Green Plains Inc (GPRE) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Green Plains fourth-quarter and full-year 2013 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.

Thank you and good morning, and welcome to our fourth-quarter and full-year 2013 earnings conference call. On the call today are Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; Jeff Briggs who is our Chief Operating Officer; and Steve Bleyl who is Executive Vice President of Ethanol Marketing.

We are here to discuss our quarterly financial results and recent developments for Green Plains Renewable Energy. There is a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website at gpreinc.com on the Investor page under the Events and Presentations link.

Our comments today will contain forward-looking statements which are any statements made that are not historical facts. These forward-looking statements are based on current expectations of Green Plains' management team, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Green Plains' actual results could differ materially from management's expectations. Please refer to page 2 of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause different outcomes.

The information presented today is time-sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Green Plains will not be reviewing or updating this material.

I will now turn the call over to Todd Becker.

Thanks, Jim, and thanks for calling in this morning. 2013 was a record year for Green Plains. We ended the year with one of our strongest quarters, and that performance did not include our full ethanol production capacity that we just acquired the plans from Wood River, Nebraska and Fairmont, Minnesota, at the end of November.

We generated $63 million in total segment operating income before corporate costs. Excluding the gain on the sale of the agribusiness assets in the fourth quarter of 2012, the fourth quarter of 2013 was our best ever. For the year we generated net income of $43.4 million, or $1.26 a share. This was a significant improvement over the net income of $11.8 million, or $0.39 a share in 2012.

We produced approximately 210 million gallons of ethanol, which was approximately 100% of our daily average production capacity for the quarter. With all of the plants now online and running for the full quarter, our capacity should just average a little over 250 million gallons per quarter going forward.

Corn oil production totaled 51 million pounds in the fourth quarter, and we made 170 million pounds over the last 12 months. Corn oil contributed $11.3 million in operating income for the fourth quarter of 2013, or approximately $0.05 per ethanol gallon sold.

We are nearly complete with our corn oil addition at our Atkinson plant, so going forward we will have all 12 plants producing corn oil. And with the progress we have made on improving the yield, we expect to produce approximately over 250 million pounds of corn oil in 2014.

Our marketing and distribution segment had a strong quarter with $14.3 million of operating income. We had solid results in our merchant trading programs, as there were good opportunities with movements of physical product as a record corn crop was coming out of the field. More impressive was our BlendStar terminal volumes which were up 63% year-over-year through our company-owned terminals. Birmingham continues to be a big part of these expanded volumes as this new terminal has delivered results as we expected.

Finally, we expect some crude oil volumes through our terminals starting this quarter as well. This will be the first time we see this product utilize our system. I'll expand and update our merchant activities a little later in the call.

We continue to work on deleveraging the balance sheet in the fourth quarter. While the cash ended the year at just under $300 million, we reduced our ethanol plant term debt to $0.36 per gallon, the lowest mark in our history. Overall, I am pleased with how we finished the year, and 2014 has started even stronger. Ethanol demand remains solid for both domestic and export markets.

The discount to gasoline continues to range anywhere from $0.70 to $1.00 per gallon on the forward curve, and the overall price structure of the corn market has remained stable. We believe EIA data suggests that with a solid year of ethanol exports, stocks will remain tight through all of 2014, well below the past three calendar years.

With strong worldwide demand for our products and our recent acquisition fully integrated, we believe 2014 will be a year we can really demonstrate the power of the platform we have built. We will process over 10 million tons of corn this year, produce nearly 3 million tons of livestock feed, and over 250 million pounds of corn oil. Green Plains has grown to be one of the largest corn processors in the world, and we believe this will open up new opportunities for growth.

I'd now like to turn the call over to Jerry to run through the fourth-quarter financial performance, and then I will come back to close out the call with some additional Company and industry outlook and comments.

Thanks, Todd and good morning everyone. As Todd said, we had a strong finish to the year. For the fourth quarter we reported net income of $25.5 million or $0.65 per diluted share, compared to $6.7 million or $0.21 per share last year. I should note that those numbers did not include a $26.3 million after-tax gain or $0.73 a share from the sale of the agribusiness assets in 2012.

On a consolidated basis for the fourth quarter, we reported revenue of $713 million, which was down 19% from a year ago, primarily as a result of lower grain and agronomy sales and a 20% lower price per gallon of ethanol sold. Our revenue is significantly impacted by decreases in commodity prices, particularly ethanol and distillers grains, but operating margins are not directly affected.

In fact, our operating income for the quarter was $51.1 million, which was a significant improvement versus a year ago. Reported operating income from the fourth quarter of 2012 was $68.4 million. Again, that included a $47 million gain on the sale of the agribusiness assets, leaving operating income from our base business in 2012 at $21.3 million.

