Green Plains Inc (GPRE) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Green Plains second quarter 2012 financial results conference call. Today's call is being recorded. At this time, I would like to turn the call over to Jim Stark. Please go ahead.

Thanks, Melissa. Welcome to our second quarter 2012 earnings conference call today. On the call will be Todd Becker, President and CEO; Jerry Peters, our Chief Financial Officer; Jeff Briggs, our Chief Operating Officer; and Steve Bleyl, who is our Executive Vice President of Ethanol Marketing, will be here to go through our results and to talk about recent development for Green Plains.

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, www.GPREInc.com. It's on the Investor page under the Events & 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 the 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 like to call over to our CEO, Todd Becker.

Thanks, Jim, and thanks for joining us this morning. Our focus has been and remains on the sustainability of our Company. Over last three years, we have acquired technologies, built and acquired businesses, and expanded segments that added revenue and income, which has reduced our dependence on our ethanol production segment.

At the same time, we have repaid debt and built our liquidity. We believe that we are in a good position to continue to operate our business and weather the trough margin environment we continue to experience in the ethanol industry. I will discuss the margin environment and get into the outlook for the industry a little later the call.

We did issue our second quarter earnings release yesterday after the market closed, and while we are not happy with the overall results, we are pleased with the performance of our non-ethanol operating segments. Our revenues in the second quarter of 2012 were $870 million. We reported a net loss of $7.6 million or $0.25 a share.

That was a $5 million improvement over the loss in the first quarter of the year, and we believe as we navigate through a challenging third quarter, we should be profitable in the fourth quarter, which we'll talk to in a little bit.

We produced 172 million gallons and we sold 177 million gallons of ethanol in the second quarter. The 5 million gallon difference was production held over from the first quarter of the year. Operating income before depreciation for the ethanol production segment was slightly positive in the ethanol segment for the second quarter.

Our ethanol yield improved to record to 2.85 gallons of ethanol per bushel of corn. On an ongoing basis, we have worked to refine the ethanol production process and get more out of the corn we grind. Whether it has been through our new enzymes or improving process flows, as a Company and an industry we continue to seek improvement in yields.

We have deployed new technology we refer to as fine grind in our Shenandoah plant, and we are trialing this technology at another one of our facilities. The process goes after the last 7% of the starch for enzyme conversion to sugar, breaking larger starch particles into smaller ones and breaking starch away from the fiber, protein or fat in the corn kernel. We believe this technology could improve our ethanol yields 2% to 3% and could also increase corn oil recovery yields 10% to 15%, both having positive contributions to the bottom line over the long-term.

We will keep you updated on the progress we make on this technology deployment.

So as we evaluate our operations daily, we consider a number of the factors as to whether to slow down or shut down each of our plants. These factors vary from plant to plant and region to region, and for Green Plains, improvements we have made from debottlenecking production to implementing corn oil extraction and now evaluating fine grind technologies, all weigh in our decision process for production levels.

In this decision, we also look at additional railcar repurposing. To date, besides the announced slowing of a few plants, the right financial decision for us was to keep running.

We generated a record $14.6 million of non-ethanol operating income in the second quarter from our corn oil production, agribusiness and marketing and distribution segments. Corn oil production also achieved a record high production of 38.6 million pounds on a record conversion of 0.64 pounds per bushel of corn. Both our agribusiness and marketing and distribution segments had improved quarterly performance as well versus the first quarter of the year, with $2.4 million and $2.9 million of operating income, respectively.

We believe our non-ethanol operating segments should produce approximately $60 million of operating income in 2012. The $10 million increase in projected non-ethanol operating income is partially related to our ability to increase the number of rail cars redeployed, crude oil transportation to over 500 cars for the rest of 2012.

We have not experienced any significant effect on our ethanol plant operations as a result of this redeployment effort. In fact, the third quarter will see almost the full benefit from this program with better expected performance in our marketing and distribution segment.

As we noted in our earnings release yesterday, we have locked in approximately 40% of our ethanol margins for the fourth quarter at profitable levels. This combined with positive results from our non-ethanol operating income segments gives us the confidence to say that we believe will return to profitability in the fourth quarter. This estimate is based on the current Q4 curve combined with our locked volumes. Obviously this changes daily, but at this point, even with a weaker forward curve, we are still projecting a good recovery in the fourth quarter, helping neutralize the defensive third quarter.

What is a bit different this year is that we have most of the physical corn bought against this program as compared to last year, when we just locked in the financial crush and remained exposed to the volatility of the US corn basis, which was extreme. The combination of Q3 and Q4 together as it stands today neutralize each other, and we expect our liquidity to remain consistent with current levels.

Now I'd like to turn the call over to Jerry to discuss our liquidity and financials in more detail. And then I will come back on the call to discuss forward ethanol margins, where we stand on industry fundamentals, and our BioProcess Algae segment.

Thanks, Todd, and good morning, everyone. I would like to start today by discussing a topic which seems to be on a lot of people's minds lately. That is our liquidity position and balance sheet.

Given the current margin environment, we are often asked about our debt structure, including our bank covenants. So I'd like to address that in some detail this morning.

In general, all of our bank debt financing is at the subsidiary level, non-recourse to the parent, with each of our ethanol plants, our grain companies, and our marketing businesses holding the debt. Each of these subsidiary financings have four primary financial covenants -- minimum net worth, minimum working capital, maximum capital expenditures, and a fixed charge, or in some cases, a debt service coverage ratio.

It is important to note that each of these covenants is structured to provide an equity cure if needed. So, to preemptively address the financial covenant for a particular subsidiary, we can inject equity from the parent company and add that equity into the particular ratio calculation.

By using our corporate-level liquidity to make an equity injection into a subsidiary, we are able to avoid violating a financial covenant. In fact, we can take that action on a retroactive basis when we have determined our final -- financial results. This is an important way that we have positioned our balance sheet and structured our loan agreements to maintain control even in a difficult margin environment.

