and recent developments for Green Plains Renewable Energy.

There is a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website at gpreinc.com on the investor page under the Events and Presentations link.

Our comments today will contain forward-looking statements which are any statements made that are not historical facts. These forward-looking statements are based on current expectations of Green Plains' management team, 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.

Please refer to page 2 of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause different outcomes. 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 for everybody joining on the call today. Over the last 10 profitable quarters, our strategy was to operate safely, diversify our earnings, maintain our focus on disciplined risk management, and lower our operating cost per gallon. This was all to protect our shareholders during times of ethanol margin compression and to prove we have a sustainable business during the cyclical downturn.

This explains what happened in the second quarter of 2011. We did earn $0.14 a share in the second quarter, which was a direct result of our diversification strategy where we can earn enough from other segments to maintain profitability across the whole Company.

Corn oil production made a significant contribution in our profitability, generating $6.3 million of operating income on the sale of 21.5 million pounds of the product. Eight of our nine plants are in full production, and the ninth plant will be producing corn oil by the end of the third quarter. We expect to be producing over 25 million pounds per quarter going forward with the additional plant and improved yields, as we line out our equipment and debottleneck that process.

Because of the significant contribution corn oil makes to our business, we have broken it out as a segment for reporting purposes. And remember, we report corn oil as a net number after keeping our plants whole for distillers grains revenues and covering expenses related to the production of oil.

We again reported profitable segments across the board in this quarter, as we generated $22.6 million of operating income before corporate expenses. Total EBITDA for the quarter was approximately $30 million, which was also an improvement over the second quarter of last year.

We sold and produced a record 184 million gallons of ethanol and a record 514,000 tons of distillers grains, which we sell to all segments of livestock as well as for export. Even with the compressed margin environment, we were successful in producing good results in our Ethanol Production segment. I will get into a broader discussion on margins later in the call.

Year to date, our Agribusiness is performing in total as expected, yet we continue to work on driving up profitability by focusing on cost to handle and margins. We have taken some steps that should begin generating better results and believe that as we close out 2011, we will see a strong finish in Agribusiness.

We are finishing our Tennessee grain storage expansion and also had the opportunity to build an additional 1 million bushels of space in Iowa, which we had not yet reported. This will be an expansion of our Gruver and Langdon facilities, and should be ready for harvest. In total, we should have 37 million bushels of own storage in our Agribusiness segment by the end of 2011.

We did complete a small acquisition of a country elevator in Hopkins, Missouri in June that increased our grain storage capacity as well. And we continue to actively pursue acquisition opportunities in this segment. As I mentioned earlier, corn oil production is now its own segment, removed from the Marketing and Distribution group.

We did see good growth opportunities in our Marketing and Distribution segment, as we focus on expanding Blendstar's platform and as we become more active in the biofuels and blended fuel markets. We believe the opportunities for downstream fuel distribution are substantial.

Now I would like to turn the call over to Jerry to review our financials in more detail. And I will come back to cover industry topics, the ethanol margin environment, and our current outlook for the Company.

Thanks, Todd, and good morning, everyone. I will cover a few of the financial highlights for the quarter, which are summarized in the presentation on our website.

Turning to the consolidated income statement. For the second quarter of 2011, our revenues were up 90% to $861 million for the quarter compared to 2010, due mainly to an increase in the volume of ethanol sold and higher commodity prices overall. Our own Ethanol Production increased 41% due to the acquisition of the Lakota and Riga plants last October, and the Otter Tail plant in March of this year.

Corn oil production contributed $10.5 million to total revenues and $6.4 million to operating income in the second quarter, based on 21.5 million pounds of production.

Volume in our Agribusiness segment. Volumes were also higher in our Agribusiness segment in the second quarter of 2011, but commodity prices account for a greater portion of the revenue increases in that segment's business. Commodity prices are up considerably this year, which affected revenues and cost of sales in each of our segments.

In Ethanol Production, we experienced a 96% increase in the average cost of corn per bushel in the second quarter of 2011, compared to 2010. While that is obviously a substantial increase, as you can see on slide 4 of the presentation, we generated per gallon operating income before depreciation in this segment of $0.12, compared to $0.18 per gallon last year that was realized in the second quarter of 2010.

Again, while margins were somewhat compressed, our focus of continually locking acceptable margins in when available positioned us to realize profits in this segment even during a cyclical downturn. These margins were sufficient to fully meet our debt service obligations during the quarter, while our other segments could provide additional bottom-line profits.

