Green Plains Inc (GPRE) 2014 Q1 法說會逐字稿

Good day, and welcome, everyone, to the Green Plains first-quarter 2014 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, and good morning and welcome to our first-quarter earnings conference call today. On the call will be Todd Becker, President and Chief Executive Officer, Jerry Peters, our Chief Financial Officer, Jeff Briggs, 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. 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 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.

Now I'd like to turn the call over to Todd Becker.

Thanks, Jim, and thanks, everybody, for joining us today. After a strong finish last year, 2014 is off to even a better start, with the best quarterly performance ever in our history. The results we produced truly demonstrate the earnings capability of the size, scope, and scale of the platform we have built.

For the first quarter, we generated net income of $43.2 million, or $1.04 per share. That is almost as much net income as we generated in all of 2013, and was a significant improvement over the net income of $2.6 million, or $0.08 a share for the first quarter last year.

We produced 231 million gallons of ethanol, which was approximately 95% of our expected average production capacity for the quarter. We had several things affect our production rate. First, when we produce ethanol for export, on some of those gallons, we slow the plant down. In addition, we made a decision to idle a few plants during the quarter over a weekend or two when natural gas was hitting some record highs.

We took the opportunity to sell out the natural gas that we had already purchased and sold it in the spot market for a much higher value. It was much more economic to do this than to run the plant. This was a prime example of the optionality of our platform provides us around the commodities we process here at Green Plains.

It was also a direct result of building a natural gas procurement and trading team within the Company. This also has benefited our ethanol production segment.

Finally, the business interruption experience at Fergus Falls, Minnesota plant accounted for the remainder of the production capacity decrease the first quarter of 2014. We're happy to report that our plant has returned very quickly to producing ethanol, albeit without drying capacity at this point. We expect this to be fully repaired by the end of the third quarter.

Overall, we generated $85 million in total segment operating income before corporate cost, but this result does not -- does include approximately $22 million of intra-segment eliminations that Jerry will explain a little later in the call. Eliminations were due to gallons sold and shipped, but, for accounting reasons, cannot be included in our current quarter operating income. These will predominantly come back in the second quarter.

Jerry will also cover individual segments later in the call. But I will give you a quick comment on corn oil. The market fell a bit during the quarter to around $0.32 a pound, but has recovered into the range of $0.35 to $0.37 a pound for the rest of 2014.

We did start corn oil production at Atkinson in the quarter. And as we brought Fairmont back online in early January, we now have all 12 plants producing corn oil and we should see a pickup in production closer to 60 million pounds per quarter going forward.

I will cover specifically our Marketing and Distribution Segments, as it had a significant contribution in the quarter, with $32.5 million of operating income. Our merchant trading programs all made a strong contribution in the quarter. Our ethanol and fuel rack business to natural gas daily pipeline activities through all of our agriculture merchant activities, they all contributed.

We do not expect this to repeat in the second quarter, which will retreat back to normal historical levels or below. It was a unique quarter with unique market dynamics. I'll give you a few examples, but we cannot predict when these market conditions will be there again.

In our fuel distribution and rack business, we fully monetized our optionality that we always knew existed in our BlendStar terminal business. By having the ownership and terminal assets, we were well-positioned when the market exploded higher during the quarter.

We always maintain a pipeline of product to service the demand around these assets. But because of the tightness in supply and dislocations that existed last quarter, having these assets in the portfolio allowed the Company to enhance the production margin structure throughout the supply chain. In fact, approximately half of the segment operating income was due to the great performance in our rack business.

The rest of the performance was scattered throughout many of the initiatives we have started over the last several years and our merchant businesses, specifically our natural gas business and agricultural products business, which all had great results.

As I said in the release, the size, scope, and scale of our business have provided us with a low-cost production platform. It has the ability to produce significant results, particularly in a stronger margin environment. It also provides us with significant optionality.

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

Thank you, Todd. We're pleased to report a strong start to 2014, with net income of $43.2 million, or $1.04 per diluted share, compared to $2.6 million, or $0.08 per share last year.

On a consolidated basis for the first quarter, we reported revenue of $734 million, which was down 4% from a year ago. Revenues were lower as a result of a 21% lower average price per gallon of ethanol sold. But all of our key volume-driven metrics increased as a result of the acquisition of 3 ethanol plants during 2013.

Our ethanol production increased 35%, distillers grains productions by 32%, and corn oil production increased by 33%, compared to the first quarter of last year.

Our consolidated operating income for the quarter was $78.3 million, versus $12.7 million a year ago.

In short, our platform is much bigger and margins are much better in 2014 versus 2013.

