Green Plains Inc (GPRE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Green Plains Renewable Energy, Inc. third-quarter 2011 financial results conference call. As a reminder, today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Jim Stark. Please go ahead.

Thanks, Nicole. Welcome to our third-quarter 2011 earnings call. On the call today is Todd Becker, President and CEO; Jerry Peters, our Chief Financial Officer; Jeff Briggs, our Chief Operating Officer; and Steve Bleyl, Executive Vice President of Ethanol Marketing is on the call today as well for the Q&A session.

We are here to discuss our third-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 the presentation on our website at www.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's 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's actual results could differ materially from management's expectations.

Please refer to page two 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 it 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. I'm glad you could join us on the call today. First of all, we had a strong performance from our non-ethanol production segment in the third quarter, generating $13.7 million or 40% of our segment's operating income. We have now demonstrated that our goal of $50 million of non-ethanol operating income can be achieved, and we are looking for ways to further increase this contribution to the bottom line.

This is the culmination of our work over the last couple of years to minimize the ups and down in the cyclical ethanol production segment. This will allow us to remain profitable, and continue to service our debt and generate free cash flows during times of margin compression.

Ethanol margins did show good improvement in the third quarter when compared to the second quarter of 2011, as we generated $20.9 million of operating income from the ethanol production segment, the highest level on a quarterly basis this year. For the 10th consecutive quarter, we reported profitable results with fully diluted earnings of $0.32 a share on net income of $12.4 million.

Corn oil projection, again, made a significant contribution to our profitability, generating $9.6 million of operating income in the third quarter. For the last three quarters, corn oil production has generated over $18 million of operating income for our Company. The payback on this investment was less than a year. And as a reminder, the cash flow generated by this segment flows freely to the corporate entity and is unencumbered at the ethanol plant subsidiaries.

Our Tennessee Agribusiness operations has helped reduce some of the seasonality we have typically seen in this segment. We saw an improvement in Agribusiness in the third quarter, generating $2 million of operating income, which was $1.5 million better than the third quarter of 2010. The business benefited from an excellent Tennessee soft wheat harvest. Our grain storage expansion projects have also been completed, bringing our storage capacity to 37 million bushels overall. We are confident this will be an excellent investment for the long-term.

We produced and sold 185 million gallons of fuel-grade ethanol; 534,000 tons of distillers grains; and more than 32 million pounds of corn oil from our plants during the third quarter of 2011. We have built the foundation of our business on risk management and operational excellence, while operating our facilities in a safe environment. It is our belief that the solid base we have constructed will allow us to sustain our business model for the long-term, and it gives us confidence to continue to grow as opportunities come along.

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

Thanks, Todd. Good morning, everyone. Looking at the consolidated income statement for the third quarter of 2011, our revenues were $957 million for the quarter, up 93% when compared to the comparable quarter in 2010. The increase was mainly due to an increase in ethanol we produced at our own plants, which was 56 million gallons higher than last year, as well as an overall increase in commodity prices.

We acquired the Lakota and Riga plants in October of last year, and the Otter Tail plant in March of 2011, which accounts for most of the volume increase between the periods. Corn oil production contributed $15.5 million in revenues in the third quarter, based on 32.7 million pounds of production.

Agribusiness segment volumes were also up, as we sold 5.4 million more bushels of grain in the third quarter of 2011 compared to 2010; and revenues were up 43% year-over-year. Again, commodity prices account for a large portion of the revenue increase. Higher commodity prices versus the previous year continue to affect revenues and cost of sales in each of our segments.

In ethanol production, we experienced an 80% increase in the average cost of corn per bushel in the third quarter of 2011 compared to 2010. Even with the increase in corn costs, as you can see on slide four, we generated per-gallon operating income before depreciation of $0.17 compared to $0.19 per gallon realized in the third quarter of 2010. The $0.17 per gallon in the third quarter of 2011 was a $0.05 per gallon improvement over the second quarter, and is well above our debt service of $0.10 per gallon, as noted on page eight of the slide deck.

So we generated $47 million of gross profit for the third quarter, a 48% increase over the third quarter of last year. Consolidated selling, general and administrative expenses increased $2.7 million quarter-over-quarter, which is the result of a larger scope of our business in the third quarter of 2011 versus 2010, and due primarily to the acquisitions we completed over the last 12 months.

Our consolidated operating income increased by approximately $12 million or about 70% in the third-quarter 2011 compared to last year. Again, corn oil accounted for about $9.6 million of that $12 million increase. Interest expense was higher by $2.9 million, due to higher debt levels as a result of the acquisitions we made, and the convertible notes were issued late last year.

Our effective tax rate remained at about 36%. As a result of higher pretax income, tax expense increased $3.9 million compared to last year. Earnings before interest, income taxes, depreciation and amortization, or EBITDA, increased $15.5 million for the third quarter to $41.6 million, and on a trailing 12-month basis, totaled approximately $147.4 million.

Our liquidity remains strong with a total cash position as of September 30 of just over $154 million. During the third quarter, we utilized about $12.5 million of cash for principal payments on our term debt; about $8.5 million for capital expenditures; and about $14 million for the share buyback we completed. As of September 30, our total ethanol plant debt was $471 million, or $0.64 per gallon. We have worked consistently to drive this ratio down, and when you look over the past two years, we've reduced ethanol plant debt per gallon by $0.22, even with the addition of three ethanol plants over the last 12 months.