So as a result of defensively managing our Ethanol Production margins and our diversified income streams from our other segments, we generated $35.1 million of gross profit for the second quarter, a 14% increase over the prior year's second quarter.

Consolidated selling, general, and administrative expenses increased $3.9 million quarter over quarter, which is similar to the increase from last quarter and is the result of the larger size and scope of our business in 2011 versus 2010.

To summarize, as a result of strong increases in volumes across our businesses, our focus to remain a low-cost operator and greater diversification of our business, consolidated operating income increased by $0.5 million in the second quarter 2011 compared to last year, despite a period of tighter ethanol margins.

Interest expense was higher by $3.6 million due to debt taken on as a result of our acquisitions and the convertible note issuance late last year. Our effective tax rate remained at about 36% compared to 22% last year, and we don't expect that to change much for the balance of 2011.

Total EBITDA increased $3.5 million for the second quarter to $29.8 million, and on a trailing 12-month basis, totaled approximately $132 million on 647 million gallons of ethanol production. Our cash position increased slightly over last quarter end, with a balance of $164 million in total cash on the balance sheet.

Keep in mind during the second quarter, we utilized about $12.3 million of cash for principal payments on our term debt and about $15.5 million for capital expenditures. Capital expenditures included about $5.5 million for corn oil extraction facilities and $3.7 million for progress payments for our grain storage projects.

Managing our balance sheet is critical to managing our business, particularly in an environment of high commodity prices. At June 30, our total ethanol plant debt was $482 million or about $0.65 per gallon of capacity, which is a 16% reduction over last year.

We are currently working on a new revolving credit facility and term loan for our Agribusiness operations. We expect to increase the capacity under the revolver to provide for the growth expected in grain volumes from our expansion projects and give us the ability to continue to manage our grain business effectively in the current commodity environment.

In summary, this was a quarter where we believe we demonstrated the viability of our strategy that is focused on diversification, risk management, operational excellence, and maintaining a strong balance sheet. Now I would like to turn the call back over to Todd.

Thanks, Jerry. Ethanol demand remains solid and we have seen a widening of margins for the rest of 2011, and even into 2012. We have not seen this level of visibility on an 18-month curve for quite a while.

There is one phenomenon taking place, particularly in this third quarter, that we haven't seen for some time in the grain business. The corn basis around our ethanol plants for the remainder of the crop year is very strong. In some cases, out East we were paying $100 over Chicago futures for corn, and the Western Corn Belt is seeing end-of-crop-year values strong as well.

The good news, as previously indicated, is we secured a large portion of our physical corn needs for the third quarter, but we still need to be cognizant of the impact of these levels. We have been successful in locking away a significant portion, greater than 50%, of production for the rest of 2011, at better margins than we reported in the first half of 2011.

As discussed, corn supplies will remain tight into the new crop, but we do not intend to do anything but run our plants at full throttle throughout. Corn oil now provides an additional motivation for us as well. As you may remember, on our first-quarter call, margin visibility in the third quarter did not exist, but now we firmly believe that we will show better profitability sequentially over the next two quarters than we reported in the last two.

What we see today tells us that Q3 will be better than Q2, and Q4 will be better than Q3. With regard to the ethanol tax credit, we have said all along as a company we will be fine when a tax credit to blenders and refiners end. The ethanol industry has matured and has become a permanent part of the fuel supply in the US, and is gaining a foothold in international markets as well.

Ethanol still remains at a discount to wholesale gasoline over the next 12 months, which will provide blenders economic incentive to continue to blend our product.

Exports remain strong for US ethanol. We believe nearly 90 million gallons were exported in May, bringing the year-to-date total for exports to 410 million gallons. That is more than what was exported in all of 2010. We see no signs that exports of US ethanol are going to slow down anytime soon. In fact, as late as this week, we have seen additional interest for barrels into both Brazil and Europe for the remainder of the year.

Stocks remain tight in certain geographic markets for ethanol as well, which is driving overall complex values higher and margins as well. As we have said, there are five main drivers to what we believe is a very good fundamental story shaping up for ethanol in 2012. The expanding mandate to 13.2 billion gallons, export markets remain strong. CBOB volumes remain strong, as more refiners are producing subgrade gasoline. We should see early adopter E15 implementation in states like Iowa. And finally, the ethanol curve in 2012 remains a large discount to gasoline. And we are profitable out there today as well, and that is without the tax credit.