In fact, we continually stress test our available corporate liquidity against our forward expected financial performance and are confident we have sufficient liquidity, even during a period of sustained margin compression lasting through the fiscal year. As we have said many times in the past, we focus on preserving, protecting and growing our corporate liquidity to provide the flexibility we need to manage a commodity processing operation.

At a more strategic level, we think about our sustainability in tough margin environments this way. Our ethanol debt service is approximately $0.10 per gallon or $73 million per year. When you factor in our term debt on our other businesses, the total is about $82 million annually. Non-ethanol operating income, as Todd said, is now running approximately $60 million per year.

After accounting for the corporate SG&A and depreciation expense from our non-ethanol segments, we have net about $43 million in cash flow outside of ethanol production. So, almost 55% of our debt service is covered before we consider cash flow from ethanol production.

On an annual basis, that leaves about $39 million of debt service from ethanol production or about $0.05 per gallon. We've managed that number down from about $0.12 a few years ago.

Our next layer of defense is our liquidity position, which I just talked about. And of course, we focus on maintaining a strong and open relationship of each of our lender groups. We are proud to have consistently made all payments on time, without exception. We value those business relationships and believe these firms are excellent partners with us.

Turning to the balance sheet, we ended the quarter with solid liquidity, with total cash as of June 30 of nearly $137 million, about $51 million of which was at the parent Company level. In addition, we had nearly $162 million available under committed loan agreements at our various subsidiaries.

During the second quarter, we repaid $24 million of term debt, then about $14.5 million for capital expenditures, and reduced the amount outstanding under our working capital revolvers by $36 million. Our net cash provided by operating activities was very strong during the quarter at over $52 million. As we mentioned in the release, we had built inventories during the first quarter which were liquidated in the second quarter, which contributed to that strong operating cash flow.

With over $60 million in debt repayments during the second quarter, our total consolidated debt now stands at approximately $679 million. Of this, $106 million is in short-term working capital debt used to finance inventories and receivables in our agribusiness and marketing and distribution segments. As we discussed during our first quarter call, these balances fluctuate significantly during the year and are supported directly by various current assets, such as the grain inventories and trade receivables of these businesses.

Ethanol plant debt at June 30 was $422 million or $0.57 per gallon compared to $482 million, $0.65 per gallon, at the end of the second quarter of last year. We now have broken through $0.60 per gallon, and by the end of the year we expect it will be lower again.

I know that was a fairly detailed discussion of our balance sheet and our liquidity position, but I wanted to clear up any questions that may exist on these topics.

Turning to our financial results, consolidated revenues for the second quarter were $870 million, up 1% compared to the second quarter of 2011. The revenue increase was about $8.8 million, which was primarily due to higher revenues in corn oil production and agribusiness.

We sold 38.6 million pounds of corn oil compared to 21.5 million pounds in the same period of 2011, and our agribusiness revenues increased primarily due to additional volume of grain sold, and higher unit margins for grain and fertilizer.

Total ethanol market increased by 29.5 million gallons or about 11.5%, but average realized ethanol prices were down about 13% between the periods.

As a reminder, we reduced production volumes at two of our ethanol plants by approximately 30%, which equated to about 7% of total production capacity. As I mentioned earlier, we also built ethanol inventory at heading into the second quarter as the market provided a reasonable return on storage capacity. In the second quarter of 2012, that additional ethanol inventory was liquidated.

We consumed 4.5 million bushels less of corn in the ethanol production segment as a result of lower production levels in the quarter, as well as improved yield versus the same period in 2011. Our average cost per bushel for corn actually decreased by 8.7% in the second quarter of 2012 compared to 2011.

Our gross profit for the second quarter was $18.1 million, which was down $17 million when compared to the second quarter of 2011, but that was $9.3 million better than the first quarter of 2012.

Operating income increased $18.9 million in the second quarter compared to 2011 as a result of the factors I just discussed.

We recorded an income tax benefit of $4.1 million compared to an income tax expense of $2.9 million for the second quarter of 2012 versus 2011, respectively. As a result, we recorded a net loss for the quarter of $7.6 million or a decrease of $12.5 million from last year's second-quarter. But again, it was a $5 million improvement over the loss reported in the first quarter of 2012.

EBITDA for the second quarter of 2012 totaled approximately $11.4 million. This is nearly a $10 million improvement over the first quarter of this year on a trailing 12 month basis EBITDA for the period ending June 30, 2012, with approximately $100 million. Now I'd like to turn the call back over to Todd.

Thanks, Jerry. So as we said, we are on track to earn over $60 million of non-ethanol operating income, which is even more from an EBITDA perspective. As Jerry reviewed with you, this will help cover a significant portion of our debt service.

We get often get asked why we carry such a large cash balance all the time. Well, we strongly believe for this business it's absolutely the right strategy.

To put it very simply, in the second quarter we generated $11.4 million of EBITDA, paid $9.8 million in interest, and the rest was principal on our term debt. Some of that principal was paid from our cash balances. As Jerry said, we still have $137 million of cash and additional liquidity of $161 million from loan agreements.

Finally, we still have an investment in our hedging program that can be available almost immediately as well if we would ever need that liquidity, which we don't today. And that investment has ranged anywhere from $10 million to over $40 million over the last 12 months.

As far as growth opportunities, we continue to look both internally and externally for those. We are adding grain storage at our Riga and Bluffton facilities. Both are getting 1 million bushel flat storage upgrades. This will allow us to gather more grain at local harvest levels.

We plan to build more of these in the future and increase grain storage capacity where it makes sense at our plants. This does not take away from our continued strategy to grow our agribusiness segment.

Construction of our 96-car unit train terminal in Birmingham, Alabama, continues to be on schedule to generate revenue for us beginning in the fourth quarter of this year. We are very close to selling out the capacity of the terminal, and we believe we can take this model to some of our other Blendstar terminals. We are also looking at another one of our facilities and determining whether to upgrade the facility to a unit train receiver, but so far it looks favorable.