In the Agribusiness segment, we've been working to expand our revolving credit facility to finance more and higher price grain inventories. As we noted in the release yesterday, we expect to close in the next few days on a $195 million revolving credit facility and a $30 million term loan for this business. This new line of credit should provide more flexibility for future growth if necessary, through a $55 million accordion feature and an ability to use repurchase agreements during periods of peak need. With these new facilities, we believe our Agribusiness operations are well-positioned financially to maximize the opportunities in this business.

Todd, I'll turn it back to you.

Thanks, Jerry. Throughout the ethanol cycles of the last three years where you've seen volatility in the ethanol margin environment, our platform has stood the test of time and continues to generate consistent profit, which is what we have told you we are focused on. Our optimism about the future of ethanol in the US remains intact. In light of all of the ongoing noise and news that comes out of our nation's capital, the fact is that we believe ethanol is competitive with gasoline without the tax credit.

Our five main fundamentals, which we have outlined in the past, are still very much intact. First, the RFS expands to 13.2 billion gallons in 2012, which provides a consistent demand base for our product. I'm sure using the renewable fuels standard has come under attack in recent weeks by the House of Representatives. Although we don't believe any attempts to modify the RFS will be successful, we plan on defending it vigorously, as it is the only significant piece of national energy policy that reduces our dependence on foreign oil today.

Secondly, export demand remains strong, as the US has exported 641 million gallons for the first eight months of 2011. We are on pace to export 800 million gallons by the end of the year. We believe the overall export fundamentals are in place for a solid finish to 2011 and a good start to 2012.

Third, ethanol remains a discount to wholesale gasoline through all of 2012, so both obligated parties and discretionary blenders both have an incentive to blend at maximum levels.

Fourth, along with the profitability mentioned already, subgrade 84 octane production is in full swing in the United States. In many of the largest markets, gasoline cannot leave the terminal without blending with 113 octane ethanol, which by the way, we believe provides a refiner with an additional $0.04 to $0.05 per gallon of profit.

And finally, the E15 initiative remains a potential demand increase over the next 12 to 24 months. NASCAR has now run E15 over 1 million miles, and has stated that they have better performance with very little impact to mileage. We hear some teams actually have seen a mileage miles-per-gallon increase.

While the macro industry factors are solid, for Green Plains, it is about risk management, operational excellence, and providing a safe work environment for our employees. We know this sounds repetitive, but it is what continues to make us successful as a commodity processing business. We continue to employ very comprehensive risk models in the execution of our margin management strategy.

In terms of our outlook for the remainder of 2011, as you can remember, we started to lock Q4 margins in October of last year, in 2010 for 2011. We are mostly done with the fourth quarter from a financial crush standpoint, but it has been challenging in recent weeks to attract some of the final new crop corn needs, as the physical corn bases around our ethanol plants and in the United States remains very high for this time of the year. This could have some effect on how we finish up the year, depending on the timing of the completion of harvest and farmers' willingness to sell their new crop corn. We have never seen basis levels this high across the Corn Belt at this time of the year.

As we have told our shareholders since the inception of our Company, sudden spot margin improvements will provide a limited benefit to us, and that is the case in Q4 as well. Our margin management strategy causes us to lag rapid margin expansions, but outperform during margin contractions. While we still believe our ethanol segment will perform well in the quarter, we will not change our strategy to accommodate a quick win. If we took that view, our performance year-to-date would not have been as good. We operate and look at margins as far as 18 months out forward, and start to lock margins away when we can service debt and provide returns for our shareholders.

A good example of that is the daily third-quarter crush for our platform average -- since the beginning of the year, $0.10 a gallon, while we achieve much better levels. We did not start to lock in any large amounts until we saw a Q3 expansion in June. When the crush expanded, we moved quickly to lock away the margins you saw today -- even though spot margins during the month may have been higher at times. We have over $1 billion of capital invested in our business today, and we believe besides the consistent risk management strategies, scale is extremely important to maintaining our low-cost producer status, which is vital to our business in managing the volatility around our markets.

Corn oil extraction technology deployment was a valuable project for us to embark on in October of 2010. As we did with our ethanol production, we are working on debottlenecking this process, as we learn more about the technology, and we believe we can see marginal improvement in extracting the residual oils out of the process. We do expect a strong quarter from Agribusiness with a good harvest activity near all of our elevators. On an overall basis, we continue to be confident we will finish the year with a stronger quarter than we just completed.

BioProcess Algae and Green Plains recently announced successful completion of the first round of poultry feed trials. We're excited about what we have seen in these feed trials, as there has never been any large-scale poultry feed trials done in algae before. We will continue with further testing, and we are now working on developing a replacement for the fish meal market, which is approximately a 10 million metric ton market annually on a global basis. These are big markets where we are focusing on. We believe that the economics for these markets provide profitable opportunities for BioProcess Algae in the future.

Initially, as we grow out the platform, we will go after the higher value nutraceutical and omega-3 markets, but can see moving to feed markets as we continue to expand our algae production capabilities. What we think about every day is the path to profitability. If there's no path, then a project will come to a stop. But nothing is telling us that we should stop this project.