The 2011 and 2012 crop is in good shape in our areas around our locations, and we believe the crop will get harvested and produced, providing a little more stability to input prices. In both Tennessee and Iowa on recent tours, we believe crops tributary to our elevator system are better than last year. And crops tributary to our ethanol plants are in great shape as well, especially in Nebraska and Minnesota.

BioProcess Algae's Phase II is making solid progress down the path to producing food, feed and fuel. We should finish up a 1.5 acre outdoor reactor system in the next 60 days, which can produce finished products to provide into various downstream markets. Our early focus is on high-value nutraceutical omega-3 oils and animal feed markets, specifically fish meal and poultry. In fact, we are currently in poultry feed trials at two universities as we speak.

The Company will break ground on a five-acre farm this fall at our Shenandoah ethanol plant, and complete the construction in the spring of 2012. We believe this farm will be capable of producing some of the first commercially available algae products at competitive cost points. We only continue to invest and build alongside our partners because we believe we have a path to profitability, even on our early larger farms.

What we have found is the fuel market is one of the last markets to focus on, as others mentioned provide a better value proposition today. We are still focused on this market and we have continued developments there as well.

In closing, I would like to say that we are on track of producing the $50 million of non-ethanol operating income over the next 12 months. Certainly, the 42% of operating income coming from non-ethanol crush-related segments in the second quarter is a strong start to delivering on that goal, and helps you understand how we have been able to diversify our income streams, to soften cyclical margin downturns and remain profitable.

We are very much still a growth company with focus on growing the front end Agribusiness segment and the downstream Marketing and Distribution segment from our platform, and we will keep you updated on our progress there as well.

With that, thank you for calling in today, and now I would like to ask Jay to start the question-and-answer session.

(Operator Instructions). Mike Ritzenthaler, Piper Jaffray.

Good morning, guys. Congratulations on a nice quarter in a tough environment. My first questions are on the corn oil extraction income. It was well above our expectations, and I guess my question is two parts. One is, were there any upside surprises that you saw in the quarter, whether it's volumes or pricing or some mix or some other industry trend that might be a factor? And I guess the second part is if you've considered doing food grade oil?

To answer your question on things that impacted the quarter, I mean what we did is we were getting all of our plants online and we started to push yields higher a little bit in the equipment, as we were again lining it out and debottlenecking. So we saw a little bit of production, but we also saw a very strong fats and tallows and soy oil complex.

And while we don't quite get soy oil prices, they remained strong during the quarter and then they competed well -- and corn oil competed well in the fats and tallows market, which actually had an uptick against the oil market. So, in general, we were able to achieve a bit higher pricing on a little more volume than we thought we were going to get.

In terms of food grade corn oil, this is actually at the back end of the process. And while we look at those markets a lot from a pricing perspective, this is not an oil that can actually hit that type of market. That would have to -- from our perspective in the plants that we run, they would have to happen with an application in the front end fractionation, and we are not focused on food grade at all at this point.

Sure. Okay, all right. Thanks for the clarification. Then I guess my second question is around the noise -- and thanks for the commentary on the 2011, 2012 outlook. The noise around the Brazilian blending rates being lowered, I believe they were talking about 18%. And whether that actually happens it's anybody's guess, I guess, but have you incorporated that into your thoughts about how you look at margin support through 2012?

Yes, I mean, I think when we look at 2012 and even if they drop -- they have dropped to 18% before, and they were still importing. I think there are other structural issues in Brazil going on. They still need to import gasoline. So whether they are importing ethanol or importing gasoline, they are going to have to import fuel based on kind of their current run rates on demand.

In general, though, we don't view that that would give them an exportable surplus of any consequence. And so while we believe maybe that lowers demand from Brazil a little bit, it still keeps world demand coming to the US for our product through 2012, until they can come to a point where they have a bunch of exportable surplus. I think they structurally have difficulty exporting today, both politically as well as pricewise, and I think that will continue on through next year, which will hopefully keep our exports strong out of the US for quite a while.

Okay, great. One last quick question is can you give us a sense for what hurdles there might be in getting the Shenandoah ethanol produced -- proved as an advanced biofuel? Is there some sort of process you have to go through with the EPA to get -- is that something that you are looking at doing to be able to capture higher RIN values, that type of thing?