BioProcess Algae's expanded production facility, or Phase 3, is due to be completed in the next 60 to 90 days. As you saw in June, BioProcess Algae entered into commercial supply agreement for production of EPA-rich omega-3 oils for use in nutritional and/or pharmaceutical applications. The Company continued to work on other agreements for products across other industries around food, feed, fuel and nutraceuticals.

We believe this is one of the first times a real product is being sold based off the carbon in a production plant anywhere in the United States.

The rail car program that we announced in our last call is fully underway. We now have over 500 cars fully deployed. While you have seen a slight benefit in Q2, the real ramp-up in earnings will be in Q3 and Q4, as they are all in service now. This is a combination of actual marketing and training of crude oil in our cars and leasing the rest of the cars out for the next 12 months.

Car values are consistent with our last call, and in some cases even stronger at over $3000-a-month market lease rates available today. Our expectation is that this program will generate at least $12 million of operating income over the next 12 months.

One of the biggest topics in the US today is the drought in the Corn Belt. While it is still hard to predict final yields, we know that they have continued to deteriorate.

Along with this discussion, there is broad speculation on the impact to the renewable fuel standard and calls for the government to scale back. The EPA and the USDA have said repeatedly at this point this is not on the table. Here is how we see it and the reasons why they say this.

Ethanol today is still cheaper than gasoline. The industry, according to yesterday's data, is already scaling back production to 796,000 barrels per day or a 12.2 billion gallon run rate. From the high of over 14 billion gallon run rate, we are naturally rationing corn to the tune of 700 million bushels per year.

There are an estimated 3 billion gallons of RINs in the market, which would allow the obligated party to not blend ethanol and use a RIN to fulfill their obligation. This is another 1 billion or so of bushels for potential rationing. The obligated party can also roll forward 20% of their obligation to future years, or up to another 2.5 billion bushels -- 2 billion to 2.5 billion bushels of rationing, more corn from natural rationing. The export market is slowing down -- I'm sorry, 2.5 billion gallons of obligated party roll forwards that can take place.

The export market for corn is slowing down with these high prices and with available alternative feedstock in the world as well, and in fact today we saw negative corn export sales out of the United States. And the market is also looking at importing Brazilian corn as well.

Animal feeding is slowing down as well, yet there is still a 60 million ton supply of BDGs for that sector to use. And our exports should slow of BDGs with the high price of soy meal as a substitute.

With all of this said, there are no right or wrong answers now. We need to harvest this crop, determine the size, let the market determine how to ration, if needed, the corn crop.

Finally, in order for the EPA to lower the mandate, there are waiver procedures clearly spelled out in Section 211(7) of the Clean Air Act. EPA does have the authority to arbitrarily waive the overall RFS based on speculation -- I'm sorry, EPA does not have the authority to arbitrarily waive the overall RFS based on speculation about impacts of a short corn crop. Rather, the statute dictates the process that the agency must follow to consider a waiver.

In general, any petition seeking a waiver must establish unequivocally that implementation of the RFS would severely harm the economy or the environment of a state, a region, or the United States. Further, EPA must offer public notice or opportunity for comment before making such waiver determination. The agency must also consult with the USDA and DOE.

From a Green Plains perspective, we analyze data daily to determine our production levels. To date, as mentioned, we have not slowed down anything other than announced levels. We expect to keep running our assets at this point, as all of our operational improvements combined with growth in other operating income has given us this ability. If this changes, we will slow or shut down if that action is dictated.

The mandate, exports and the need for octane and oxygenate for blending in our fuel supply and E15 slowly beginning to make its way in the marketplace all stack up for solid demand for ethanol in the long term. The main question always looming is the octane dilemma. Replacement octane in large quantities is at least two times the cost of ethanol today.

But every gallon decrease in ethanol supply starts to throw off blend patterns in the US. With a large percentage of refiners producing sub-grade gasoline, there is an additional profit margin over the blend that is at risk for them if we don't produce. While we don't have the answer to solve this, it will need to be watched very closely.

US ethanol exports totaled 367 million gallons for the first five months of 2012, which leads us to believe that we will export somewhere between 600 million and 800 million gallons in 2012.

To close, we always said to you that we would go through a period of a cyclical downturn. This has lasted a bit longer than our liking. But with what we have done in the fourth quarter, we believe this will stabilize the overall last half of the year, and allow us to look forward to 2013 with cash on the balance sheet and a growing, diversified Company.

I want to thank everybody for calling in today, and I will ask Melissa to start the question-and-answer session.

(Operator Instructions). Patrick Jobin, Credit Suisse.

Thanks for taking the question. So I guess just to follow up, Todd, on the capacity outlook question, I guess what do you think the other operators are looking for to get to some sort of decisionmaking process? And where do you think production could level off at?

Well, from the high of production at about a 14.5 billion gallon run rate in the fourth quarter, we're down a couple hundred thousand barrels a day, almost, to a 12.2 billion run rate, which is 1 billion below the mandate. And we're still exporting ethanol, and stocks are coming down. So I think ultimately, it's going to be a function of the market to tell us at what point we should see margins stabilize, and at least give the market a margin to run.

We've yet to see that from a marginal standpoint. I mean, we're still running, covering variable costs. But from the standpoint of the overall market, we probably will see a little bit more production come out, ultimately start drawing from stock and seeing where we stabilize the margin structure.

Actually, I think this is a two-year low on production, and we will have to wait and see what next week brings. There are still shutdowns coming in the third quarter, and I still think we will start to compete in these markets. To give you an example, we're selling ethanol in Nebraska at higher than Chicago levels this week. So what we've seen is the impact -- you haven't seen it in the financial market yet, but the physical market is starting to take price adjustments already.

Now, we haven't seen a dramatic change in the ethanol margin structure yet because the ethanol market hasn't kept up with corn. But you can see in a lot of markets they're trading at very high historical index levels. And that's kind of the first move that you start to see in a margin structure improvement. Again, hard to predict how fast or slow this is going to happen, but we're starting to see some underlying things happen in the physical market.

Great, that makes a lot of sense. And then also your comments from kind of a policy outlook and what potentially the agencies have, they could or could not do. I mean, I guess from your perspective, is there any policy measures that could be taken that would impact the ethanol dynamics?