Next I will touch on some key highlights of each segment's performance. The Ethanol Production Segment generated $66.2 million of operating income, which for this segment is $3 million more operating income in the first quarter than we generated for all of 2013.

Taking a look at slide four of the online presentation, you will see that we generated operating income before depreciation and amortization in the Ethanol Segment of $0.34 per gallon, compared to $0.05 per gallon realized in the first quarter of 2013.

These improved production economics, along with transportation challenges, caused a significant increase in our intersegment eliminations, which are required to defer income recognition until our products are transferred to an outside customer.

The intersegment elimination for gross profit and operating income increased by $22.2 million for the 3 months ended March 31, 2014, compared to the same period in 2013. This was obviously significant to the quarter, and will positively affect future quarters. I will take you through this at a detailed level so we're all clear.

Our Ethanol Production Segment sells all of its production to the Marketing and Distribution Segment. The sales are recorded by the Ethanol Production Segment at prices approximating market and traded as third-party transactions in our segment reporting.

Beginning October 1st of 2013, the intersegment sales occurs as it's produced and transferred into storage tanks located at each respective plant. The finished product is then transported and sold from the Marketing and Distribution Segment to external customers.

So profit is recognized by the Ethanol Production Segment upon the sale to the Marketing and Distribution Segment, but is eliminated from consolidated results until title to the product has transferred to a third party. In most cases, this occurs after delivery of the product at the customer's location.

During the 3 months ended March 31, 2014, finished ethanol inventory levels increased to unusually high levels, primarily due to product that was in transit to external customers as a result of transportation constraints experienced this winter. Again, this has caused a deferral of profit recognition of about $22 million into our inventory accounts.

The timing of recognition of those deferred profits is dependent on future inventory levels as well as ethanol margin. Based on our current forecast, we expect about three-fourths of that deferred profit to be recognized in our consolidated results for the second quarter of 2014.

We generated $41.1 million of non-ethanol operating income for the quarter, which was up from approximately $21.2 million in the first quarter of 2013.

Todd already covered the excellent results of the Marketing and Distribution Segment, which was up $19.5 million over the first quarter of last year.

Corn oil production totaled 50.6 million pounds in the first quarter and generated $7.7 million of operating income, or about $0.035 per gallon of ethanol produced. With all 12 plants producing corn oil, we should see increased total production going forward. As a result, we would expect to see corn oil operating income run closer to the $9 million or $10 million level for the next 2 or 3 quarters, at least.

Interest expense increased approximately $1.7 million in the first quarter of 2014, compared to a year ago, due to the issuance of $120 million of 3.25% convertible notes in September of last year.

Our income tax expense was $26.5 million for the quarter, which was approximately a 38% effective tax rate. We anticipate a similar to slightly lower tax rate for the remainder of 2014.

Earnings before interest, income taxes, depreciation, amortization, or EBITDA, was $94.1 million for the first quarter of 2014. And on a trailing 12-month basis, EBITDA totaled approximately $226 million.

Onto the balance sheet. As expected, with our call for redemption in the first quarter, we triggered conversion of the $90 million of 5.75% senior notes that were originally due 2015, triggered that conversion into equity and issued approximately 6.5 million shares to the holders of those notes.

On slide 7, you can see our term debt as of March 31, 2014, was approximately $33 million higher than one year ago. The increase was mainly due to the financing of the $108 million acquisition of the Fairmont and Wood River plants last November. That was reduced by normal debt repayments that occurred over the past year, of approximately $82 million.

We're often asked why we maintain so much cash and liquidity on the balance sheet. First quarter of 2014 demonstrates our financial strategy in that regard. We used our balance sheet liquidity to lock in significant levels of cash flow hedges against favorable margins. Those hedges required a significant investment of cash security in our margin accounts. That is why you will see a $70 million drawdown of our cash balances during the first quarter, even while we generated a record quarter of profitability.

As our hedges roll off in the second and third quarters, the margin deposits will be returned to us and we should see cash balances and overall liquidity move higher.

I would also like to highlight our leverage ratio shown on page 7. With a strong performance from our ethanol and non-ethanol segments, our ratio of term debt to EBITDA has dropped to 2.3 times and our term debt to total capitalization is now at about 46%.

Over the next few quarters, our balance sheet will continue to strength as we realize the benefits of our growing platform in a favorable margin environment.

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

Thanks, Jerry. So looking out for the next couple of quarters, we wanted to give you some hedge numbers of what our forward book looks like as of last night. We're approximately 80% hedged for the second quarter. The net realized ethanol production margin will be stronger in the second quarter as a reversal of intersegment eliminations, which Jerry discussed, will impact positively on the results.