Much of the improvement year-over-year was a result of the performance of our ethanol production business. The ethanol production segment generated $40.5 million or 64% of our total segment operating income. This was a $28.5 million improvement over the fourth quarter of 2012, and represents the best quarterly operating income for this segment over our history.

Taking a look at slide 5 of the online presentation, you will see that we generated operating income before depreciation in the ethanol segment of $0.24 per gallon compared to $0.14 on a per gallon basis realized in the fourth quarter of 2012. This is the best market since the fourth quarter of 2010, when we earned $0.25 per gallon that quarter. And again, remember, this does not include approximately $0.05 per ethanol gallon that the corn oil segment adds to our production economics.

It is also worth noting that our ethanol yield for the fourth quarter was approximately 2.81 gallons per bushel, which is roughly flat to last year's fourth quarter. That's significant because we ran our plants much harder this quarter versus last year when we were running at about 91% of capacity. So we were able to offset the normal yield drag that results from running the plants harder with continued process improvements.

We generated $28.2 million of non-ethanol operating income for the quarter, which was up approximately $10.3 million versus the fourth quarter of 2012. The increase was driven by the marketing and distribution segment which was up $7.6 million over the fourth quarter of last year, and the corn oil segment up $4.2 million versus a year ago.

Excluding the gain on the sale from 2012, the agribusiness segment was down as we expected it would be, about $1.4 million in the previous year.

Our agribusiness segment now has two purposes. The first is the traditional strategy of earning a first handle margin and carry, which we have discussed in the past. We originate grain from producers, place it in our newly expanded storage facilities, and sell it later in the season to the best markets available.

Second, we are now utilizing the segment to also manage the origination and financing for grain used in our ethanol production. We can now utilize short-term borrowings for working capital as a more efficient way to finance inventories and drive our ethanol term debt down even further.

Grain origination into our ethanol plants is done for a very small intercompany fee per bushel, which results in higher revenues for the agribusiness segment and lower margins per bushel on the bushels handled. As we continue to build out our grain storage with our target to reach 50 million bushels by the end of next year, we expect increasing margins from this segment with more first handle and carry margins in our mix.

As I mentioned, the marketing and distribution segment was up $7.6 million from last year, primarily as a result of improved income generated by our marketing logistics businesses, including the addition of natural gas trading.

We had another solid contribution from our railcar program in the fourth quarter, but as indicated over the last several quarters this program is winding down. Yet we still expect a small contribution from this program in 2014, probably in the range of $3 million to $4 million.

We generated record operating income from corn oil production of $11.3 million in the fourth quarter, which was nearly $2 million higher than the third quarter of 2013, and over $4 million higher than the comparable quarter in 2012.

Our corn oil production volumes increased 39% for the fourth quarter this year versus 2012. We have continued to push our yield higher, reaching 0.72 pounds of corn oil per bushel in the current quarter for the 10 plants that were producing corn oil. It's a little bit more than a 10% improvement from the fourth quarter of 2012. In 2014, we should produce over 250 million pounds during the year.

While prices of corn oil overall have been lower between increased yield and increased production, the segment should still see an increase in operating income versus 2013.

Interest expense increased approximately $1.1 million in the fourth quarter compared to a year ago, due to the issuance of $120 million of 3.25% convertible notes in September 2013. Our income tax expense was $15.4 million for the quarter, which was slightly better than our expected 38.5% effective tax rate. We anticipate a similar tax rate on our booked tax expense for 2014. Net income was $25.5 million, which was $7.5 million better than the first three quarters of 2013 combined.

EBITDA, or earnings before interest, income taxes, depreciation and amortization was $63.9 million for the fourth quarter of 2013, and for the calendar year exceeded $156 million.

On to the balance sheet. As Todd mentioned, we continued our focus on delevering the balance sheet during the fourth quarter. During the quarter, we repaid more than $83 million of term debt on our legacy ethanol plant facilities. Offsetting this amount was an additional $95 million in debt, including capital leases, that were added during the quarter to finance the acquisition of the Fairmont and Wood River ethanol plants.

So net-net we added 230 million gallons of production capacity and about $12 million of ethanol debt during the quarter, resulting in $0.36 per gallon of ethanol plant debt.

On slide 8 you can see our net debt as of December 31, 2013 was approximately $265 million compared to $239 million at the end of 2012. So during 2013, we increased our net debt by just under $26 million, but we added 280 million gallons of production capacity and 9.4 million bushels of grain storage capacity to our platform.

With the increased cash generating capacity of our platform, we still believe after the significant strategic acquisition, our goal of zero net debt by the end of 2015 is achievable.

To summarize, we produced a record quarter and a record year. Our balance sheet and our liquidity have us well-positioned to support our current operations and our future growth initiatives.

With that, I'll turn the call back over to Todd.