We continue to invest capital as a partnership and we're going to continue to commercialize this technology. We should break ground on a five-acre farm later this year and begin producing algae next spring from these reactors. Hopefully, by the middle of next year, we'll begin developing a 400-acre facility at Shenandoah, Iowa, taking the CO2 from our plant, converting it into biomass, then further into feed, food, or fuel product.

We announced the stock repurchase in early September. Our largest investor, NTR, was looking to rebound some of the renewable energy portfolios. We bought back $28 million of their stock at $8 a share. NTR has been with us since the beginning, and remains our largest and one of the most committed shareholders we have at over 23% of our shares outstanding. We think that was a good transaction that gave them some liquidity, but also demonstrates our confidence in our long-term strategy to deploy capital in a stock repurchase. As well, at $8 a share, it is about the cheapest ethanol plant you can buy in the United States today, of the highest quality.

In closing, the M&A front has been quiet, but we continue to search out opportunities, both externally and organically, to grow our Company. At this time, we are evaluating several potential opportunities in all parts of our business, and remain focused on growing all of our business segments profitably, and providing long-term value for all of our shareholders.

I want to thank you for calling in today, and now I'd like to start the question-and-answer session.

(Operator Instructions). Michael Cox, Piper Jaffray.

Congratulation on a nice quarter, guys. My first question is on visibility into ethanol production margins as you look ahead to 2012. I'd be curious how successful you've been. And looking ahead and locking in margins, in light of the basis movement that you described in corn here recently.

Yes, I mean, the curve has provided some opportunities using very conservative estimates on what it's going to cost to buy your physical corn. I think nobody really knows after the first of the year where the US domestic corn basis is going to go, but I think using historical basis levels in anybody's calculations today will probably not work for the next 12 months. So I think you have to use a much firmer outlook on the physical corn basis across all of the Corn Belt.

With that said, we have seen some opportunities in Q4 of next year again to lock in margins actually in kind of the mid-$0.20's per gallon based on, again, conservative estimates on the corn basis. We saw some opportunities here recently in January and first quarter to lock in some margins kind of mid- to high-teens-ish kind of numbers. Middle of the year is still playing out with really no visibility; but this time last year, we had no visibility as well.

And then just finally, when you look at it and whenever we see those opportunities, we'll obviously take a look at locking margins away out forward. But we want to make sure this year, as we did last year, we get some physical corn bought before, so we know exactly what our corn costs will be over the coming 12 months.

Sure. That makes sense. In terms of the capital deployment with the progress you're making in the BioProcess Algae, I guess how do you assess the priorities between putting more money into that project versus growing the core business or M&A as well? But I'd be curious how you think about prioritizing investments to meet different growth opportunities.

Yes, I mean, to date, obviously, our investment has been more in the development side of the BioProcess Algae platform. When we look at the five acres that we are going to break ground on here hopefully in the next couple of months, that is, will only get broken ground if there's a profitable outlook for those five acres of product. Right now we see good interests in the raw wholesale algae that would come off those five acres. And we believe from a CapEx and OpEx standpoint, if we build the five acres, it will be profitable. So again, it will just compete for capital the same way everything else competes for capital in our platform.

When you look at the bigger outlook, if we go to a 400-acre facility and then spread that across all of our plants, obviously, capital needs would be much greater. And we wouldn't move forward unless we saw very high return on capital from that standpoint, with very good off-take agreements in place.

So all of those have to come in for us to deploy capital. And don't forget, we're only 35% of the partnership, so there is 65% of other partners that have to deploy. And then at that point, we'll make the determination whether it's a debt or equity infusion as well. And so we think that if we continue to build, and if you see us continue to build, you'll know that we have -- it's a profitable venture and it has competed for capital well.

When we look at our other segments, obviously, they have to think about it the same way. So if we look at expanding our terminal business, expanding our green business, or even looking at additional ethanol production, they all compete for capital from the parent.

Okay. That's helpful. And my last question, on the Agribusiness side, a healthy increase across the board. And I'd be curious as to your outlook on the fertilizer side in particular. I know you've made some good strides there, stepping up your share. But as you look at application rates for the fall and looking at it to the spring, what's your outlook there?

Yes, I mean, from our standpoint, we'll be very steady from what we've seen in the past in terms of sales from the last -- we've improved last year, and I think we may see a small improvement this year; but in general, application rates could be similar. I don't have those statistics right in front of me. But really from our standpoint, I think what we've been able to do is stabilize those earnings, make them just consistent.

And really where our growth is coming from is by making an investment in the space with the additional storage we've built this year, especially in Tennessee, where we've seen great returns on space; especially around the soft red harvest this year. So, fertilizer, we don't see a ton of growth coming out of that. We see more coming out of the earnings against our assets.

Okay, good. Thanks a lot, guys.

Matt Farwell, Imperial Capital.

I just want to look into a couple of things. First is on your commentary about basis. What is the historical average and how far away is the basis currently at this point?

Yes, I mean, if you take a look at -- go up to even northwest Iowa, and typically, this time of the year, you could be paying $0.25 to $0.40 under for corn across the dump. And while some of that still happens from off-farm, typically to buy any commercial -- any real quantities of corn from commercials, if you're an ethanol company, it's taking at least 500 to kind of 500 over-ish kind of values. So we're at $0.25 to $0.40 higher than historically on corn.