Well, look, I think that question comes down to the algae farm that we are building down in Shenandoah from the partnership of BioProcess. One of our early focuses on why we were focusing on algae is that when we take one-third of that corn kernel and we capture the CO2 that was originally coming out of the stack, and we grow and harvest algae into food, feed and fuel, that capture then should help reduce your carbon footprint.

Today, because we're not at scale and we're not capturing enough CO2, we are not really focused on having Shenandoah be an advanced biofuel. I think as we grow out the capacity there, move into more commercial scale operations and we capture more of the CO2, we have had early discussions with EPA and DOE on why wouldn't Shenandoah qualify then as an advance and break through that corn discrimination clause. And while we have nothing to report today, it's something that we continue to focus on in the future.

Okay. So the right way to think about it is another step in the diversification strategy.

Yes, I mean if we can capture the higher RIN as we capture more CO2 off the stack, that would be great. But today our goal is instead of losing that carbon in the ears, now we create a product out of carbon. So we actually have value for our carbon anyways, which kind of answers part of the reason why we are doing it. And then the RIN would be the extra bonus if we could actually get that cleared, but that's a harder process.

Right, thanks.

Farha Aslam, Stephens, Inc.

Hi, good morning. When you look at 50% of your ethanol being hedged going forward, could you just give us some color around kind of which of those two quarters that falls into?

Yes, I mean, I would give you color that in the third quarter we are over two-thirds done in our hedges and are working very fast and furious to kind of finish out the quarter as margins in September have expanded in the last week.

One thing to keep in mind, though, is you cannot use historical corn basis levels to figure out what a margin is. You have to use more recent kind of upticks in corn, albeit the margins have remained strong. In the fourth quarter, we are over 50%. As we buy more physical corn in the fourth quarter, we will start to move that up as well. But our investment in locking in margins has been made in the third quarter as we saw those expand over the last 60 days from levels that we weren't very happy about to levels that we felt we needed to start locking in aggressively.

So once we lock down the third quarter, then we will focus on locking down the rest of the fourth quarter. But that takes an investment in capital, as a lot of this is done in cash flow hedging through financial instruments.

Could you just give us some color on what has caused the margin expansion? And if you are at all concerned where oil companies are buying ethanol forward and there's going to be sort of a hole in ethanol demand on the other side of all this buying?

I don't think that -- we have not seen a huge buying program beyond 60 days from consumptive demand. So we are starting to see now them come in for September. But in terms of fourth-quarter consumptive demand, we have not seen -- those are not the biggest market participants out there.

So they are still staying in this kind of 60- to 90-day space, and we don't believe that they are overbuying the third quarter to get into the fourth quarter. We just have seen better demand, both globally and domestically. We have seen -- and when you export all these stocks, you have to replace them domestically with production. We have seen production kind of levels basically maintain themselves and even drop off a little bit.

So overall, when you kind of put all that together, we saw our days of inventory have kind of dropped from the first quarter into the second quarter at the high 20s now more into the 21, 22, 23 days of inventory, which is typical when we start to see a margin expansion coming into summer driving season; as well as we have seen a very good impact of demand from the conventional gas moving into CBOB, which is a subgrade gas. And that phenomena is also helping fuel demand.

Okay. And then there is some question down in DC whether the VTEC will be part of this budget or whether it's just going to expire naturally at the end of December. Any thoughts on that and how that's going to impact ethanol buying patterns?

Well, VTEC obviously needs a legislation to get attached to, and people thought it would be the budget or the recent debt ceiling legislation. If there is no tax attachment to it, then it cannot find a legislative vehicle to attach to right at this moment. I am sure they will continue to work on it. Otherwise, it would expire at the end of the year without any other program.

So I am sure people are working hard to find some legislation to attach to. But at this point, depending on how the debt ceiling legislation goes if there is no tax implication, then VTEC won't get attached to that. So we will just see if there is another vehicle.

Okay, and my final question and I'll pass it on, a follow-up to Laurence's questions. Could you tell us kind of how you're thinking about the algae buildout? Kind of what would be the milestones of when you'd make decisions on expanding that algae project?

I mean basically as we have gone through, we have continued to say if it continues to work and we continue to see a path to profitability at all levels, then we will continue to build out. We are not a -- this is not a path to revenue company, and so we want to make sure every investment we make will generate some sort of return. And that is where we are at right now.