Yes, I think the call for the RFS reductions have come from mainly the livestock groups so far. And we haven't seen a broad call yet. I mean, I think people realize that there are safety measures in place that can be impacted long before you reduce the RFS. It's not ethanol that's causing harm to the economy, and it's the drought. And that's still yet to be seen if that actually causes significant harm.

What we really look at is the price of gasoline. And so I think that's the big thing that the market and the legislators in Washington really look at, is have we impacted the price of gasoline, which really, truly does have a direct impact on the overall economy. And today, the answer of that would be no.

And until we see kind of $0.25, $0.30, $0.40 increases in gasoline because ethanol is so high priced, we don't anticipate that you can prove any actual harm to the economy. So it's going to have to happen naturally. And so at that point, we'll have to wait and see.

Makes sense. And then just one last housekeeping question, and then I'll jump back in the queue. Can you quantify the impact from the rail car initiative in this quarter, and then also how many cars are you expecting to deploy to get to that 12 million number over the next 12 months?

Yes, the impact this quarter was small at around $750,000. But we expect it to be about $1 million a month going forward. And you will see that come through marketing and distribution in the next 6 to 12 months. And they are all deployed at this point, and those numbers we believe are pretty solid.

Great. Thanks.

Farha Aslam, Stephens Inc.

Just first, on your marketing and distribution segment, you had corn oil and you have crude oil revenues in there. Could you just share with us color on how corn oil and crude oil is working into your marketing and distribution segment?

Sure, Farha, I will take that one. Our corn oil production is sold -- similar to our ethanol production is sold entirely from our internal company to the marketing and distribution segment. And they're the base in the market that sells that corn oil. The crude oil activities relates to our rail car initiative. In some cases, we are leasing cars. In some cases, we are directly buying the crude oil and selling the crude oil. And so a portion of our revenues there within the marketing and distribution comes from that activity.

Okay. So corn oil revenue in your marketing and distribution segment was only $5 million, but revenue out of your corn oil segment is more like $15 million. What is the difference between the $10 million?

I think our total revenues, it should be virtually identical, because the pounds sold was very nearly the same. So I think if you're looking at a $5 million number for marketing and distribution corn oil revenues, that would be a misprint. It should be about $15.5 million of corn oil revenues.

So it would be $15.5 million, and so it should be $15.5 million here? Or it shouldn't be $5.1 million; it should be $15.1 million?

It should be $15.5 million.

So it should be $15.5 million, not $5.1 million?

Correct.

Okay, that helps clear it up, because I was kind of confused. All right. And then, Todd, you had mentioned on your prepared remarks about where you think the RFS could have some adjustments. Could you just kind of tailor those a little bit more in terms of year? If you look at 2012 versus 2013, the RFS this year is 13.2 billion gallons. So there's 20% of that can be filled with RINS for this year, right, as there's RINS available?

Yes, there is RINS available. We don't anticipate that anybody will -- we don't anticipate that the market will broadly fulfill their obligation for 2012 with RINS today because, number one, blending is still profitable. Ethanol is still available. And then we will have to wait and see how the third-quarter production rates will run, right?

So if we are only producing 12.2 billion and we are down to kind of less than 20 -- or around 20 days of supply in the market, we will have to wait and see if RINS are used or if there is a still positive blend margin. We still think there is a positive blend margin from an octane perspective, as well as in some of the slots there's still a positive blend margin from just a blend perspective as well. And then the question is, can they ramp up from an 84-octane production level at most -- at about we think about 80% of the refiners, can they ramp up to 87-octane quick enough, and actually, we don't believe that they can. Steve?

You're seeing the blend value right now. You're still, for the strip forward, you're about 16 under gasoline right now off the boards. So the blend economics are still in place. And I probably think the sub rates are probably running 90% of the US right now.

So it's very hard to just say, okay, in the fourth quarter we're not going to blend to the RFS and use RINS. So that kind of -- but the interesting thing about what's happening right now, if you kind of take the US corn situation, I'll just take one second just to comment on that, and then I'll comment on your 2013 question, if you don't mind.

Sure.

We are running at a 12.2 billion run rate right now. And the government has 5 billion bushels of corn for 2011-2012 crop year. And in the last two months of the crop year, we are running at about 1.8 billion less than that. You're generating 50 million to 100 million to 150 million extra corn, the corn balance sheet, that you're not going to use in kind of July and August in the crush. And so that is not being really considered at all in building stocks -- additional stocks for this year. I think that's pretty interesting. We're not having any trouble buying corn for August, and even September values have come down as well.

So to give you context, July was, again, a defensive month. August actually turned out and is turning out in general to be able to buy some cheaper corn, and in general, we saw some opportunities for a day or two or three around the crush. And I guess actually August was somewhat respectable from a crush perspective. And then we haven't locked in very much of September yet, so we're waiting to see what we do there. So the quarter is still yet to be played out, but we are basically done for July and August fully, and September is still open.

In 2013, that's kind of going to be the big question. You're not going to have any trouble buying corn. There will be corn available in the fourth quarter. Then we get into the first -- the next eight months, and that's kind of where the problem lies, getting the new crop next year. And so the real question is, is number one, what's the crop, and then how much of that crop has to get rationed in ethanol.

So at 146 yield, the government kind of said we'll be at a [four six] run rate. And so if we take it down to 135 yield or lower or higher, depending on where your beliefs are, the real question is, is how much comes out of exports and how much comes out of ethanol. And so -- but even if you get down to 4 billion bushels at a 2.8 yield, which is what we believe in, there's certainly enough RINS to fulfill your obligation. You could roll forward some of your obligation. And the market today is producing at basically about a [four two] usage right now anyways.

So we are already rationing this year, and we're already kind of on the run rate of rationing next year. And then if you use a little bit more, more of the RINS, you can get through the first eight or nine months, and as well as with some Brazilian imports as well. Those are coming in as well. But those are kind of satisfying the D5 RINS.