If you go to Indiana where the harvest hasn't really started yet -- and that's part of the problem, is harvests got pushed back because of rain -- Indiana this time of year could be a 10-under market and you're paying as high as $0.40 to $0.60 over for corn across Indiana today and Ohio. So you're seeing a pretty significant increase.

So a lot of people will look at the Bloomberg simple crush and say, oh my goodness, look at how big margins are. But I think you have to discount some of that. I mean, there's still good, but you have to discount some of that because of the higher cost of physical corn than we've ever seen in the past.

What you have to remember is our carryout. Last year, it was about a month of usage. And so -- and with the crop getting pushed back, you really went into those stocks pretty hard, which left most of the commercial and farm space empty by the time we get to harvest. So a lot of that is getting put away, getting put on storage, getting put on deferred pricing, and getting locked on the farm. And so it just takes more and more to get.

And then we saw a break in the harvest of corn from mid-to high-7's to low-6's, and even into the 5.50 range. And if you look at that, you're getting close to cost of production, including land costs in Iowa and Nebraska. And you're just not going to bring that much corn out of storage at that point. So the job of the market is through the basis first, and we're going to have -- and then the spreads next, and then flat price, hopefully, could react as well.

And based on what you've seen so far for new crop in the moisture and density specifications, can we anticipate a reduction in conversion yields in the coming year?

Yes, it's a little early to say. I mean, we've seen some areas with lower yields to start because of the high moisture that came in early. And then as the crop dried down, those yields started to pop back up. It's a little early to say, except the first indication is that yields will probably not be as good as last year across the industry. But again, it's a little early to kind of come to final conclusions. It won't be a dramatic difference, but in general, with the little bit wetter crop, maybe a little lower test weight, and to start, you might see a slight drop in yields this year.

Slight, meaning -- you were in the 2 -- kind of the high 2.7 range?

Actually, over the last 12 months, this crop year, we were in the 2.82-ish range.

Right, but prior to this year?

Prior to last year -- I think the year before that, we were about 2.77, 2.76. We will be -- I'm not sure we'll still achieve the 2.82 to 2.83 levels, but I would say still a chance -- there's still a chance to be above 2.8 this year.

And then lastly, we've seen a pretty large bump in ethanol production nationwide. Would you characterize that as due to plants coming back online after scheduled maintenance? Or is this a result of the improvement in margin?

Yes. It's a little bit of both, right? So we went down into the [mid-850's] a day in terms of daily production, barrels per day. And now we're back around [905 to 910] barrels per day, which kind of runs you -- and year-to-date, I think we're still running over 900,000 barrels a day, which is running you more to that 13.8, 13.9 mark.

I don't know that there's any new production coming on because of margins. I don't think actually there's a lot of production taken off really since the second quarter. The drop came for scheduled maintenance. And you have to think when you were scheduling your maintenance for the third and fourth quarter, when you were looking out at the curve in March/April/May, looking at when you were going to schedule your downtimes, there was no visibility at all. The lowest margin environment was late September/early October. And that ended up being a good margin environment where you had to take your plant down, because you scheduled it a long time ago.

But yes, I think in general, we'll still be over 900,000 barrels a day for the year, and then we'll see how we end up for next year. But if you look at that running at 13.8, 13.9, with the mandate at 13.2; with exports next year, it could be again 400 million to 600 million gallons -- you potentially go right up to those levels. And so I think there still could be a good supply and demand equilibrium, albeit we'll have a bit of wait and see on some of the different parts of the curve.

Okay, great. Thanks for the color.

Brent Rystrom, Feltl.

Just a couple of quick questions for you, Todd. I don't know if you saw the data yesterday out of Data Grow out of Brazil, but they cut the hydrous ethanol production there again another 3%, down 20% now from where the year thought it was going to start. Does that imply the next four, five, six months, some upside to export volumes?

Yes, I think we've seen very good demand through the end of the year and some of that is due to good competition versus the tax credit expiring domestically versus export. We've seen very good demand, physical demand in the first quarter from an index standpoint.

Obviously, margins will -- financial margins will take a little bit of time to transpire, but there's good physical demand in the first quarter, at better freight differentials than we've seen at this time of year last year for the first quarter. Not seeing much in the second quarter, hearing some product thinking about moving north again out of Brazil into the US; but I think that will be a politically always difficult when you're in a short sugar crop and you're fighting for ethanol production with very high levels.

I think one thing that we see is that from our platform, with four or so plants that we have that can make export spec now, we have been producing and shipping Brazilian spec ethanol. We don't sell it; we deliver it to whatever port they want it in the US and then they load it on a boat. But we've seen good demand for Brazilian spec ethanol, and we're even hearing that there is some continued reduction on the spec to get more ethanol into temper their market. So we have the view that at least for the first quarter, we'll continue to see export demand. And we'll have to wait and see what the Brazilian looks like past that.

And when you say you've seen some things that might flow the other way, I've been seeing data about export licenses being pulled in Brazil to export ethanol here. Is that kind of what you're referring to for the back half of next year?