The Marketing and Distribution Segment will return to more historical levels over the next several quarters, as mentioned.

We've also seen a strengthening margin environment for the third quarter, which developed over the last 30 days or so. We currently have 40% of the third quarter locked away as well.

If you recall over the last several years, we've had no visibility to that part of the forward curve, which we believe point to the continued favorable environment that exists today. Obviously, there's still volatility in the outlook, but 2014 should be a very strong year overall.

Demand for ethanol remains strong. We continue to experience solid gasoline demand, which has been running at the higher end of the 5-year average of 135 billion to 138 billion gallons per year. That is significant, because at a 10% blend, that puts US ethanol demand in the range of 13.5 billion to 13.8 billion gallons.

Exports for 2014, total 152 million gallons so far and keeps us on a potential run rate of 800 million to 1 billion gallons of exports. We have 19% of our production sold for the second quarter and 5% so far sold for the third quarter into export channels. We are seeing interest every day for more offshore demand, so we expect later quarter commitments to start to climb.

I want to take some time to discuss some of the future growth initiatives. Our grain capacity expansion is on track with a target of being completed by the fall harvest. The plant should add additional 12 million bushels of storage in 2014. Our total ending storage capacity will be 43 million bushels by year end. We're also on track to be at least 50 million bushels by the end of 2015.

We believe this plan is a critical component to maximizing the opportunities in our supply chain in the future. Since we now grind over 10 million tons of corn, this storage capacity still only represents a small portion of our overall demand. We will continue to examine the right mix needed. But I can tell you, at this point, we have expanded our processing capacity, we will need additional storage beyond our stated goals outlined to you.

As you saw by the results from the first quarter, the Marketing and Distribution Segment was a significant contributor to the bottom line. Today we have 20 traders working in a variety of different commodities. We continue to search for individuals and teams to come into our well-developed platform to maximize the opportunities that exist within and adjacent to the commodity flows we own.

I would reiterate that over time these businesses will provide more predictable cash flows as they continue to establish themselves in each of the markets we participate in. But for now it remains opportunistic as we grow this segment. We have allocated very little risk and balance sheet capacity to the strategy to date and have been very successful in this structure.

I want to talk a little bit about BioProcess Algae, because often there are a lot of questions on that. We've recently made some changes to the operational structure of that entity. We continue to see solid progress on the technology front, but we felt it was time for Green Plains to assert more control of the day-to-day operations of the business as we embark on our next phase of this project.

First, with regard to the Department of Energy grant, we have produced required on-spec biomass and extracted the required amount of oil from that to meet our initial obligation in the program. We are determining the next steps in whether we continue on with this project or not.

While the initial focus was on providing algae oil for military fuel development, based on the encouraging results, we have found this oil to be very interesting for other fields of chemicals which we own, the results solely for our use. DoE fuels have not been a diversion, as the findings help accelerate other initiatives that can now be developed because of the very encouraging results.

Our focus still remains on the higher-value animal feed and human nutrition markets. We have several partner projects in process, but are subject to nondisclosure agreements. We have several product development efforts, which I can be more specific on for your information. The variety ranges for omega-3-rich powders for human nutrition, extracted [hialaic] oils for fuels and chemicals, high protein powders and high oil powders for feed, and high pigment powders for natural colorings.

All of this product has been produced from our platform. As we mentioned on the last call, feeding trials are underway to determine the performance of the BPA algae as a fishmeal replacement in aqua feeds. Initial results from a recent study with the USDA suggests that BPA biomass performed better than the standard meal. We will hear back more as we get more detailed performance data, and we'll be happy to report that to you.

We're starting on a 2-year plan for BioProcess Algae that will have one of the following outcomes. We're either going to spin the company in one form or another, partner with a large strategic end user, internalize as part of Green Plains, and, as I said from the start, if it's not producing the results we believe will make it profitable, we'll shut it down.

Again, everything we see and believe today is to keep going because we are seeing solid results from the projects, and I am confident that we can achieve profitable product results in the near to medium term from the progress we continue to make.

We are planning to build an integrated autotrophic to heterotrophic system that can move in both directions, depending on the strain and the product we are producing. The CapEx required for this will be between an initial $8 million and $20 million, depending on the size and scope of the project. The initial capital required may either come from the partnership or from new external partners, both commercial and financial. This is under determination.

Once again, we believe the development efforts will determine the cost and the scope of the project. We want to have a clear pathway to profitable operations when we build this project. The key component is to use the sugars we create in the ethanol plant, combined with the expertise and fermentation we possess to combine this into a system that can be very versatile and low-cost, all starting with the original autotrophic systems we've developed.

We'll keep you updated as we step through the next several months and as to where we are with BioProcess Algae.