So it will be an interesting time because, again, the world is still buying our ethanol. It's still profitable to blend. The biggest thing is, where are you going to get the octane? So if you all of a sudden kick ethanol out of the blend at 113 octane, I think the least-talked-about thing in the market today, everybody can talk about RFS all they want. The least talked about is, where are you going to get octane today?

And so spot New York Harbor octane is trading at 50 over RBOB and 70 over RBOB, and ethanol is trading at 22 under RBOB. So, I mean, you've got some issues around where you're going to get that octane before you stop blending ethanol. And then there is still a positive blend margin.

So it's really going to come down to the first nine months of 2013. And RIN values have popped here lately. People are buying RIN in the market. There is a quoted market. They are trading -- they traded at $0.06 yesterday and $0.07. And so there are people that are buying that for protection, or they possibly don't blend. Again, these are all just part of the formula, and it's hard to predict until we see a final prop number.

Okay. And my final question, and I'll pass it on -- [Bez] have talked about having adequate availability to make it through the fourth quarter. But in your just recent discussions here, you said that it's going to be tough for the next possibly eight months into the next year until we get to new quals next year. Are you talking to your banks and just increasing availability for Green Plains and talking about those covenants?

Well, let me just comment first on the eight months to the next new crop. I think that's a bit of a stretch yet. We don't know what the crop is. We're still producing ethanol. I think if the industry remains disciplined, they can take ethanol production down and produce it profitably at certain levels. So I don't think you can actually say anything about the margin structure yet for 2013 until we kind of realize what's our run rate as an industry and what's the need for rationing if there is a need beyond kind of what I've talked about.

In terms of the discussion around the banks, I will let Jerry talk about the banks, but again, we outlined that over those nine months, if we just run everything else, running at a $60 million run rate on non-ethanol, then how do you service your debt? And we believe will end the year with similar cash balances, if not potentially up from there, because we have a lot of money invested in hedging programs today that we could bring back liquidity on the balance sheet.

So we have a bunch of safe measures, but Jerry, do you want to talk about kind of discussions with the banks so far?

Yes, we have been in constant contact with the banks, and they're seeing it across all of their ethanol borrowers, the tightness in covenants and the like. And so we've gone through those discussions and keep them very well informed.

Beyond that, we are focused on a couple of financing initiatives over the coming six months to simplify some of our financing. In particular, within our trade group we have a facility that we use to -- we borrow against our receivables. But one thing that we are not doing is borrowing against our inventories. And so we are working on freeing up some liquidity there just as additional cushion against long-term tough margins, as well as additional ability to put hedges in place to secure good margins.

I think the key points, Farha, is that what you see from a cash perspective, we have other levers to pull to free liquidity up. And so we are trying to manage our debt levels down, keeping our liquidity high, but keeping other options around liquidity that we have in other places across our Company.

And so we have other levers to pull if we needed to. But at this point, we don't really need to do that. If we liquidated our hedging program today, we would bring a lot of cash back onto the corporate balance sheet. And we don't feel today that's the smartest thing to do. But as those hedges would liquidate, that cash flows back into corporate. It is very expensive now, with margin requirements, to run a hedge program. And we continually monitor that to make sure that if we ever need that liquidity, we can free it up within hours.

Okay, great. Thank you very much.

Craig Irwin, Wedbush Securities.

Most of my questions have been answered already. One thing we haven't discussed is BioProcess Algae. Can you maybe give us an update on overall progress there and the outlook for next steps as we look at the rest of the year?

Yes. So we're fully under construction on the project we announced. We expect that we will phase in reactors on the total project. So we are going to be able to phase in a couple acres of reactors in the next couple of months to start to fulfill our obligation under the high-value omega-3 oils that we have a supply agreement with.

Those are full-scale -- we already are at full scale; we are actually just making them bigger. So those are going to be bigger-scale reactors than are what in place today. We are building new processing capabilities as we speak, new dewatering, new drying. All of that is being done right now for a full-scale plant that is coming.

What our next steps after that is we are in design and engineering phase with an EPC contractor on 50-acre modules, as well as 10-acre modules, but mostly 50-acre modules. And then we can start to roll out as product gets to the market. The hard -- the interesting thing is that, while everybody hears about algae, there actually isn't a lot of algae product in the market, besides a couple of plants or a couple of companies that sell extremely refined oil at a very high price. There isn't any kind of mid-level priced oil in quantities. And that's why, every time we kind of bring up more production, we get more interest from across the food and nutraceutical spectrum.

So we will bring these online. We will fulfill our obligations. We have others that we are negotiating with right now on different levels of product development, from big to small type companies. And at that point, once we kind of got these 5 acres up and running, fully processing, hopefully making money, we will look at the next step in Shenandoah or any of our other ethanol plants to say, okay, what's the next size that we want to build? And that could be 10 acres. That could be 50 acres. But it's all a function of the demand that we can now create for a product that we are developing.

It's much like we think about it -- we think about it a couple of ways. BioProcess Algae could build those on their own and raise capital to do that, either internal or externally. We could actually treat it like a corn oil type investment and actually build those ourselves and pay a royalty on technology and have that profit flow through Green Plains, which we believe relative to cost of production and price of the end market could be a very interesting opportunity for our shareholders. And all of this is coming all very rapidly. So once the 5 acres come up, the decision needs to make around where and how to build the next big project, and where that product is going to go, and at what price.

We believe that everything is holding on a scaling standpoint, as we've outlined before. We believe we can compete all the way down into the fishmeal, fish oil market, in the mid-$1500 to $2000 a ton, and still remain profitable against our production costs. And nothing is telling us you have to stop doing that. And I think that's going to be something down the road that's a benefit for our shareholders as we continue to scale up.

Excellent. Just another question that I had was, there were a couple themes that you hit on in this call. One is the issues around availability and the decisions that the blenders are going to make as far as the amount of ethanol they use in the back end of the year, and the good probability for lower-quality producers to feel significant stress in this environment. If investors are asking questions about your liquidity, I happen to think that there are significant questions about a number of the smaller private producers out there.