So we are building out the 1.5 acre infield at Shenandoah to move to a five-acre farm facility in Shenandoah. We actually believe that those farms will be profitable. Can't comment on what that level will be, but we are hoping that that is the case based on kind of early indications of the high-value products.

And then at that point, once we kind of break ground on the five-acre farm which should be late summer, possibly September, then we will make the decision on the complete scale buildout at Shenandoah of what we think could be 300 to 400 acres, and then that will give us commercial quantities of algae to sell into the market.

We are focused on providing commodities to people that need the use of algae, whether it's in the nutraceutical, the EPA, DHA. When you look at eggs and milk and you see kind of high EPA and high DHA applications, that is a lot of times algae oil.

Moving into animal feed markets, we are focused on the fishmeal markets where we believe it will compete, and then down into poultry markets and then finally into the fuel markets. At all those levels we believe with the technology as we have been building out that there is a path to profitability. And as long as we continue to prove that, we will continue to invest, and that will make the decision for the largest commercial scaleout next summer.

Great, thank you very much.

Laurence Alexander, Jefferies & Company.

Good morning. This is Lucy Watson on for Laurence today. I have kind of a two-part question. Your ethanol gallons produced --internally increased by about 7% quarter-over-quarter, but your marketed and distributed gallons declined by about 8% quarter over quarter. So I was just wondering maybe if you could describe what drove the increase quarter over quarter at your own plants and if production increased at all of your facilities? And then what drove the decline in marketed and distributed gallons?

I will comment on it and then if Jerry has any further comments, we will let him come in. But basically as we have been acquiring plants and ramping those up, we are starting to get to our full what we believe will be 740 million gallons of production, with producing 184 million gallons this quarter. So that's just a ramp-up internally from acquired assets.

We did see a small drop-off in marketed volumes as we terminated a contract with one of the marketing plants last quarter. So that really just explains the up and the down. But net-net, we believe that the business will remain strong.

Okay. Then I guess as you've got about 10 profitable quarters behind you, are you evaluating any options for returning cash to shareholders or any plans to elevate CapEx? Or I guess maybe a simpler way of asking would just be what are your priorities for cash going forward?

Well, as we have told everybody over the past 10 quarters, having a strong balance sheet is key to being successful in the commodity business. And the reason we are able to act fast like we did in the second quarter when we had the opportunity to lock margins is because we had the strong balance sheet and we were able to invest in the cash flow hedging program that we have.

And so, especially with the level of volatility at the underlying commodity markets with the prices moving $1 in a month either direction, we believe you have to continue to maintain a strong balance sheet and have strong capacity.

We also have a lot of opportunities that we believe are investable opportunities in front of us, and we will have to wait and see what we can bring forward. But we are continuing to look for opportunities to invest in our Agribusiness segment, as well as invest in our downstream segment.

We are not actively seeking ethanol plants, but if they actively seek us, we will talk to them. But today we are really focused on growing our upstream and downstream. We want to make sure we have balance sheet capacity for that.

We believe over the next couple quarters we will continue to generate free cash and pay down debt as well. When you look we've paid down over $35 million of debt, I think year to date in terms of principal. And if we are successful over the last half of the year as we think we will be, we will have to pay down debt through sweeps as well. And that will just continue to delever the Company.

And when you kind of look at it, we are on track to pay down $50 million a year of principal, as well as with cash sweeps it could be greater than that. So when you look at our debt number today at kind of $480 million of ethanol debt, if we kind of look two years out with sweeps and with principal payments, we could take that down to into the low 300s, which gives us great agility to operate.

So I think we're focused on growth, having a strong balance sheet to make sure we can manage our risk correctly, and then continue to pay down debt.

Thank you.

(Operator Instructions). Brent Rystrom, Feltl.

A couple of quick questions for you. I just got off the Bunge call and they were talking about soybean crush margins coming in pretty tight here the next couple of quarters. Does that have any implications for your corn oil?

No, not that we are seeing. Oil, if you look at oil that we are extracting today, that's what we compete with. Whether oil goes to 50 or 57, we are still remaining at discount and still profitable in our corn oil segment.

So today, the curve on bean oil is in the 57, 58 range, and so we base ourselves off of there. So even at 1 to 50, it would still be strong. But I don't believe it impacts us at all.

All right. Then kind of an odd question. Both they and ADM have told me that they are seeing prices firm up in some areas, Central and South America, for a lot of the soybean products, because they are seeing DDGS getting priced out of the market. So I am assuming you are getting some pretty good pricing for the DDGS right now.