Our Company has built a solid diversified platform that can produce significant results here at Green Plains when the environment is right. Growth remains a central focus for us. That growth will continue to be around the areas we are confident we can deliver even better results. Growth opportunities may be in adjacent handling and processing businesses that we can apply our management team experience and expertise to that would also diversify our revenues and income streams for Green Plains.

We hope that our shareholders continue to appreciate the value that has been created over the last 6 years. We will not lose focus on our mission of continuing to grow long-term shareholder value. Our plan remains to have zero net debt by the end of 2015, and this is clearly in sight.

Thanks for joining the call today. Now I'll ask Orlando to start the question-and-answer session.

Thank you. (Operator Instructions) We'll pause for just a moment to allow everyone an opportunity to signal for questions. Brett Wong, Piper Jaffray.

Thanks for taking my question, and congratulations on a very nice quarter. Just looking at the current quarter, the second quarter, outside of the deferred profits that are going to benefit the second quarter, you've locked in margins that are better sequentially?

Well, what we're talking about and how we're thinking about it's kind of the net-realized margin. While the margin in the first quarter was in the mid-30s, deducting the 22 million off of the eliminations, then we kind of roll that to the second quarter as a combined entity, sequentially including the eliminations will be better. But the overall segment margin is a little bit lower, but the net of all of it overall will be better. If that makes sense.

Okay, great. Yes. Yes. Thanks. And then looking out into the back half, what margins are you locking in in 3Q? And have you hedged anything for the fourth quarter?

So across the platform in Q3, we're seeing margins in low 20s cents per gallon of EBITDA. And we've seen them a little bit higher and we've also seen them a lot lower even over the last several months.

So up in this range is where we started to lock the margins away. We still have 60% open. We do expect a little bit of eliminations to return in that quarter as well, as the pipeline gets back to normal. But overall, we're starting to see margins, and where we've started to lock away margins was in the mid-20s.

In the fourth quarter, we have very, very little [on] at all. Margins right now are in the low double digits, high single digits. But again, that's still under development. And we've seen those margins pop as high as $0.20 a gallon. But at this point, just because of the new crop rally in corn and a very, very flat ethanol curve out in the forward, we're not seeing any reason today that we would go and lock margins away.

Now, the stock situation from our standpoint, while it got a little bit better today with the demand and with the export program that we're seeing, we don't necessarily believe there'll be a [stock spill] by that time. So we're going to be patient on the fourth quarter, and when opportunities exist, we'll start to lock that away as well.

Thanks. That's very helpful color. And what are your plans for debt pay down as the year progresses?

We have our normal principal payments, which we are always focused on. And beyond that, we'll just have to wait and see what other things come about in terms of sweeps and those type of things that we have from last year. Jerry, you want to comment on that as well?

No, I think that's accurate. We will make our normal payments. Obviously, there will be some sweeps. With higher profitability, there's generally some sweeps, and we'll just continue to manage it. We do expect to see an increase in our cash balances. So I think, again, as we talk about going to a net debt of zero, that's very much in sight. So more likely you'll see a build in cash balance than a significant reduction in debt balance.

I think the key is we've been able to utilize our balance sheet for our hedging programs.

Right.

Obviously some quarters it takes a lot of cash and some quarters it doesn't take a lot of cash. Last quarter, for instance, because we had the larger hedging programs on, it took a significant amount of capital in terms of the maintenance margin. But as we roll through those and get into Q2 and Q3, that maintenance margin isn't as high at all because the margin structure on the spot hasn't done the same thing. And so we don't expect our usage to be as high, and we'll get a big return of capital, which we have already seen during the quarter as we're continuing to build our balances back up.

Okay. And one last one from me. Any thoughts on increasing the dividend or authorizing a share buyback as another use of cash?

No, not at this point. I mean, that is something that if we make that decision, it'll be at the Board level. And what we think the best thing to do is we're still looking at allocating capital for growth opportunities. And while we certainly initiated a dividend last year, let's wait and see what the rest of the year plays out and what opportunities there are around growth. And at that point, I think we can -- we'll make the right decisions for all of the stakeholders at that point.

Great. Thank you very much.

Farha Aslan, Stephens, Incorporated.

Congratulations for a great quarter.

Thank you.

And just going back to BioProcess Algae. What is your ownership of BioProcess Algae now?

We are at about 60% ownership. That ownership rate has been growing over time as we've been injecting cash. We've got a partner that hasn't been participating, so they've been getting diluted. But today we're at about 60%. And as we put more cash in, we'll probably grow above that.