Thanks, Jerry. So as of today we are about 90% hedged for the first quarter financially, but we still have more physical left to sell, and we are seeing a very strong basis at all of our plants. We have already locked away 60% of the second quarter as well.

The export market remains strong. For the first quarter we sold 11% of our current run rate into export demand. We also have been successful in selling approximately 47 million gallons of our second-quarter production to the export markets, representing nearly 20% of our production volume for the second quarter. We are still seeing good demand through the second quarter for exports, and we are closely monitoring it out into Q3.

As we mentioned earlier, we expect Q1 financial results to be similar or stronger than the quarter just reported and the first-half results to be our strongest on record. Ethanol margins have been volatile on a weekly basis depending on the weekly EIA data, which the market seems to be keying on.

While we have seen a slight build in stocks over the last several weeks because of winter storms, this latest week showed a bit of a draw and the physical markets remain extremely tight due to export demand and challenging railroad logistics. We think that with exports remaining strong and a normal driving season, 2014 could be a solid ethanol -- a solid year for ethanol margins, yet there is not a lot of visibility in the last half due to a flat ethanol curve and a corn market and a carry. As we always say, it seems like a broken record for this time of the year.

The distillers of grain market remains solid. Values for distillers grains remain strong versus the value of corn, and we continue to see both good domestic demand and export demand.

Now let's discuss our grain capacity expansion. Our plans are to add additional 10 million to 15 million bushels of storage in 2014, and ultimately reach 50 million bushels of total capacity by the end of 2015. With the addition of Wood River and Fairmont, we now have nearly 31 million bushels of grain storage at our 12 ethanol plants and 4 grain elevators.

We will especially be focusing on the two new plants as those production areas present great opportunities for us to expand storage even further. The investment on this expansion may be a little bit higher than 2013, but still under or around the $1 per bushel target we have established. The main reason for that is we are building a 5 million bushel storage building in Obion, Tennessee at our ethanol plant that will have high capacity unload and loadout capabilities. We expect this project to be ready at harvest time.

We also have plans to deploy selective milling technology or fine grind at an additional three locations in 2014. This is about a $2 million to $2.5 million investment per location and we believe well worth the money. At the locations we have installed the technology, we have experienced a 1.5% improvement in ethanol yield and approximately an 8% improvement in corn oil yield, which is paying us back in about 12 to 18 months depending on the commodity pricing.

So overall for 2014, we expect to invest about $30 million in growth capital, primarily in grain storage expansions and our ethanol yield enhancement projects.

On previous calls, you have heard us talk about expanding our traders and trading around the physical product flows and logistics. Today we have 19 traders working in 10 different commodities in 16 distinct businesses that operate on our platform. We benefited from this in the fourth quarter and believe we will continue to see a positive contribution to operating income for this segment.

While it is hard to estimate each quarter's results, over time these businesses will provide more predictable cash flows as they establish themselves in each of the markets that we are in. We are still adding traders to our merchant platform. Most recently we have added natural gas trading expertise in-house to leverage the approximate 29 Bcf of natural gas we purchase annually to run our ethanol plants.

In addition, we added a very experienced six-person team of vegetable oil traders and marketers. They will key off the corn oil we produce, but they also bring a business that trades in markets, both -- externally produced food grade and feed grade oils, both domestically and globally. As we continue to extract more oil from a kernel of corn on the front of the ethanol plants in the United States, we will be well-positioned to take advantage of this in the future.

Finally, we have over the last year launched Green Plains Asset Management, or GPAM. GPAM currently has the capacity to manage $1 billion today, and is actively raising third-party capital. Our commodity trading advisor uses discretionary trading strategies driven by fundamental research and technical analysis to trade, primarily in agricultural futures markets using Green Plains market knowledge derived from its ethanol plants and other businesses.

We believe this is an excellent time to launch an investment thesis that is now a bit off cycle, but we believe in the next couple of years it will shift back and allocations will flow again. We feel we are well-positioned to capitalize on these flows when the capital comes back to this sector.

Currently, they have their first capital -- outside capital commitment of $30 million and continue to seek a seed investor for either our onshore or offshore investment fund, which are both established. GPAM has a team of experienced professionals with over 95 years of combined experience in commodity trading and asset and fund management.

We believe this provides us a jumpstart for the important initiative of monetizing our intellectual capital without the use of our balance sheet.

Bioprocess algae, I wanted to give you a quick update on our algae initiative. As we indicated last quarter, we were focused on how to best deploy capital for growth. While the venture was focused on the rollout of the first phase of the Department of Energy grant, we have made several breakthroughs as well. First let me discuss briefly the grant.

The grant was to determine whether an algae-based feedstock grown in our reactors could produce viable transportation fuels. We are on Phase 1a of the process, so there is a long way to go. At the end of every phase we can make the call whether either party wants to continue. One of the requirements of the grant was to install fermentation capability for the base feedstock of algae that was produced in our outside reactors.