Well, actually, this is still the summer doldrums for DDGS. I mean DDGS in the Midwest, Nebraska, this is kind of when the summer hits and they put a lot of cattle out and they are not feeding as many DDGS and right now DDGS are actually on the lower end of the range as a percentage of corn than it has been.

So what they are talking about is more related to price declines in the crush versus price increases, which are DDGS?

Yes, I think so. What happened -- there was a phenomenon earlier in the year where DDGS hit a point that we priced ourselves out of the soy meal markets as a substitute and so maybe that's having an impact on them.

All right. Interesting thought I was thinking about, when you look at a combination of two things -- either the drought they've had in South America or actually the freeze. The combination of those two could set back sugar production, not just for a season, but for a couple of years. Could open up a pretty interesting window for you. Any thoughts on that?

Yes, I think, yes, I think that that's something we have been looking at closely. And I think that that has a great opportunity for us. I think a lot of people forget that when you make ethanol in Brazil, you still have to deal with a commodity price and while it might be cheaper to convert it to ethanol, it isn't necessarily cheaper from a finished product standpoint. And I think that's where the confusion comes from our competitiveness in the US.

In addition, a smart trader had indicated to me that they believe that there is even some structural land issues in Brazil that potentially you're not going to get the same yields out of the old land without some improvements out to those acres. And that's also a possibility that may reduce sugar over the short term until they reinvest in some of those processes down there as well.

Then you combine that with all the heavy new planting the last six to 12 months and that comes into play too, I would assume?

Yes, I'm not an expert on sugar in Brazil, but I would assume that's part of it.

All right. And then a quick question on corn. Given your background, which is pretty strong in this stuff, are you locking or thinking about locking in corn prices prior to the carry-out for 2012?

No, look, again, we don't allocate risk capital and if we find chances to buy corn and sell ethanol, we will do that. I think corn is range-bound at this point from our standpoint. We are starting to get towards the upper end of the range.

I think the bigger impact on the world today is the fact -- and we've mentioned this before -- that Russian wheat started the rally and Russian and Ukrainian could end the rally because, right now, Russian wheat is a $50 discount in the world to corn. And I think -- and they are still trying to find homes and I think when you look at that, and you look at structurally the corn market where it's at today and the potential for the crop that we have, even though a lot of people are very worried about yields today, I think when you look at structurally in the world, there are plenty of feed grains and I think that will probably keep more of a -- at least a reasonable top on price this year without worry of an explosive market unless obviously the yield in the US degradates to a point where it's impactful.

And the Russian priced feed rate, $50 per ton, primarily because of the quality of the wheat, that actually plays into your advantage because it pushes more of it into more of an industrial use rather than a feed-based, human consumption, right?

Yes, I mean, look, I think they will take a bid for human and/or feed. I think the issue is that the international markets, besides kind of Chinese corn buying international markets for feed grains, other than that, the Russian wheat will start to take care of that. So that's kind of what we are thinking.

Great. Well, thank you very much, guys.

Matt Farwell, Imperial Capital.

Good morning, great quarter. Just curious, you mentioned the corn basis and some of the local areas being $1 over CBOB. Has that offset the strength in ethanol prices? Or put differently, what kind of margins are you seeing right now as you lock into the remainder of Q3?

I think as you look at margins right now, it's extremely difficult to pinpoint that specifically because it depends how much corn you have bought versus how much you don't have bought, versus where you are located. I just think when you look at it, that's a very broad question. And you have to look at what you have bought versus replacement.

So when you look at it from that perspective, it's kind of all over the place, but I think high teens, low 20s is kind of a base number. The spot market is better if you don't need any corn. If you do need corn, the spot market drops down significantly. So in general, I think to finish out the quarter, we are kind of in that -- into that range and we will just have to wait and see.

We still have a little bit of corn to buy left this quarter, but not a lot. So we are able to kind of, as margins expand, lock away a little bit. But we've got, as you know, we saw a point where our full platform at one point on average was kind of negative EBITDA in the last 150 days and now we've moved into -- we saw mid-teens, into the high teens, into the low 20s and you just still have to take into consideration the corn basis.

So we move very quickly when we see good cash flows and maybe we missed that last $0.10 move, but, in general, I think you can expect more of a normalized average margin for the quarter.