Bringing those two together, and then looking at the book value of the stock, where you're trading on an enterprise value per gallon and where some of the historic transactions have happened in the market, would you entertain any potential approaches from other companies in the market maybe looking to acquire Green Plains to take off some of the risk of ethanol availability in the very back end of the year?

Yes, I mean, so when we kind of answer that question, some of the things we really can't comment on. But in general, based on current transactions the last six months of good high-quality plants in good locations, it would be very difficult for us to acquire ethanol plants at the prices that it would take, because you still can't buy a really good ethanol plant at anywhere close to what our equity value is trading at. They are much higher for good-quality plants.

And so when you kind of look at that from that perspective, we have not been approached. But even if we are, we probably wouldn't talk about it. I think we evaluate everything that we do every day, and for our shareholders, and make the determination what's the best thing to do for them. At this point, we're still running our business, and we will continue to do so. If somebody approaches us to look at assets, we will obviously evaluate that approach. But at this point, there's nothing we can comment on relative to that, but except to say that we will do what's best for our shareholders if we do get approached.

And then last question, can you share with us if there are any significant moving parts that are available to you to continue reducing your overall cost structure, improving your competitive position out there in the market?

Yes. I mean, we are evaluating expenses every day. If you look at our plant expenses, we look at expenses across the whole platform. The fine grind technology deployed at Shenandoah so far works great. We are seeing yield improvements there, and hopefully you'll start to see those through the overall platform. We are going to deploy it at the second plant. We are kind of going to our lowest-yielding plants first, and then from there, we are look at what the effect would be on a higher-yielding plant.

Interestingly enough, slowing down some of our [delta Ts], which is what we've slowed down, has increased yields pretty good. I mean, we actually have one plant right now yielding as high as [299] over the last couple of months. So that has kind of led to the overall increase in our yield.

We just continue to make breakthroughs all the time on running these plants cheaper, running them better, getting more out of the corn kernel. And the fine grind gets us to that next level. It just makes us more competitive. And you see that we've continued to debottleneck our corn oil production as well with record yields this quarter. So we are very focused on reducing costs, increasing profitability through getting more out of the corn kernel. We think that's what we do very well.

Great. Thank you for taking my questions.

Laurence Alexander, Jefferies.

A couple of quick ones. I guess first of all, there was a question earlier just about approaches for the firm. But as you look at the components of the firm, some assets have gone for fairly high valuations in recent transactions. Are there any reasons with the way you've designed the operations that the components of the Company are inseparable?

There is no reason for that at all. We evaluate all of our components as an individual business, as well as together in the enterprise. And we know that there's been high valuations paid on grain assets, as they are -- there is a scarcity of supply in their legacy assets. And we will evaluate each of our businesses separately. And if we can bring shareholder value through opportunities at one of those or more of those, monetizing those, we would have to evaluate it. But at this point right now, we're basically keeping the whole program together.

You can see the benefit of that, when we are generating $60 million-plus of non-ethanol operating income. All of that together is through the components that we've built along the value chain. But that's not to say that we see the value of our asset base relative to the value of our equity today, even related to the value of our cash today, and are as frustrated as you are.

And then as you've -- you mentioned several times there's a trade-off between the various levers you can flex to bring down the perceived debt ratios, coupled with the growth opportunities that you still see in different business lines. What would need to change to trigger actually flexing some of those levers? Is it the Q4 outlook, If you see that get pushed back? Would it be difficulty accessing -- getting physical access to corn? What would you need to see?

First of all, when you say leverage, the flex in our balance sheet isn't necessarily leverage. It's cash that we can free up through reducing our hedging programs, those type of things that we have invested, or inventories or things like that. And so we can certainly flex some of those if we saw a point somewhere on the curve that we needed to do that.

But as we said, based on what we've done in the last quarter of the year on our hedging program and the overall last half of the year, all of our analysis says we don't need to do that. So at this point, there's not any need to really go after that liquidity and hit those levers first nine months of the year.

I mean, even if you look at that, there's more levers to flex. I mean, even in our calculation of shutting down a plant, we can look at redeploying those cars in different ways to help soften the impact of slowing production. Interesting thing, though, is that if I could shut a plant, I would, but I can't because I haven't been able to yet, based on everything we've been able to do and the margin structure we've been able to kind of lock in for July and August and waiting for September and then the fourth quarter.

So our improvements we've made have driven us our ability to so far withstand the cyclical down that we've been facing here for the last six or seven months.

And then looking at the algae platform, can you give us a sense for -- and again, very just rough swag -- if the omega-3, if your entire 5 acres were producing for the omega-3 product line, what roughly the free cash flow per acre might be, or the EBITDA per acre?

We haven't given that out. Probably a little early to talk about that. High-value omega-3 oils are at a price point where we believe on a per-acre production, not necessarily including all the startups, and you've got to build a processing plant and all that, but just from a per-acre production, when you look at that, would be profitable. But you still have -- you're still investing in your grow-out.

So I don't know that there's going to generate a bunch of free cash necessarily that flows out of there right away, because you're still investing into technology grow-out. But I would tell you that by doing that contract, we are, basis cost of production and the contract cost, it is a profitable contract. But you have other factors at play that you probably won't see that for a little while.

And then lastly, I think at one point you had mentioned going out to other industrial groups, refiners or whatnot, who have CO2 production, and trying to explore whether or not they might want to test and evaluate rolling out the same platform on their end, in some sort of licensing model. Can you give a sense for how that's progressed or if that has solidified?

Yes, we are still in discussion with everybody from refining through electrical generation type plants and any and all of the above, anybody that has a CO2 source. And what we are showing is that you can monetize that CO2 source, hopefully through a larger-scale algae production facility, just using CO2, warm water waste, even the sun, without sugars. And that is what's very different about our platform, is that we don't have a cost of sugar, which is something very unique about what we do. Yet we are growing on a per-acre basis very competitively.