We have started feeding this process initially with one part of algae and four parts of sugar as early test runs. The results have been very promising so far on increasing yield from the outside reactor to the inside reactors. We are feeding a very high lipid variety to start in order to make sure the process can produce what is needed by the catalyst provider to convert the algae into fuel, but we can also use this process for varieties focused on nutritional components -- the EPA, DHA and protein.

In addition to the inside fermentation, we have been feeding our outdoor reactors which sugars to enhance yield capabilities as well. This mixotrophic process has proven successful in stabilizing and increasing growth capabilities. So why are we focused on this? With corn values moving lower, we produce sugar at below $0.10 per pound and can feed these sugars into either process, mixotrophic or heterotrophic.

More exciting has been the early results from our fish meal replacement trials with the USDA, led by Doctor Rick Barrows. The trials have met initial criteria and continue to be underway. The species tested to date in these trials using what we call BPA fresh feed have been trout, sea bass, yellowtail and herring. The results today have shown that our BPA fresh feed algae resulted in high survivability and digestibility, which have compared favorably with other high-protein replacements as fresh feet feed is known for a high-quality protein content among other benefits that land-based crops cannot produce.

In addition, our fresh feed algae tests are showing additional benefits by increasing tolerance to environmental stresses and reducing waste that can be problematic in high density aquaculture. We are looking at market access for this product and hopefully to see something in the next couple of quarters where we can announce some type of deal that has this product in some longer-term process around feeding in the aquacultural space.

In addition, we are also looking for a regulatory pathway to market on our poultry feed, which we announced those tests a couple years ago which were successful as well. This knowledge is solidifying our vision of using an ethanol plant to feed the needs of the algae process. We continue to have a multitude of discussions with end-users, mainly focused on human nutrition and animal feed. We want to make sure when we announce an agreement, it is for a product we can make and a product our partner can use. We will not announce for the sake of announcing if we cannot execute on this product.

A nonbinding agreement is exactly that, and we will not play that game. While it doesn't seem like a lot going on, let me assure you these latest developments has increased our enthusiasm that there is value in the third of the corn kernel where we get the CO2 from.

So Green Plains continues to focus on growth. We will continue to seek opportunities to expand our platform across the value chain. We believe that adding more capacity, whether it is processing agricultural commodities into finished products, using our trade flows to earn additional returns on monetizing our intellectual capital by managing third-party capital, we believe we are well-positioned for growth.

We also believe scale and commodity processing businesses like ours (technical difficulty) have benefits, and we intend to deliver those benefits to our shareholders.

In closing, we made good progress in 2013, delivered strong financial results, and the earnings power of our platform should continue to improve. Our focus has always been on growing long-term shareholder value and believe we are on the right path to continue that.

Finally, we were excited to pay our first dividend in 2013, and hopefully you will see that this shows that we have great confidence in the future of our Company.

Thanks for joining in the call today, and now I will ask Marquita to start the question-and-answer session.

(Operator Instructions). Farha Aslam, Stephens Inc.

Hi, good morning.

Hey, Farha.

Congratulations on a great quarter.

Thank you.

And my question is regarding the international markets. US ethanol is flowing out to new markets. Do you think it is because demand in those new markets is growing, or are we simply replacing Brazil which is not in the export market right now?

Well, it's a little bit of both. I mean we are seeing new markets open up that both Brazil and the US have not shipped a lot to. I mean it comes down to the price of the molecule. And with US ethanol as cheap as it is, we are finding both new markets and replacement markets for Brazil ethanol -- for our ethanol globally.

Okay. Longer-term when you think about supply/demand dynamics for US ethanol as Brazil comes back online, what are your thoughts there?

It really kind of comes down to -- and we talked about it in the past -- is who has the cheapest sugar. And with corn at $4.50 or lower, we believe we have the cheapest sugar which converts us into the cheapest ethanol globally. So as long as we can retain that competitive advantage from an initial feedstock, we think we will be competitive globally as well.

So I mean when you look at the next five years, we are continuing to project an increase globally in demand while not projecting a huge increase globally in supply of ethanol. So the balance sheet certainly looks in our favor.

The one wildcard is going to be China. We saw our first initial shipment to China in November. And if you look at that as a replacement molecule there, if we can continue to see any indication of demand coming from that sector, that would be all new demand. And we believe that could be a potential game changer for the industry globally.

That's helpful. And then when you look at Green Plains specific, you have raised that convert and you have a significant amount of cash now on your balance sheet.

In terms of priorities, where do you think you are finding the best opportunities to deploy that cash?

We're looking both horizontally and vertically and very active in trying to deploy that capital, whether it is continually looking at is there another ethanol plant we want to bolt-on, looking at storage both of agricultural products or energy products, looking at additional types of businesses that would be bolt-on in terms of utilizing our expertise.