Well, you're hearing in Q2 and Q3 that there is some product that with the California market wants to move up north based on the different [rens] that they get for that product. But in general, I would think that, again, as you say, the licenses to do that will again face challenges this year as they faced last year, when they saw Brazilian starting to think about coming into the US. I think the government stepped in down there and got pretty tough on those guys because there's shortages already in Brazil.

Not to mention the port problems they have usually getting out of there. So, out of curiosity, any thoughts on bidding for acres this winter? When you look at where the fertilizer prices are setting, it implies that corn is going to have to be someplace between 6.70 and somewhere in the 8's with prices sitting up where they are now. And then likely they'll pull back a little bit next year. But any thoughts on how you think the bidding might go here first quarter for you guys -- how that might impact you?

Steve?

I'm a bit confused. The what?

Basically, from the bidding process, essentially industries, various industries bid up the price of various products to try to force 95 million acres of corn instead of 92 million, or whatever the number might be.

Right. Okay. Got it.

And just thinking how you might think about that and how we might think about how that could impact first, second quarter operations.

Yes, well, I think if you look at cost of production right now and you take a sample middle Nebraska farm and you look at their production costs versus fertilizer and land costs, they need to be over $5 a bushel right now to break even. So with a 30-under Nebraska corn basis, futures have to be at least [5.30] to break even and you have to go up from there to compete with soybeans.

I think that the US farmer is in a rotation of more corn. And especially with the economics that they've been able to realize that some of these higher spikes into mid-7's again. And again, while he's not selling much today, they came into new crop about 40% sold or so. A lot of those at the higher levels, so they're in a very good position right now financially.

And I think when they look at the last couple of years where they got the best returns, it was consistently from corn. And I would expect that they'll try and plant the maximum amount that they can. I mean, there's early numbers out -- [93 million, 94 million]. We don't have a view yet just on that, but I think if they're going to plant something, they are going to continue to try to plant corn. And see if they can get a yield bumped next year versus this year.

Great. My final question then just any thoughts you might have on the Chinese situation, officially coming out and saying they are going to need 5 million tons this year. And talking about significant growth in that over the next several years. How does that weigh into your consideration for how you might have to compete for that?

I think that is the single biggest component to the corn market that we're going to have to watch in the next five years, is the China demand and whether it's going to be a 5 million ton or a 20 million ton need. We look at them -- I don't think that -- I think they're there, I think they're well-bid on the brakes. Corn court got in the mid-5's again, I think the Chinese were well-bid for some more. I think they understand the sensitivities of not buying too much to drive us to very low carryout levels. But I think they're there to support the corn market. And I think that is not going to go away any time soon. And that is obviously impactful to long-term agricultural pricing in the US.

Thanks, guys.

Laurence Alexander, Jefferies.

A quick question on bioalgae. Has anything -- as you've been working through this process in the initial demonstration phase, has anything changed in your assumptions about either capital requirements for scale up? How quickly you would scale up? Initial response from other people in the downstream markets who may or may not be interested in the product?

Nothing has changed so far. I think since we've opened up the horizontal reactors in Shenandoah, coming out of the building with the large -- from the large verticals, we've seen even more interest now that people can see that we can produce.

If you look at the five acres that are coming on there it's going to be approximately a little under a time per week produced on those 5 acres. And a ton of drive wholesale algae is what's below looking at from a production -- a little less than that on a per-week basis.

But I think it is again making sure that there's an end-use market. And first and foremost, it is mostly around high-value nutraceuticals, omega-3, and then the fish meal. And I think it's a function of if you have a product and there is demand for it, especially from a drive wholesale perspective.

So nothing has changed from that standpoint. We have still lots of interest around the product and getting their hands on the product. And we have that in a lot of people's hands both in poultry, fish meal, companion animals, all the way into refiners and other uses of high-value nutraceuticals. They have our product in their hand, and they're testing it and telling us what they need.

For example, an omega-3 in an animal, you've got to make sure the color doesn't affect some of the waste that comes out of the animal. And so you might want to grow a darker variety instead of a more green variety. So those things are the things that we have to do for some of our interests these days.

When you look at it from an OpEx, CapEx standpoint, so far, everything we've seen from a scale of perspective is staying steady to what we've been indicating in the past. And we believe that we can continue to drive even more costs out of our capital expenditure model as we continue to scale up. We've seen great productivity out of our horizontal reactors. We're harvesting them almost on a daily basis. And then converting it to drive wholesale algae and getting as much into as many people's hands as we can.

And are you just seeing any interest from people who have other high concentration CO2 sources at looking at the technology? Or is it all -- is most of the interest coming from downstream?

No. The interest is coming from there as well. We've had several discussions with CO2 sources from small-scale local utilities to large-scale utilities, and any and all of the above. They look at this as a potential for CO2 absorption, not just sequestration, where they can then create a biomass that can be used for many sources. And so yes, we have interest from that sector as well.

But again, for us, this is all about not getting ahead of ourselves; making sure we put those five acres in the ground; making sure we can grow and harvest the algae at the production rates that we say; scale up against the CapEx; keep our OpEx steady; and produce a product that's profitable. And we believe that that's what the five acres will show the market. And at that point, we'll make the decision on the bigger scale-ups.

But I think that when we look at the parties that look at it from a CO2 standpoint, we actually have some reactors at a refinery today blowing off CO2. And so we would expect that that initiative will also increase over the coming year.