Okay, great. And then just thinking more broadly, I am looking at production numbers for this year and it looks to me that they are going to average out at about 13.7 billion gallons. And so there is about 12.6 billion of RFS demand, and we think about 700 million to 800 million going to exports. So it seems like the market is well supplied. But next year, you have the RFS rising to 13.2 billion. So my question is, number one, do you expect exports to grow? And number two, do you think that the ethanol production capacity could rebound? Maybe some of it is operating below capacity or how do you think that supply and demand looks for 2012?

If you look at the run rate right as we speak, we are not running at a 13.7 billion run rate. And that was just the data the other day. It was more like a 13.1 billion, 13.2 billion run rate. I think we could be hard-pressed to run towards the upper end of that range that you are talking about this year. And so when we move into the end of the year, obviously, I don't believe we are running as strong as we were as an industry. We are running fine, but I think as an industry I don't think we are running quite as -- I never believed actually we were running over 13.5 billion anyways.

And so I think from when we look at 2012 and you have a 13.2 billion base, you've got say a minimum of 400 to 500 of exports, that gets you a 13.7 billion base. I think we will get to E15 implementation as well, that will give you a little bit of extra. And then if you see any strength in exports towards what we are going to see this year, I think you have -- start taking a tightness in the supply demand equilibrium.

I don't believe necessarily that you will see huge amounts of new plants coming on. There's a couple that need to get finished, there is a couple that need to get started and there's a couple that are shut down. But in general, those might be the kind of those peaker margins that you will see some plants come online.

But when you look at kind of base demand in the United States with the blend margins that are in place, I think there will be plenty of base demand and with the export demand, I think we should be fine for 2012. We are already seeing it in the curve. We haven't seen a curve, at least for quite a while, that you can remain profitable for 18 months out and generate pretty good cash. The thing you've got to watch out is you've got to lock your corn basis in for 2012 and that's very hard to buy out front.

So while you might want -- if you could financially crush it, that's fine, but then you would be short a lot of corn basis, and I don't think that would work very well this year. So you have got to be very careful about that curve, but in general if you look at kind of reasonable corn basis numbers, not even down to historical lows, there is a chance, even in 2012, with visibility. So today, the market is telling you they need the ethanol.

Great, thanks for the color.

Luke Beltnick, TPG Credit.

Thanks. Hey, guys. Just a couple of questions. The first one on the $0.12 per gallon margin from the ethanol production segment in Q2, any idea of the range it would have been had you not locked in hedges previous to the quarter? Just trying to get an idea what the impact of your hedging program was.

Yes, the daily spot crush on our total -- if you go back to January 1 -- from January 1 to June 30, the daily average spot crush was $0.11 a gallon. And the range on that was kind of zero to a couple days into the high teens, low 20s. That's the daily average spot crush for those 120 days -- or I'm sorry, 180 --

For a six-month period.

-- (multiple speakers) 180 days. If you would have looked at the single 90-day quarter -- April, May and June -- the daily average spot crush was basically right in line with where we were at. We were around 12.9 EBITDA and it was right around $0.13. But that was only because of the last 15 days of the quarter. So if you look at April average alone and you look at May average alone, without the last 15 days of that quarter, you wouldn't have been able to achieve those margins.

So we watch it very, very closely and there were some times during the quarter where the spot crush was in the low single digits and there were some times in the quarter where the spot crush was in the high 20s and low 30s, but you had to have your corn bought and that was only against having corn bought. If you had to do replacement corn, it would be significantly less than that.

Got it. Okay, thanks. Regarding the E15 roll-out in labeling, any additional color on what you are hearing from the EPA and where that's out and just in general what your view is on the timeframe and how this gets rolled out?

Yes, look, the label is done and it's been put out there. I think from the standpoint of a large roll-out, we have to get through some other kind of state issues around pumps, Underwriter Laboratories and things like that. I think if we can get through some of these Congressional things and get money for blender pumps, that would be very helpful. But what we are seeing in the state of Iowa right now -- the state of Iowa, for example, they put a tax credit in place for E15 and so that was the impetus then for the petroleum marketers in Iowa to start thinking about E15 because it actually puts them into a tax position that earns them some additional revenue.

So even without the VTEC, and if you add in the Iowa tax credit and you add in the blend margins, the blend E15, it's a very, very profitable thing to do in Iowa. We think that they will be the early adopter state and then from there, hopefully, people start to realize the same thing and maybe we'll see some early adopter states and the rest in Minnesota and South Dakota.