That's helpful. And then just again going back to Brett's question. In terms of the second quarter, you highlighted that margins would be better than what you saw in the first quarter. But in terms of roughly what range would we look for in terms of EBITDA per gallon?

What we said is a net-realized margin when you take into consideration the production segment margin and eliminations. And then you roll that forward to the second quarter, the net-realized margin we expect to be greater than those two netting out. Jerry, you want to comment on any kind of -- in terms of guidance from that perspective?

No, I think that's -- again, on the intersegment eliminations, that's where we're -- we're basing that forecast on a return to more normal inventory levels, as well as profit margin levels. And so that's why we're projecting about three-fourths of that $22 million should return to us in the second quarter.

And so outside of that, what should we expect EBITDA margins will be?

I don't think at this point we guided towards the segment EBITDA margin. Have we, Jim?

No, we haven't. But I think earlier you were answering Brett's question, and you said we're seeing margins in the mid-20s across the second quarter at this point in time. So from where we stand --

I mean, that was -- well, okay. So we start for the third quarter --

Okay. I thought that was --

That was the third quarter. So the --

That was third quarter.

-- margins were -- that is correct. The margins were across the third quarter. So that can kind of give you an indication where we locked in a lot of our second quarter, then you add back the eliminations to that. And so your net-realized margin will be higher overall.

Okay. That's a little bit clearer. And then just in longer term, in terms of the ethanol industry and kind of how you see supply/demand growing in the domestic market, as well as the international market, do you view sort of the domestic market as fairly mature here? And what kind of opportunities do you see in the export market? And how sustainable do you think that export market is for ethanol?

So first, let me comment on the domestic market. While certainly it feels mature, I would say it's not quite there yet. In terms of our initiative as an industry to use E15 as an impetus to get to expanded blends across the US -- I mean, you got to remember, we're not -- we don't have the capability to blend E15 in the United States today broadly, but we do have the ability to blend E11 or E11.5 broadly across the US, using E15 as the way to get there.

So we're starting to see 15 to 20 states have E15 approved. We've got major chains that have gone and started to look at it or have implemented it, like NAPCO did in the southeast. We've seen extensive work being done by many different size of convenient store chains.

And so we do believe, though, that the market will continue to pull product to higher blends because they're capable of doing that, especially [as you've got] the new 2015 fleet rolling off the production line, and you got another 15 million to 17 million new cars coming off that are approved by the EPA, and a lot of them are actually approved by their own manufacturer.

So we think that we're going to work very hard as an industry. And I will say it's a very well-developed cooperation across the industry to work very hard to drive higher blends in the US. So I would say that while the industry may feel mature at [13.5] to [13.8], I would argue that with expanded blends, we'll continue to see better base demand here. If that happens, obviously, then it becomes a very interesting time when the world still needs the ethanol as well and how we price into the world.

So we've seen good demand globally. A lot of it's driven by the price of corn versus the price of sugar and how Brazilian ethanol plays into that calculation. But when you're sitting there on the forward curve at $1.85 to $2 gallon and you're the cheapest molecule in terms of a feedstock for octane as well as for the Clean Air Initiative globally, we think, broadly, we're just tipping the iceberg. We're seeing global growth between 2% and 3% a year, without really any production growth offsetting that.

So overall, we think ethanol plays very well. It's going to be ebb and flow. But I think as long as we continue to grow corn crops in the US and broader crops globally, with sugar prices where they're at, we should remain very, very competitive throughout this year and even into 2015. When we're sitting in 2015 on the curve at $0.50 to $0.80 a gallon under RBOB, which then also puts us very, very competitive against the forward sugar curve.

Thank you. That's helpful. And my final question relates to capital allocation. You've highlighted that debt pay down is a priority. But in terms of M&A is there a focus for Green Plains?

Yes. So while we certainly said net debt zero is a priority that may come in many different ways. So it might come through stronger cash generation and determining how we want to use that capital in terms of actually paying down the debt or keeping a strong cash balance. Either way, our net debt zero is in sight for 2015.

In terms of acquisitions, we are actively seeking growth opportunities. We've been in many processes. Things are expensive, as you can see in the world today. So we're being very patient, finding the right opportunity for our shareholders across many different types of adjacencies and things within our supply chain. I would only say that we are very, very active in many different processes, and we don't know which one will or will not actually come to fruition. But we continue to seek growth opportunities across everything that we do.

Thank you.

Patrick Jobin, Credit Suisse.

Thanks for taking the questions and congrats on the quarter as well. First question, just wanted some more detail on the Marketing and Distribution seasonality comments, just kind of how we think about that segment on a normalized contribution going forward and kind of what the gives-and-takes are for that. And then a follow-up. Thanks.