Sorry, when did those -- when did you put the reactors at the refinery?

It's just a small scale, a single vertical reactor that is sitting at a refinery today in very early testing. So it's nothing that's usually material but we wanted to get at least our first view of what that looks like. And we would expect that we'll have other opportunities to place some reactors at other locations as well.

And then on the M&A landscape -- pipeline, can you characterize at least the mix? Is it fairly balanced between upstream and downstream acquisitions? Or have you shifted your focus in one direction or the other? I mean, any sense of what the landscape looks like? And also are valuation multiples coming down or are they moving up?

Yes, in terms of -- we are looking at all three of our segments. We are looking at several -- both organic as well as external opportunities in agribusiness. We are evaluating opportunities all the time from that perspective.

We also think there's some opportunities again next year to expand our own space ownership and build some additional space, especially in our Tennessee assets. And I think we'll probably begin to evaluate those opportunities. Externally, we have several opportunities that we're looking at today. Valuations are really all over the place depending on whether it's a single elevator or a business that's in place today.

In the ethanol segment, there's several opportunities that are out there today around some pretty good plants, but valuations are -- still continue to remain high. It takes -- from our perspective, we think it takes at least $1.20 to $1.38 a gallon to buy a high-quality, right technology, right location ethanol plant. And those bids we think are well supported.

And so when you look at that -- we have to look at it over the long-term to say is that really -- do we want to deploy capital at that, when it's maybe a bit below our current valuation. But that is what it takes to buy, in our opinion, a good ethanol plant in a good location.

And then downstream, we have several terminal projects under evaluation right now, both from small-scale to large-scale, that we'll see where those end up. But we are putting a lot of time and attention in our downstream business between distribution of additional products as well as building out our Blendstar terminal platform. And we've now moved in Nashville, as we've been testing our systems for blended gasoline. We are just about kicking off a larger scale initiative in that area as well, across some of the other facilities.

So any and all of the above from the standpoint of expansion. And we are heavily focused on growing all of our platforms.

Thank you.

(Operator Instructions). Patrick Jobin, Credit Suisse.

Great. Thanks for taking my question and an impressive quarter. So it seems like you demonstrated that you can take advantage of the volatility and attractively secure margins above the curve. And Q4 was looking relatively strong over the last few quarters but the basis is reducing some of that. So I guess previously you had stated that Q4 might be up relative to Q3 just from a margin perspective. I guess where do you see Q4 ending up just from a range, if you had to put it on today?

I think overall, the business will perform -- at this point it's showing it will perform better overall than Q3 in most -- in all of our segments at this point. We still have some work to do on the final physical corn purchases at some of our plants; but at this point, we still based on final yield as well. I mean, there's a couple of points that we're looking at that we discussed on the call -- yield, basis levels and some final things around those. In general, we're still tracking higher than Q3.

I think people, when they look at the spot margin and then temper that a bit with higher corn basis levels, we locked in October over the last year. So again, while we may stare at our board and be frustrated that we're not achieving the absolute high at the spot margin, we stood at our board in Q2 and we're very happy that we weren't achieving the absolute low in the spot margin either. So I think we're still close to what we've been saying in terms of the fourth quarter. And we still expect a sequential growth quarter versus the third quarter.

And then on the corn oil segment, I guess now all nine plants are operating. How should we look at the run rate contribution there? And you suggested maybe some debottlenecking efforts for more extraction. I guess what do you think the potential is or how should we look at that segment over the next few quarters?

I think what you are starting to see is a pretty good run rate. We had about 30 million-plus pounds of oil. We said we thought we'd produce 100 million pounds and we're producing closer to 120 million pounds right now. And then also looking at, we think there's opportunities for some increases in that, but they will be again marginal and not large steps, if we see them. But we're continually debottlenecking some of our underperforming units right now that may be our lower yield than the platform.

So we think there's a little bit of upside still there but we'll have to wait and see what we can actually get out of it, depending on -- some of it depends on the quality of the corn as well, and the ability to get the oil out of the kernel while not degrading the quality of the DDG's.

But keep in mind we've also seen a drop in bean oil prices from the highs -- in the high 50s to more of the low 50s. But what's interesting is we've seen fats, tallows, [soy] grease stay pretty consistent in the low 40s. So $0.40 to $0.43 a gallon from a competitive standpoint on a gross basis. And then you have to take out the cost of the DDG's and some other expenses to get us on a net basis, where we get our 9.6 million right now run rate.

So a big answer there, but in general, debottlenecking is going well. Prices are hanging in there from a comparative standpoint, even though bean oil prices have come down. And overall, we expect the segment to perform well over the next 12 months.

One thing we have done, which we did not mention and I'm glad you asked the question, is that we have about one-third -- a little less than one-third of all of our corn oil locked in for next year already, at similar type levels to what we've seen year-to-date. So we got ahead of the curve a little bit and we'll continue to focus on locking in more corn oil for all of next year, as we lock in the baseline recurring earnings stream from this segment.

Great. Thank you.

Farha Aslam, Stephens Inc.

Congratulations on a great quarter. When you look at the [VTech] tax credit expiring at the end of this year, that's definitely driving demand going into year-end. About how much ethanol can be stored and used in the first quarter of next year?