I will tell you we have an active and a robust M&A process going on right now and a business development process, so we believe that we will deploy capital in the next 12 months and we will be able to start earning against that capital.

Great. My final question relates to algae. Do you anticipate monetizing algae? How do you anticipate that algae business growing over time? And if monetization, would that be a 2014 event or is that sort of a longer-term?

So what we are finding right now is we really have to make the determination how we want to allocate capital and how much capital will be needed and where that capital will come from. And so right now, that is really what we are trying to figure out with that business. We know we can grow a product. We know we have a product that can move into the feed markets. We believe we have a product development effort that can move into nutritional markets as well.

So what it really comes down to is the return on the capital invested, whether we go for the higher value products or the lower value products. And so when we look over the next kind of 12 to 24 months, we have to grow more, we have to produce more, and we have to sell something. And that is our goal.

And once we do that, we can make a determination on the ultimate need of capital over the long-term and how we get that capital. So whether it is going to come from the partners or whether that will come externally, we will have to figure that out. But that will all be based on the fact that we get into some type of long-term arrangement to supply the product that somebody needs, and that is what we are working on today.

I mean we are -- we have several discussions going on with everybody from large to small, in terms of needing a product like this. Again, it is the chicken -- it is kind of the cart before the horse. You don't really know. If you grow too much, you may not have a market for it. If you don't grow enough, you may never get to the market. So you have to play that balancing act.

But I would say our goal is to grow more over the next 12 to 24 months, have more coming online, utilize the new findings that we have in terms of what we will call quote/ unquote supercharging yields using the waste sugars from the ethanol plant, which we produce very cheaply and produce a lot of it every single day and have lots of access to it. And then if we could kind of match all those together, we believe that we will be able to realize longer-term value out of this venture. And we are going to continue to invest because we continue to have reasons to invest.

I understand. Thanks for all the added color.

Thank you.

Laurence Alexander, Jefferies.

Good morning.

Hi, Laurence.

So I guess a couple of questions. First, the new or expanded commodity trading effort, can you give a little bit more detail in terms of value at risk, number of days running losses; how you are thinking about how that will play into how you manage your current balance sheets and so on?

Yes. So when we have been adding each of these different businesses, these are very low VAR, very capital efficient trading businesses, and that is really the model that we are looking for. We are not looking to increase the VAR of the Company overall, and we have always been a low VAR Company. We haven't released our VAR statistics. That is something we will consider in the future, but today those are all internal.

I will tell you that anything we have done has not increased our VAR to any high level, and we are very, very comfortable. These are -- as I mentioned, these are capital-efficient businesses. So I'll give you an example. From a standpoint of our distillers trading businesses, we get paid very quickly, sometimes before we pay. That happens a lot in these physical flow businesses. So the efficient use of our balance sheet is certainly something we focus on.

In our natural gas trading businesses, what we are able to do is monetize -- to start, what we looked at is when we internalized our procurement we have 7 different pipelines and 12 different -- or 11 different utilities that we operate on. And we have never really had the direct relationship with the pipelines and the utility. We've always had an external third-party provider doing that for us.

Now that we have internalized that, what that gives us is daily capacity every day that we can then have optionality to trade in and out of based on the ups and downs of our needs of usage on a daily basis for natural gas. Depending on whether we are drying more or drying less, we are able to monetize that.

So there is not a lot of VAR that you have to allocate to that and it's a very efficient use of capital off the balance sheet. Even in these latest times of volatility that you see in natural gas, having this group internally has allowed us to earn additional returns against the crush because we have been able to flex our gas around.

Thirdly, we are very excited about our vegetable oil trading team. It is a team that will tee off of our 250 million pounds of corn oil, but also has extensive contacts globally, has traded in excess of 500 million pounds of oil, and we believe that will be just a great additive to what we do, both domestically and globally, both in servicing the feed markets, the dealer markets, and then the renewable diesel markets and then the renewable diesel markets globally.

So when we kind of look at these, there is not a lot of VAR needed for these businesses and we have always focused on low VAR, and that is basically how we are thinking about our trading businesses today.

And then what return on capital expectations are you placing on that business compared to looking at an acquisition? What is the hurdle rate?

Like I said, I mean they use very little of our balance sheet to generate the excess returns that we are getting in marketing and distribution. So you will have to be careful how quickly you can scale that business because we are very thoughtful in our approach. This isn't anything none of us have done -- we have all done this before.

But in terms of you have very outsized returns on capital use versus asset acquisitions. So there isn't much of a comparison except to say that the reason people scale businesses like this if they can keep their risk profile low is because you have outsized returns on an asset-light trading business like this versus an asset-heavy processing business. But you can't -- we don't believe that you could continue to build a merchant business without a very large strong base asset business, and that is why we are able now to finally capitalize on those flows.