Yes, no problem. Our typical expectation for that segment of operating income has been kind of between $5 million to $7 million of operating income per quarter. That's our base assumption. The exceptionality of Q1 is, as we mentioned, is not repeatable in Q2. It was just very unique situations where because of the pipeline we always have going into BlendStar in a market that [explodes] higher, we get to take advantage of that in terms of the ability to get product to our customers at the market, but albeit, we always keep a baseline of product in the pipeline that we felt -- we bulk that up a little to make sure our customers don't run out of product, because in a lot of markets they were. And that never happened to anybody that we were doing business with.

So from the standpoint of going forward, I would say still be in that $5 million to $7 million range and we will have some exceptional quarters. And the rest of them will be pretty well standard to what we're thinking.

Over time, we think that we'll start to -- the volatility of the numbers will start to be much more standardized. But at this point -- we had some good quarters last year as well, like you saw, but then we returned to a normalized quarter very quickly. So it's all really depending on what the opportunity is in the market that quarter, so.

Okay. Last question, just want some more color on the transportation issues. I think you highlighted that it drove some of that deferral of profits, just kind of what the constraints were and how they're being alleviated now. Thanks.

Yes. So when we ship product, sometime the product -- sometimes title transfers at the point of shipment at our plant, and we can recognize the profit. Sometimes we have a large [delivered book] on where we can't recognize the profit until it gets to their destination.

Typically, we've been managing through that. This was just a quarter where because of the railroad congestion, we had a very large in-transit inventory that was not at the destination yet to realize that profit. And so while it was ethanol probably produced in the last 5 days of the quarter, loaded on a railcar on its way to somewhere, where sometimes it gets there very quickly, sometimes it's sold FOB. But when it's sold delivered, this was one of those quarters where because of the congestion, it just slowed everything down, and it just brought a very larger -- there were larger inventory in transit number than we had expected.

Looking forward -- and the other thing, too, that, from our standpoint as a company, which is why we ran as hard as we did -- when you think about the capacity we ran at, the reductions weren't due to the fact that we didn't have transportation. In fact, a lot of the cars we got back from our oil program last year made our fleet right-sized, where we really never slowed down for anything other than making export spec or having our Fergus Falls plant shutdown because of the small explosion that they had.

Other than that, our fleet was right-sized. We had a lot of product on the rails, and because of that, our inventories and our transit went up. And we don't -- so when we get to this quarter, we expect that to be more normalized back to where it has been, which then you get the return of those -- you get to recognize those profits back.

Okay. That makes sense. And then just lastly, the railcar initiative, I assume all of your cars are being used for your own production, given your capacity utilization?

We still have a couple hundred being used in oil service. And as we're starting to see the railroad catch up a little bit, and depending on what we want to do with our fleet, we may have excess capacity again. We may [flux] some cars back up there. But at this point, we only have a couple hundred cars in that capacity. But it is still throwing off a nice return for us.

Great. Thanks so much.

Laurence Alexander, Jefferies.

Couple of questions. To the extent that you get to the zero net debt, does that materially change your hedging opportunities or how far out you can lock in margin? Or are there no impact there?

I think naturally, because of the size and the scope of our platform, you're getting a little more exposure to the nearby markets, just because when you put out a large forward hedge book, you have to be very cognizant of the fact. You have to make the margin call, if margins do something like they did in the first quarter.

So we actually reach a point where, when we run our models, we say, if it moves a certain amount of standard deviations, we will start to stress the balance sheet. And we're not willing to go that far.

So naturally, because of the size and scope, going from 330 million gallons 5 years ago to a billion-plus gallons today, you're getting more exposure to that. From the standpoint of changing our strategy, so we look at things in much longer periods than one quarter at a time. And so when we go back 5 years and we look at it, the 5-year average realized margin for Green Plains is about $0.16 a gallon. The average daily spot market, and this is including the drought, so we take into consideration the drought, the daily average spot market that we would have realized would be $0.17 a gallon, if we were in a spot every single day, including the drought and the other stressed years.

The volatility, the standard deviation of hedging was 9% and the standard deviation of staying uncovered was 18%. So for twice the amount of risk, we would have realized $0.01 more over a 5-year period.

Well, certainly, we sometimes sit on the outside and get criticized for our hedging programs during a quarter where margins go exceptionally high, we are as often applauded during a margin -- during a quarter when margins are under pressure, yet our forward hedge book worked well for us.

So the absolute risk of staying unhedged over a long period of time doesn't pay for the return. But, obviously, that doesn't help in the quarters where margins absolutely blow out to the top side. But again, we're not going to change the strategy of the Company and what we built this on, which is lowering volatility for our investors, giving you predictable and sustainable cash flows, which I think we've proven over 6 years that we've been able to do that.