Yes, I mean, as we've said, typically, ethanol storage rates over the last couple of years has been from the 15 to 30 days of storage. And you get much above 25 to 28, you're starting to stress storage capacity, with everything in transit, everything at the terminals and everything that you have in storage in the industry.

So I don't think you'll have high storage at the end of the year, mainly because a lot of big export program to the end of the year. You are seeing some things happening around people pre-blending some of their needs and getting in blended positions, but while we might have thought that that would cause a drop in demand in the first quarter, we're not really seeing any drop in demand right now at all. In fact, we're seeing a very robust demand from at least a placing physical product.

Now the margin is not as robust as we'd like to see right at this moment, but placing physical product at better freight differentials than we've typically seen is something that we've been able to achieve. And I think that just tells you that demand will remain good. And it sounds like nobody is buying ethanol in 2012 because there's no tax credit. In fact, we've seen really no drop-off in demand for our product out of our plants at this point for the first quarter.

Great. That's helpful. And then in terms of the margin environment, the first-quarter margins tend to be very volatile for ethanol. Just looking at bases and all the things you see, do you think first-quarter March margins in 2012 can be comparable to 2011? Or do you see it shaping up -- like 2010 was an extraordinary first quarter.

Yes, you know, I think it's yet to be determined. We have seen in the first quarter in the high teens and we have seen in the high single digits in the range so far. Compared to the fourth quarter of next year, which we've seen in kind of the mid-20s, but you can get huge amounts of volume out of there but we did some stuff early.

So that's still yet to be determined. It's very much like the discussion we had earlier in the year on the third quarter where there really were no visible margins at all. And then we've achieved $0.17 to $0.18 a gallon type numbers. So I think it's going to be a little bit more wait and see for the first quarter. But with the demand as good as we've seen it, I mean, we're optimistic that we could see good margins. But at this point it's still middle of the range, and we'll have to take a wait-and-see for a little while longer here as they develop.

Understood. Your demand comments are helpful. And then when you look at Agribusiness and trying to make that buy versus build decision, about how much does it cost to build new capacity? And in terms of per bushels, what is the ranges you're seeing in the M&A environment?

Yes. We've been able to build new capacity depending whether it's flat or up right kind of in that average $1.50 to $2.25 per bushel type range, depending on the quality of the space that we put up right. If we've put up right higher ration bins that we attach onto a facility, those are definitely in the higher end of the range. If we put flat storage on like we did -- for example, we've built a flat storage facility in our Otter Tail ethanol plant -- not necessarily agro business, but that was on the much lower end of the range. But that tells you kind of the range.

In terms of acquisitions, I think the acquisitions range somewhat similar for high-quality assets. Again, for assets that have a little bit on the lower quality side, you have to do some CapEx upgrades as well as space upgrades to them and those will trade at a further discount. For larger scale acquisitions with earnings streams, those will trade at a premium. So it's really all across the board depending on location, who's selling, quality of assets, and what the expansion opportunities are.

Okay. Very helpful. Thank you.

[Luke Veltnick, TPT Credit].

First question just a modeling one. What was the D&A figure for the quarter for the corn oil segment?

It's a small number. It's about $500,000 -- it's about $600,000 for the quarter.

Okay. Got it. And out of curiosity, what is roughly the percentage of the ethanol production margins you guys had locked in before the quarter began?

Before the third quarter began or fourth quarter?

I guess each of them.

Well, I mean, like we said, in early June, we had very little margins locked in. And then probably by the 10th of July, we had most of the quarter put away. So when we saw the margins expand from negatives to mid-teens, we opened up the floodgate, and let our marketers and traders lock it all away as quickly as possible, to make sure that we had a good quarter. So as we call it, our process and machine worked very well when we saw the margin expansion. And we were done very quickly for the quarter.

Luke, I'm going to correct what I just said as far as our depreciation and amortization run rate. I was looking at a trailing 12. For the quarter, it was about $300,000.

Okay, thank you. So Todd, going into the fourth quarter, do you have a lot locked in -- or did you have a lot locked in? And where does that stand?

Yes, we're mostly done for the fourth quarter before the quarter started, except for some physical corn we needed to buy. So we still have some open gallons but nothing that could materially take initial margins we locked in up. And some of that will even offset -- the gains those opened gallons will offset by some of the basis strength in the US today. So net-net, we're basically close to being done for the fourth quarter, as we came into the quarter as well.

Okay. And to go back to the third quarter, I think you said you outperformed the number had you been just spot. Do you know what the difference is? Have you run the numbers, had you just been spot through the quarter roughly, what margins would have looked like?

No, what we said is we -- if you take the daily average since January for the third quarter, through the third quarter, the average on our platform was $0.10. And so that's the number we look at because we lock risk every day. During the quarter, it was definitely into higher levels than that if you were spot during Q3. And the same really in Q4 as well. But if you look back at Q1 and Q2, there's probably offsetting the same amount for us locking in what we had versus the actual daily spot as well. But we look at it compared to beginning of the year to the end of the quarter -- it was an average of $0.10.

Okay. Switching just a little bit, E15, any update on what you're hearing in terms of the rollouts in the various states, as well as what's going on in Washington with blender pumps and subsidies, just kind of a mix of -- how do you see this rolling out?