And with the margins that you have locked in on the first quarter, how does that set up the sequential comparison? Do you think you can match the performance that you saw in the fourth quarter?

Yes, we believe we will match or exceed the performance in the fourth quarter in the first quarter. That is how it is stacking up today. And on the 60% of the second quarter, it's actually not -- it's within the same ranges, but we still have some work to do, so there's more volatility when you have 40% more to lock away and even more than that in the physical side.

But I will tell you that overall, the first half will be strong and our strongest on record. The first quarter should exceed -- will exceed the fourth quarter based on everything we know today. The export markets remain strong. We don't believe you will be able to build stocks in the US of any magnitude in terms of the weekly EIA data that you see.

We have to -- if you look at the data and we have done this internally, and again this is kind of a rough back of the envelope, you need to produce 925,000 barrels a day of ethanol just to match the export demand that we see for the remainder of the year, and small growth in domestic usage to just keep stocks even steady.

And so right now in the last four months, we have been averaging 912,000 barrels a day, and last week we saw 895,000 barrels a day. And that based on current export demand that we see will not allow the US to build stocks in ethanol anytime soon, and we are well below the last three years of those values.

So I think the other thing for us is that while you see a 90% locked in for the first quarter, as we have continued to grow and our assets are getting bigger and our flows are getting bigger and our volumes are all bigger, naturally we are going to have a little bit more in more of the nearby markets, which I would say we are still going to lag the expansion and we will still lead the contraction, which is how we are going to set the business up.

But I think you will see just naturally because of the size and the scale of our business, we will have a little bit more in the nearby markets than we had in the past.

And then just one last one, just a quick one on the BioProcess Algae side. The sort of path to commercialization seems to be taking a little bit longer than I think initially might have been hoped, but you also seem to have a broader opportunity set that you are evaluating.

Do you have a rough timeline for when you think commercial shipments to either the animal feed market or one of the other markets will be sort of ongoing and repeatable?

Commercial scaling of the technology I would say is pretty close to being done. I mean, we don't think that our reactors will get much bigger than what you see today. I would say the most exciting part of it is the increase that we see by utilizing the waste sugars that we produce on a very cheap level and at quantity stabilize, and then increase -- even increase yields in a short stress period around using that corn sugar from the ethanol plant in a heterotrophic quick process that we can then -- we've seen as high as a 10X on the kind of very early results, but I wouldn't go with that in terms of the long-term scalability.

So when we talk about scalability, we are going to focus on obviously very high-value products first and where we can at least get a partner from that perspective to utilize our product. We have customers that are interested in a high EPA, DHA and protein strain, and we are working on choosing that strain to start to develop the base product for the demand that they are looking for.

So we are in a -- we have a lot of business development efforts going on, and it is just going to come down to when we find the right situation for the right value proposition, we will scale very fast to meet that demand. Our goal is to have that something in place in 2014 to show the market.

Thank you.

Thank you, Laurence.

Craig Irwin, Wedbush Securities.

Good morning and congratulations on the strong quarter.

Thanks.

I wanted to ask for a little bit more color around some of the comments you have made him on the call and in the release. The improvement into the first quarter, is this an improvement in your crush margins, or is this more an improvement driven by strong crush margins but really the additional gallons that you are bringing online?

Well, it's a little bit of both actually. I don't think we have given out the total crush margin, but a lot of it -- right now it is driven by the higher volumes. And so we believe overall you will see better operating income for the total Company.

And then when you look at the margin structure for the first quarter, it is overall similar to Q4 on an overall EBITDA per gallon margin structure. Is that correct, Jerry?

Yes, that's right. But to kind of go back to the point of the volumes, we sold 213 million gallons of ethanol during the fourth quarter of 2013. And at full capacity -- and we are running pretty hard right now, but at full capacity we'd be at 250 million gallons of ethanol production in the first quarter.

So we will produce 30 million more or so, or ship produce or sell 30 million more, roughly 30 million more gallons in the first quarter. And those gallons will be kind of driven through the whole EBITDA or margin structure.

Great, thank you for that. Second question I wanted to ask was about the M&A environment. I think everybody that follows your Company appreciates the M&A strategy, the way you've executed in the past and the recent acquisitions, that they were bought at an attractive price really at the right time.

Now that we are looking at a question mark on the crush in the back half of 2014, are you seeing more enthusiasm on the part of plant owners to potentially sell? Is this an environment that you think is really a buyer's environment that offers you the opportunity to continue to increase your footprint in the industry?

I don't think anybody is too focused on the last half. I mean, I think every year you look out to the last half of this time of the year, there isn't much to see in terms of a margin structure. I mean, I would say that it's probably more positive in the last half than we've seen overall in the last couple of years. But people don't get too fussed for it to be seven, eight months out and thinking to themselves they need to sell their ethanol plant.