So while it's not going to be a one-year phenomenon, we think as it starts to roll out over the next multiple years and as we start to get more flex vehicles on the road and start to get more blender pumps and we start to use it more in our 2001 and newer fleet and get more market acceptance, it will be a roll-out over the next three to 10 years to get full penetration to E15.

And do you have any guesstimates of what the incremental demand will be in call it 2012, 2013 from E15?

We think incremental demand could be a couple hundred million gallons, building to a couple hundred million gallons, maybe 200 million, 300 million gallons over the next two years. And add that onto your 13.2 and then it goes to a 13.6 mandate, I think after that.

13.8.

13.8 mandate -- sorry, I've got Jim here. Add that on plus the fact that exports should remain good, I think we will continue to see a good equilibrium between supply and demand building into 2015 into a 15 billion gallon mandate without that production available today.

Okay. And then last question, on the M&A front for ethanol plants, it sounds like you guys aren't all that active at this point. Is that just because there's not a lot out there or is it bid/ask spreads? Just any color of what you're seeing in the market and how you guys are viewing it.

Well, no, I mean, look, if there is an opportunity, we will look at it. We have good competition; I can tell you that. That is not from a weak player, players and so every time we see something, we are going to go against the likes of the oil company or the refinery that is interested in building out their platform. And it's different when you can write a check to a farmer-owned plant that has no debt versus us having to kind of go to the market, raise some debt, get some equity. Hard to compete from that perspective.

And so yet we haven't seen any -- we've seen sale processes, yet we haven't seen any sales. We've talked to people directly around acquisitions, but when margins expand like they have and people get more optimistic that they will continue to -- they made it through that quarter, then the activity gets a little bit less. But what we are seeing is an aging of the ethanol -- single ethanol farmer ownership structure that has paid down a lot of debt. And as they sell it for $1.25 a gallon or $1.30 a gallon, we are seeing them want to monetize their investment again and then invest their money elsewhere instead of having it in an ethanol plant.

That's what we think will drive acquisition over the next couple of years and when we see that, I think we will be able to opportunistically look at growth. But today, as we say, we are not actively seeking ethanol acquisitions. They still actively seek us, but we haven't seen anything today that fits our profile.

Got it. Thanks for the color.

Paul Resnick, Resnick Asset Management.

Good morning. It may not really be statistically meaningful, but I have gotten spoiled in looking at improved yield over time. And there was just a slight reduction in yield this quarter from a little bit over 2.85 a gallon, to a little below 2.84 a gallon. And I was just wondering any thoughts about your ongoing efforts to improve yield.

Well, I think if you kind of look at it from back in 2009, and we were at a 2.76 yield pushing towards a 2.83 yield or 2.84, whatever number you have, statistically, it is 0.3 to 0.4 is de minimus from our standpoint because some of that could be timing; some of that could just be weather; some of that could be corn in different areas. We won't call it for that. It could be a quarter of a shutdown. We had some shutdowns, things like that, that happened.

But I think in general, we continue to focus on yield. As we run harder and harder and harder, sometimes you give up a little bit of yield to get more in volume, but net-net it's still positive. So in general, I don't think that tells you very much in terms of -- actually we have about the same anyways. I think it is statistically within a 0.5% or half a -- 0.005%.

You had historically worked on all sorts of debottlenecking and stuff to improve yield. Are we reaching a point where it's going to be hard to get yield much higher?

No, I think yield can -- you have to give up yield if you want to run hard and then ultimately that will come back together again, as we see improvements in enzymes and technologies and some more debottlenecking. But we are getting -- we watch that very closely and monitor yield versus volume to make sure that we don't lose any by running hard to give up too much on yield.

So no, I don't think it's over; I just wouldn't -- it's hard to say. Part of it is the corn crop as well. We had a good strong corn crop with high starch values and that was part of it as well. But yield is the magical number that sometimes is hard to explain, but in general we are very happy with the way that our plants have been running.

Fine, fine, thank you.

And there are no further questions at this time. I would like to turn the call back over to Todd for any additional or closing remarks.

Just want to thank everybody for coming on. We continue to prove out the value of our platform with the things that we are doing to execute on non-ethanol operating income. We are optimistic for the remainder of the year, as well as 2012 as we mentioned, and we will continue to work hard for our shareholders. Appreciate everybody on today. Thank you very much.

That does conclude today's conference. Thank you for your participation.