Then when you were a much smaller company, you also had a fairly low tolerance for value-at-risk, if memory serves. Has that changed or does that, by necessity, have to change with scale?

You know your VaR is going up with scale, but it's not in terms of -- when we look at years ago when we were 330 million gallons, we actually started the company with a $250,000 daily VaR. Our VaR average as a company which is 3 times the size, is in the range of about $1 million daily VaR on average. Some days it goes a little bit higher, some days it's a little bit lower.

So when you look at how we scaled the company, we still have the absolute same philosophy of not taking directional risk, not taking flat-price risk, and really just locking the margin away, and that hasn't changed at all, even including the addition of all of our merchant programs has not added a significant amount of VaR, because most of those programs are very short-dated, back-to-back margin trades that are available to us. And so we have not changed that philosophy at all.

Okay. And then two, hopefully quick ones. On the BioProcess Algae side, as you've looked at the difference between the heterotrophic and autotrophic systems, is the impact on product quality or is it on the CapEx costs of the potential expansions? And how do you balance those? And then secondly --

So the great thing about --

-- just think --

Sorry. Go ahead, finish off.

And then just lastly, on the -- as you think longer term about the mix of the business, as you layer in potential adjacencies and M&A, is the center of gravity going to be moving more towards being a animal nutrition or human nutrition platform with an ethanol engine, so-to-speak, rather than being an ethanol business with other co-products?

Right.

I mean, philosophically. Or do you still view yourselves very much as centered around the ethanol industry?

Okay, so I'll answer those. The first answer to your question is when we talk about heterotrophic, it's a combined system that starts the algae in an autotrophic sense, goes through the mixotrophic process, which you add sugar into the reactors in the evenings to boost yield. And then our heterotrophic system is a very fast-stressing system, where you can take the cell and really increase the lipid content very quickly.

So we're not starting in the dark. We're finishing in the dark, so it's a finishing system which has, we believe, is the right formula. It's low-cost and you can get a lot of product out of -- in terms of product, as we used to say, tons per acre.

So we've seen that as a bit of a, we'll say, quote/unquote, supercharging the yields in a very quick-stressed environment, which then pops out the capability to produce high lipids.

The interesting thing about it is that we've actually been able to start heterotrophically and finish autotrophically for higher quality products as well. So that's what we've learned.

And by doing the DoE experiments, we've actually learned how to use the system for all of our human nutrition, animal feed needs as well. So by supercharging yields in a quick-stress environment, compared to the normal fermentation times, we believe that will drive CapEx lower, get us to a much higher ton per acre at a lower CapEx, and allow us to compete very well.

So when we talk about a $6 million to $8 million build, that will give us 3 tons to 4 tons per day of capacity, and those tons are profitable in terms of the cost structure to do that. So it's really supercharging and stressing the yield. Where it used to take, let's say it would take $1 million an acre to build a reactor, you might have -- you'll have less than that per acre, but higher yield per acre.

So when we look at that, we believe that when we kind of lay it all down together, the autotrophic, the heterotrophic system, stressing both directions and then developing the product through centrifuge and drying technology, and now in terms of now getting to the oil of it as well, in terms of for products that need that, we believe is the right formula, which is why we want to now start to look at the allocation of more capital, both internally and externally.

In terms of the M&A discussion that -- your M&A question you had, our center of gravity will remain around commodity processing businesses. Whether that's processing corn into ethanol, whether that's looking at adjacent opportunities to process other agricultural products into finished products, we are grounded in that. We understand the process very well. We understand the risk management. That could be in the feed markets. That could be in the animal nutrition markets. But it is still going to be processing a base commodity into a finished product.

And I would say that our goal is to continue to lower the beta of the company by looking at adjacent processing opportunities which will give you more steady and predictable cash flows over time while using the Ethanol Segment certainly as a growth engine as well and as a cash flow engine as well, understanding that that brings more volatility in it.

So we will focus on the algae business as well, because that is another -- or the -- when we look at the algae business, that's another taking a base commodity and producing it into something else. But I would say it won't be the center of our universe unless some magnificent breakthrough comes out and we see that the opportunity is great. But at that point, we'll have to make the decision on what to do with that company.

Understood. Thank you.

Craig Irwin, Wedbush.

Good morning, and congratulations on the solid quarter. So I wanted to ask about your merchant trading, if maybe you could share with us a little bit more detail. So the 14.5 in profit contribution in the quarter is a really solid number. I know you said that that's unlikely to repeat. But I was hoping you could discuss the risk management there beyond just the VaR discussion.