I mean there is definitely a few plants out there, and we have seen clients trade at high values that are the ICM Fagen type vintage in good locations in that $1.35 a gallon type range. I think there is a few other plants for sale. I am not sure they will go that high.

When we look at what we've been able to accomplish and the reason we were able to, we move very quickly. We purchase the plants, we could write a check and so on. But we are also very comfortable with several different technologies or a couple different technologies, and we think we have become very good operating them and narrowing these cents per gallon production gaps.

So if we were going to continue to expand the ethanol platform, we probably don't have the same type of opportunistic deals that we've seen in the past couple of years. I would say we have to get a little bit more serious to determine whether we want to wait for another cyclical move in ethanol before acquiring. Or if there is a really great plant in a great location, maybe that is the plant that we would have to UT a higher dollar per gallon, but there would be a reason for that because of the location and operating structure.

So there is nobody right now that is saying that they have to sell their plant because margins are good. In fact, I will tell you that when you look at even ourselves getting our ethanol debt down to $0.36 a gallon, and that's not including cash to go to a net debt, when you get down to $0.36 a gallon we may be on the high side of a lot of plants right now.

So servicing debt in a cyclical downturn for the ethanol industry, the ethanol industry has a lot more staying power. And I think you've seen just about all of the players that needed to do something do something. And right now, the industry is about as strong as they have been with a margin structure like it has been growing over the last 12 to 18 months.

Great. And then last question if I may. The blend margins for ethanol have remained very attractive for quite a while and really set the table for some attractive economics. People show the enthusiasm on the E15 side.

How would you characterize the growth of E15, the outlook of E15 in 2014? Do you think we are likely to see an acceleration? What do you think needs to happen there? I mean what do you think investors should be paying attention to as far as E15?

I think you should pay attention to national chains or regional chains that start to make a move on taking advantage of the economics that are there. Economics will drive behavior, and so we have seen MAPCO in the South and Southeastern United States announce 100 plus stations of development for E15 because they see that, number one, they can be very competitive from a fuel standpoint. And number two, it gives them a competitive advantage versus from a standpoint of cost per gallon to the consumer to the competitor across the street.

We've seen some other national retailers start to experiment with E15. We've seen a lot of local regional retailers starting to experiment with E15. So it's just a matter of over time, we will see that people -- there are stations it doesn't cost a lot to convert at all. In fact, it costs nothing if you want to get rid of a high grade -- the high octane gasoline -- you can put E15 right in there.

So I think we are going to start to see over time as people start to show, as retailers start to put E15 in their stations that the competitor across the street will have to react. Economics will drive behavior. The blend margin is very good. We are sitting at about $1 on their gasoline out on the forward curve. That is a lot of profit to leave on the table if you are a retailer, and we have a lot of interest from retailers across the spectrum.

Steve, do you want to comment on that real quick?

I think it is worth noting the Murphy ones also announced in the State of Iowa they were converting over, and they are looking at expanding that piece of their business, too.

So I think we have the start of a good tailwind but a long way to go. And when you look at the fleet, right now based on the rulemaking that is in place of 2001 and newer vehicles, 85% of the fleet in the United States is approved for E15.

Now whether the automaker says you should use it or not is a different story. But beyond five years ago, there is not a lot of warranties left to void. So you have to be very careful when you read the headlines and you think about E15 and voiding warranties; when you start to see some of the bigger automakers say 2012 and 2011 and 2013 vehicles are eligible, and you are starting to see a lot more yellow caps for E15 show up as well.

Great, thanks again for taking my questions.

Thank you.

Patrick Jobin, Credit Suisse.

Hi, good morning and congrats on the quarter again.

Thank you.

Just wanted to follow up on the export markets. So I guess when you are looking at the end markets, do you have the visibility to see where that strength is coming from and kind of your expectations for exports for the year as a whole?

Yes, we have good visibility. What we announced or what we indicated in our conference call is we have got 20% of our third quarter sold into the export markets, right around 19% or 20%. We are seeing more demand in the second quarter for more export business. We believe that that will start -- we will start to see some pricing take place in the third quarter as well. It just won't drop off.

I mean, our fuel is so competitive all the way out on the curve, in fact, it's a discounted in the spot market today, and we are seeing great export demand as it is today. 11% of our first quarter is going export, but we are seeing more physical demand for that as well.

So I think the visibility beyond the second quarter is somewhat limited as I think people start to think about where the global competition will come from, but the demand is so robust and our price structure is so favorable that once we get enough demand in the second quarter, I think we will start to see third-quarter demand pickup.

Steve, are you seeing anything as well in the third quarter?

We are. We are starting to see some of it, interest level at least on the unit train level forward.

For the third quarter. So unit trains are what is shipping. We have a lot of unit train facilities and, in fact, we are starting to see some of the facilities that we go to really reaching their maximum capability that they can't actually buy any more export because they can't get the permits for the trains to come into those facilities. So we need actually some more export facilities.