So we are in discussion, I can tell you, with multiple groups, either users of the product to emitters of carbon and everybody in between that. And our focus really remains the same. So from that standpoint, I don't think anything changes. I think what we are going to be able to prove out with this contract is that you can mitigate carbon, put it through a process, and generate a return on that carbon, which is really the last third of the corn kernel that we've been focusing on.

Thank you.

Matt Farwell, Imperial Capital.

Hey, good morning. I just wanted to talk about two things that you discussed already. One is the octane floor, and the other is the RFS. It seems like these are sources of demand or support for ethanol. But it's sounding like the octane floor is probably more relevant in 2013. You said that the RFS has some built-in flexibility. And obligated parties can roll their RFS obligations into future years.

I guess you can you comment on what is the more relevant demand floor? And in addition, could you comment on whether or not the EPA is likely to hand down any fines for noncompliance as they did with biodiesel mandates, or do you think that the EPA might be more flexible next year?

Steve, do you want to talk on the octane, and I'll talk on the RFS?

Sure. I will talk a little bit on it, Matt. One of the things Todd referenced earlier was some of the octane values out there. And we track and look at the appellates and the reformates and what they go for in comparison to the ethanol piece. And you're looking at, in New York Harbor type values, you're 50 over gas on those and 70 over on the other piece of them, whereas ethanol right now on the board is still trading at about 22 under in the prompt.

So the octane side, it's a huge value to it. Now, as a percentage of, could they displace it, the way we've looked at is it takes a refiner 90 days to switch from a subgrade gasoline production to a conventional gasoline production value. So they could go to an 87-octane versus the subgrade, but it would take 90 days to declare that. But again, the ethanol piece would have to go well over -- I'm sorry, the ethanol piece would have to go well over the gasoline piece before they probably implement that.

For a longer period of time.

For a prolonged period, correct. And we are seeing [through Ds] we're still running on that strip, we're still underneath the gasoline values as ethanol.

So then from an RFS standpoint, we kind of went through most of that. Noncompliants, I don't think there's anybody that is at risk of noncompliance at this point. There is enough RINs out there. There's enough roll-forward out there. I think from that standpoint, the noncompliance issue is kind of off the table at this point.

I guess it was my understanding that a lot of the -- well, I guess you mentioned roll-forward. My understanding was a lot of the RINs would expire this year, any banked RINs from prior years. And it would really just be the capability of refiners who are up at against parties to roll forward their obligation into a future year, which should actually just engender additional demand in future years. Does that make any sense, or am I interpreting the RFS incorrectly?

Do you want to talk about the roll-forward RINs?

Yes. I think you're starting to see them roll out of certain RINs and start buying up the '13s now, is that -- that's their coverage for it. But I think you're seeing that now as they roll out of '12s into '13s.

But some '12s -- 20% of the '12s will roll forward as well.

20% could roll forward, correct.

I see. Okay, thank you very much.

Ian Horowitz, Topeka Capital.

A couple quick questions. First of all, can you kind of talk a little bit about we're lowering our days of inventory from an industry standpoint. At what point does the market get tight relative to demand?

We're starting to see it already in some markets. As we've said, Nebraska is trading -- we have traded Nebraska over Chicago, where it typically trains at kind of a 10, 11 under Chicago market. So we're starting to see certain regional markets tighten up. Steve, do you want to comment on some other markets that you've seen, and then we can kind of --

It's spot. It's certain markets where you know there's plants going down for extended maintenance, or you're starting to see plants that have closed up completely and you're starting to see people scramble looking for barrels. Some is out East; some's West. It's not one specific market. It's where it's being affected. Some of the delivery markets are getting tight because there's not as much going to them right now.

Yes, and then we will wait and see next week if we continue to at least maintain this production pace. You should see another stocks draw overall. And you start to get down to levels -- last year, we're starting to see -- you get down to levels, inventory last year, when margins started to pop. Again, we still have to deal -- we have more corn volatility this year than last year. So that's the thing that we're dealing with.

But one thing you mentioned earlier, this is the lowest-level production since they start reporting ethanol.

Right. But how many days of stocks do -- is that kind of high teens, or--?

Yes. Sub-20, you start seeing --

Yes, we've always said kind of 16- to 18-day stocks is a very tight market, where you start to see dislocations happen. And already we're starting to see dislocations happen. When you trade Nebraska at over Chicago values, you're trading Indiana at the same type of levels, you basically have almost equalized the United States. And so dislocation is already starting to happen. It has not translated yet in to stabilizing the ethanol spot price, because there seems to be a lot of sellers in the ethanol market that maybe have ridden up their long to these type of levels and are putting it out every day. But in general, this dislocation could start to have an effect.

Okay. And then a lot of stuff's gone on with regards to the feed markets, both from a supply and a demand side. Can you comment at all on correlation between DVG and corn, where it's been recently, and kind of if you have any kind of view over the next bit of time here on how this is all going to play out?

Yes, that's a good question, because we don't talk about that a lot. But typical historical DVG prices have ranged kind of 70% to 80% the price of corn. And that's at the lower corn markets. When we get to the higher corn market, it starts to push up to the higher levels of a ratio. And actually, we've traded some stuff as high as 100% the price of corn. And it's really just a function of rationing or how the whole process is when you look at your feed ration.

I will tell you, from cattle feeders that we know, they can continue to pay over the price of corn for DVGs and get a better benefit. When you start to hit these levels of kind of poultry and hogs, they can do the split and go back to corn if they want to. But the big problem right now is you have historically high soybean meal prices. And so the substitutes are all kind of playing in from that perspective.

But from a cattle perspective, they continue to take the product at 100% the price of corn. We have not seen any slowdown because corn, obviously, is one of their worries as well. So here again, then, you have another dilemma facing you, which is reduced ethanol production reduces DVG production. Then where do you get the alternative feedstock for that as well?

So this is all going to have to be very interesting the way this thing plays out. But at this point, we see very strong conversion values for distillers' grains. And I don't think the feed markets today want those distillers' grains to go away. The one -- again, there's safety measures in everything we talk about -- is that we are still exporting distillers' grains. But with even the latest cancellations of exports out of the United States of corn, I think distillers in the world are probably high enough priced, and you might start to see some of that back up, which then gives a bit of a safety net for some corn in the feed and residual numbers.