Well, I mean, we still have some regulatory things to get through around getting all the specs all approved. And there's still lawsuits that are going on and EPA is defending those lawsuits, so we're still dealing with that as well.

In terms of rollouts, they're going to be, in our opinion, it's not going to be significant for a little while here and we'll start to see more regional early adopter-type rollouts. Blender pump initiatives are high on the list. And I think that there will still be capital available, either from a tax standpoint or a direct investment standpoint in blender pump infrastructure. And that's really kind of where a lot of our focus lies.

But there are plenty of challenges on E15 that the EPA will have to defend, but we feel like when you look at all of the data and you look at even what NASCAR is doing, the data is all in our favor. And we think there will be some point in 2012 some rollouts.

Steve, you're little closer to that. You want to comment on what you know?

Yes, it's all revolving around the RVP issues, trying to get the grade of gasoline we need to blend with, so that we can still be on the spec for the RVP, because E15 does not have the -- right now does not have the one-pound waiver.

So some markets really can't go to it right now and some can, so we're focusing on the ones that can.

Correct.

And so if you had to pick numbers for incremental gallons blended for 2012/2013, do you care to venture a guess?

I think '12 will be minimal, still. I think '13 is when you can see a pretty good uptick if we get through all of the stuff that we're working on into the hundreds of millions of gallons, potentially. People will want to buy it if it's economic.

Yes, that makes sense. It just -- it seems like it's such a political regulatory quagmire at this point -- that's the hard part.

Go back and look at the history of E10. It took 30 years to get the 10% into the fuel supply. So you're not going to -- we're not going to do it in a year, get to another 5%. It will take several years to get that kind of activated and integrated.

Yes. All right. Final question, just on the cash. Do you guys -- any idea what you're going to do? You're sitting on a lot. Are you earmarking that for acquisitions and CapEx additional capacity build? Debt paydown? Share buybacks? How are you guys viewing that?

Well, I mean, we always view part of our cash as defensive. I mean, we use at any given time right now $40 million to $50 million a day just locking margins away. And our balance sheet has been -- when you talk about return on investment on cash, that was -- we always kind of flow in and out of these numbers. So -- and we always see kind of a pop at the end of the quarter based on payments that come in and those types of things.

But in general, we are earmarking our cash for additional growth opportunities; additional ability to lock in large amounts of margins when they appear in front of us. And we use $28 million of our cash that's earmarked now for the stock buyback -- $14 million already, $14 million coming out. And we're going to generate more free cash over the next coming quarters as well. So we're looking at it as growth opportunities first; as margin management second. And then beyond that, we'll make the decision if there's anything left over at that point, other than being defensive, to look at other opportunities around the other things you mentioned. But at this point, we're not focus on that.

Got it, thank you.

And we'll take our final question from Ben Kallo from Robert W. Baird.

Thanks for taking my question. As your business has grown and you have substantial cash flow going, has your threshold changed for acquisition? And then along those lines, I know we talked a lot about the US market, but is there something outside of the US that you could look to entertain business outside the US?

And then as we go further along down the line, could you move further downstream to the refining side of the business at all? Thank you.

Yes, thanks. Our threshold, I mean, it was always -- our allocation of capital always was something that we challenged ourself on to make sure we invest in the best and highest returns and uses of that capital. We've seen great opportunities over the last couple of years to buy assets -- it started out at $0.82 in '94 and $1.00 a gallon, even though we built some at $1.50 and $1.60 and $1.70 a gallon.

I think those days to buy those cheap ethanol refining assets are over for good quality, high quality asset, and you need to be in a $1.25, $1.30 range -- which, by the way, I still believe from a return standpoint, is a very compelling story as well as from our valuation standpoint; more and more transactions that happen in that $1.25, $1.30 range, we believe just shows the truth value of our asset base versus maybe what it's valued at today. So from that standpoint, we look at all of the different aspects of our business. I think you've seen now with 40% of non-ethanol operating income coming, we've allocated capital very well from that standpoint.

In terms of looking outside the US, hasn't really been our focus. I still believe, long-term, the winning solution is to be able to have flows both from the US and other producing countries into different demand points, and be able to maximize the arbitrage on those flows. But today, I don't think there's a big initiative by anybody to have multi-country ethanol assets into one single venture, except maybe some of the biggest agribusiness players out there that are doing some of that today.

And finally, going further downstream, oil refining in the gasoline hasn't been on our radar screen, but anything around distribution and handling and trade is. And as we're focused on growing our blended gasoline sales segment and looking at other fuel distribution opportunities downstream, I think ours will just be offshoots of what we do already, where we have natural abilities to scale quickly and use our commodity flows to gain a foothold in a market. But in terms of going fully into refining assets, I don't envision Green Plains doing that at this point.

Okay. Well, with that, with no other questions, we appreciate everybody jumping on the call today. As you can see, we continue to remain very optimistic about our business. We maintain our strategies -- very comprehensive risk strategies around locking margins away. I think you've heard that story before.

We are going to continue to try and grow all business segments, but achieving 40% of non-ethanol operating income, and achieving on our run rate of over $50 million a year, I think gives an understanding that we are building potential recurring income streams that show the quality of our asset base.

And we appreciate everybody coming on the call today. Thank you very much.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.