So I think overall, Patrick, when you look at the structure of the market and you think about the production that needs to happen every day against a -- and when we figured the export demand, we figured 100 million gallons a month for Q1, 50 million gallons a month for Q2 and going down from there. Even at that point it will be -- you will get into a very tight stock situation with a bit of an increase in domestic demand.

So either way, exports will drive these markets for at least the next six months, and I believe that we will continue to see the export program through the end of the calendar year.

Right, okay. Just I guess I was referring more towards the end markets for the exports, if you have visibility on that front.

Well, we see active interest in all of the end markets, and it is still coming. We are pricing export every day on backing some of these international markets and international traders that we typically will back and historically have backed with supply. And because of the scale of our asset base, we are able to certainly provide them with what they need.

So it's not letting up from the perspective of the end-use market today, and the values continue to remain very competitive globally.

Okay. And then just last question from me. Can you walk us through your assumptions for that zero net debt by the end of 2015, just kind of how you're thinking about that, especially in the context of building out more assets on the handling and processing side and potential acquisitions? Thanks.

Yes, Again, we start out today at $265 million of net debt. We have $90 million of converts that should convert at least by 2015, coming off the net debt. So that leaves you basically about $170 million of net debt over the coming years, just amortization between 2014 and 2015. And with strong ethanol margins and strong cash flow, we should be in a position to continue to amortize that debt or build cash, again, absent a major strategic acquisition.

Okay, thank you very much.

Thank you.

We have time for one more question. Chen Lin, Lin Asset Management.

Thank you. Congratulations on a great quarter. I have a couple questions. Can you comment recently the job report from Brazil that the sugar crop price had spiked, and which leads to a spike of ethanol price?

Yes, I mean what we are seeing in terms of weather in Brazil, both on coffee and sugar, have definitely led to a bottoming of the sugar market here on this recent break. We believe that obviously it is still early, but they have gone through quite a bit of a dry period during one of the most, I'd say, important times of the growth cycle in sugar, and we will see what the impact of that is.

Any reduction in that supply down there certainly bodes well for us to remain competitive through the end of the year and beyond in the global markets. It still just comes down to sugar at $0.16 a pound. It is still significantly higher than sugar that comes out of the corn kernel in an ethanol plant, which means we will compete globally from a price perspective very handily through the end of the year without -- from a perspective of competing on price at $4.50 corn versus $0.17 a pound sugar, we will produce sugar at almost half the cost of the world market of sugar.

So from our perspective, that will certainly be a positive impetus to the remainder of the year, which we have been talking about.

Thank you. I heard the [export pressures] on China, there is a lot of interest. However, do you think the current infrastructure can handle a very large export to China, for example?

The current US infrastructure?

Yes.

Yes. Yes, I think we have extra capacity that we can go to and need to pull out of if that demand does surface, and we are seeing hints that that demand is surfacing. Some of it will probably go through the Gulf and through the Panama Canal, and then we will start to see where we can find capacity off the West Coast as well for export.

But yes, I think if they came in in a modest program to start, we have the capacity for that. Any increase from there, we may have to look at them and give up other parts of the world. But we have exported 1 billion gallons of ethanol before, so there is extra capacity over even what we are expecting in 2014 of a couple hundred million extra gallons of capacity before we start to even see constraints. So we don't imagine that that will be a problem.

Okay, great. Thank you. And then my final question is recently Valero has reported their margin is about $0.82 per gallon. And while yours stands much lower, probably because of your hedging program, do you have any plan in the future to be more on the spot market to improve your profit margin?

I think if you look at our margins and you look at others that have reported since then, which are more consistent with our margin structure, while there were certainly days that we saw strong margins I wouldn't say that that was an everyday occurrence. How they do their internal pressure pricing from the standpoint of the supply agreements they have with the retail group that they spun off, we don't know how that works.

But I would say across our platform, we did not see a margin structure consistent to that on a 90 day basis and in the fourth quarter. And I am not sure others have seen that as well that have reported. So I would say that is inconsistent with what we saw in the market.

So whether it's a one-timer or whether it is some type of longer-term agreement, good for them that they got it but we never saw those type of margin structures in any kind of extended period of time, even at our best plants.

Okay, thank you.

At this time for closing remarks, we will turn the call back to Mr. Todd Becker.

Yes, so thanks, everybody, for coming on. We are very excited about the future of our Company. We have a lot of great initiatives going on. We think we are starting to monetize our commodity flows through our trade group.

We are excited about the competitiveness of ethanol in the global markets. We are excited about the acquisitions we've made in our processing platform and we are looking forward to 2014, and we will talk to you on the next call. Thanks.

That does conclude today's conference. We appreciate your participation. You may now disconnect.