Got it. You also talked, Todd, you mentioned Q3 as being defensive and then Q4 profitability. Just a little bit of clarity around that. For Q4, that would be for the entire quarter or moving towards profitability? And then for Q3 defensive, I think we can all kind of look out and see the challenges that the industry is facing. But do you expect it to be kind of moving in the right direction, or are we going to see something a bit of an improvement like we did 2Q over 1Q, or is it too early to tell?

It really comes down to where [sep] settles out at, kind of tracking -- well, we haven't really commented on where it's tracking except that it is still remaining defensive. It's not to kind of Q1 levels defensive, so we can kind of comment on that. But we're going to have to wait and see how we finish the Q3 out.

When we make our comments on Q4 for the last 12 to 14 weeks, based on what we were able to hedge earlier in the year, it has remained profitable for the whole quarter, even with the volatility in the forward curve. And when we say we locked away the margin structure, we fully locked away the margin structure. And we have corn bought against it. We have our financials all locked away. And so it's a little bit different than last year.

So those numbers have held over the last 12 to 14 weeks. If we see a serious degradation in the margin structure in Q4, that could change. But at this point, even as late as last night, we were still profitable in Q4. So we will have to wait and see.

We also think that kind of the two quarters together potentially make us very neutral for the last half of the year, and especially from a cash perspective. That's what we really look at. I mean, the earnings, yes, we are dealing with the volatility in the earnings, but we want to make sure from a liquidity perspective, as we get into the last half -- the last day of the year, number one, we have adequate liquidity on the balance sheet. Cash balances should be somewhat similar. We have other levers to pull if we need to get more cash without higher debt levels. And we certainly are watching that.

But at this point, again, based on our predictions -- and again, as you know, we [PN] all our business every single day, so we watch it very closely. Based on those predictions right now, it's a pretty neutral last half.

Great. And then one last question. If you look at the first six months of 2012 versus 2011, it looks like fertilizer volumes were down fairly significantly. It comes as a bit of a surprise, as we were putting more acres to work, and should be seeing linear increases in demand. Can you talk a little bit about what happened in that segment?

Yes, I will take that one. Actually, that was a management decision some time ago to be more disciplined in our overall approach to fertilizer sales. We didn't reach for that last little bit of sale that we could make, even if it was pretty tight on margin. So we got very disciplined in our approach, as you saw in the release, lost a little bit of volumes, but overall increased our profitability as a result.

Even on a per-ton basis, a better result than the first half of 2011?

Yes, that last 5000 tons was typically sold wholesale. I mean, we gave it to another distributor. So it was really just volume for the sake of volume and low margin, and we said we are not going to do that this year. We're going to just trade to high-value customers, sell to high-value customers, and just earn the margin without degrading the overall quality.

so, Jerry, are we going to look at a similar decline in the second half of 2012 from a volume standpoint?

Yes, I would expect about the same. You know, some of that does depend on the weather as well. Last fall we had a very warm fall, so we might've had a little bit more application going on in the fall than what we would normally have.

Yes, it depends where we sell the retail versus the wholesale. And so most of our retail is done in the spring -- or sorry, both the wholesale, what we did in the past was done in the spring, and fall is still really typical retail season. So you aren't going to see quite the drop.

Okay, great. Thank you.

Brett Wong, Piper Jaffray.

Good morning. Just wanted to hear your outlook on the E15 deployment.

Yes, so it's slower than we would like, but we are making progress. E15 is in multiple stages of rollout at multiple retailers that we're seeing. Big thing that happened yesterday was one of the pump manufacturers came out with a UL-approved E25 retrofit pumps. That is a game-changer from the perspective of you now can retrofit your pumps for about $1800, is what it is, to pump E15 through an E10 hose. Is that correct, Steve?

Correct.

So that was really a bottleneck for rollout of E15 from a retail level. And we are hearing the other pump manufacturers not that far behind from rolling out a retrofit kit as well. So instead of costing $10,000 or $20,000 or $30,000 putting new pumps in, they've come up with a solution for the retailer that could be kind of the game-changer needed, that if the retailer wants to start to roll E15 out, that is a pretty big deal.

We are in process right now at all of our pumps, rolling out -- to roll out E15 across our small amount of stations that we own up in northwest Iowa and pumps that we have. So we are deep into that process as well. There is E15 being pumped through blender pumps in the US today. And I think that there is one station right now that is pumping E15.

Our goal is to pump E15 through E10 pumps and completely eliminate E10 in the marketplace. But, again, the game-changer is, I think, this retrofit yesterday is a very big deal. And then I think ultimately it comes down to economics, and then from there available feedstock supply, so you can have the right gasoline to blend with ethanol to get the E15.

So it has been a process. It is still fully being deployed. NASCAR has run over 4 million miles on E15 and love the fuel. So I don't know if there's any better test run than that. It's just going to take longer than expected. But ultimately, we see that as one of the fuel choices for the consumer.

Great. Thanks.

And that is all the time we have for questions today. And at this time, I would like to turn the call back over to Todd Becker for any closing comments.

Thanks a lot for calling in today. Obviously a lot of questions. Hopefully we've answered some of your concerns about the future of Green Plains. We think we are in a good, solid position from a liquidity standpoint. We are in full compliance on servicing all of our debt today. We are continuing to build out other pieces of our business with non-ethanol operating income. And as you can see, we are making great strides in getting over $60 million a year of non-ethanol operating income really from a few years ago, when it was very minimal.

And if we continue to derisk the ethanol segment for you, while not happy with valuation today, which is below our cash balances from an equity standpoint, we still believe in the platform that we are building. We still believe in the future of our Company. We are going to have to deal, obviously, with some stress in the US corn crop this year, but we think we are well positioned to get through that and get ourselves into 2013.

So, thanks for calling today. If you have any other questions, feel free to call us, and we appreciate your support. Thank you.

And that does conclude our conference for today. Thank you for your participation. You may now disconnect.