Some investors out there are cautious that when you have trading operations, that they can go both into the black, as well as into the red. But I know that you have a specific discipline and focus on short-term opportunities. Was hoping you could give us some color about the risk management and how you would avoid potential loss on that operations.

Yes. So when you go back into -- when we look at the terminal business and you go back into late December, and the market, at that point, was sitting in a carry position in ethanol. And so you had the opportunity to fill your pipeline up and earn a return against that capital invested. As long as you had the money and the capital to invest in inventory, there's a very, very low risk utilization of our asset base.

What happened then, if you go into -- start go into the first quarter and then into second quarter, you saw by -- what we looked at is, when we looked at that opportunity to utilize our system, we were able to buy product and earn a return on the system. But beyond that, we also saw that stocks were getting tighter and tighter and tighter, demand was getting better and better, and that this was a unsustainable position for the market to be in to be at such a -- give you an opportunity to earn a return.

And so what happened is, we obviously took the opportunity to put inventory into the pipeline against the carry, market went highly inverted at that point, we were able to sell out that inventory, lift our hedges, and earn a very large return. And the only reason we were able to do that is because we possessed this large inventory asset position that we own through BlendStar. That was the first way.

And by the way, the VaR associated with that was extremely low, because all we were doing is treating it as -- we were basically reverse trading our fuel terminals, much like we thought about the grain business in the past, and utilizing those to earn the return on space, and then, at that point -- or return on the pipeline. At that point, we saw the market systematically change on our behalf. So that was the first time.

But again, very, very low risk allocation, much like a normal hedge position.

Same thing with natural gas, we saw the same opportunity there. We were -- we saw the demand on the forward curve. We had a small injection position against the forward crush, and we were able to utilize that injection position when the market went to $50 or $100 in MMBtu, we sold out that inventory position and made a great return in the Market and Distribution Segment.

Again, extremely low-risk allocation, very little balance sheet allocation at all. But it was just one of those opportunities that we were able to see the forward curve in ethanol, utilize our adjacencies on 7 pipelines and -- or actually, we're at more like 10 pipelines, 5 to 7 major utilities. We have positions in there. We're in the daily market every day. And because of that, we are seeing opportunities to enhance our opportunity within the segment.

Again, started out with a very small injection position against the carry, and you saw what happened in the first quarter. So it was literally almost a mirrored image. Ethanol and natural gas had almost the same exact thing happen at the same time, where the curve became highly inverted and the spot markets were extremely high.

Beyond that, much of it was just in the normalized trade that we do where occasionally we see opportunities to -- when we see supply dislocations or what we see is a mispricing between a point A and point B to earn a return on a back-to-back trade. And about a quarter of that came from those opportunities as well.

So overall, those opportunities do not exist today. So we took advantage of some of those, what we would say mispricings, utilizing the assets that we own, we take advantage of it, and, from our standpoint, we don't have much of that on it at all at this point. So very little risk allocated to that. Some of it was timing issues where you may see a little bit of a, on the last day of the quarter, markets continue to make significant highs, and some of that came back out of the second quarter.

But overall, for the year, we'll maintain much more towards a normal opportunity, unless something else comes up and we're able to utilize our system again. But today, the positions we have do not mirror anything that we had on in Q1, because the market opportunity isn't paying you to do that.

Thank you for that. My second question about Brazil. I had the opportunity recently to meet with some Brazilian ethanol producers, and they're pretty bullish about the very back end of 2014 and 2015. Looking at the increasing probability the price controls on gasoline are likely to be removed -- we don't know if they come off in one shot or if they're removed in -- if it's removed in increments. But a lot of them see the price controls that are in place down there as unsustainable. And that should create a pretty interesting demand environment in Brazil for ethanol, above and beyond what's actually being blended right now.

Can you discuss for us whether or not this is consistent with what you see and how you would see this potentially impact your business if it did play out this way in the back end of 2014 or early 2015?

We haven't had any direct discussions, except to say that we've been curious on when price controls would eventually have to get lifted down there because of the red ink being printed in terms of the gasoline being imported. And so if that were to happen, we hopefully will see Brazil go to a 27.5% blend this summer, and then, from there, determine on what's needed next.

So from that standpoint, obviously, it would be a very interesting market dynamic if Brazil was short ethanol and we saw expanded blends in the US. We are very cheap, from the standpoint on a forward curve in terms of the ethanol blend margin domestically.

But also internationally, we continue to see Canada increase their demand. We continue to see the Middle East increase their demand, Africa, Asia. We're seeing demand from everywhere. And now even Mexico trying ethanol out as well. We've seen some interest from there as well, that for the first time in a long time they're starting to pop up. And then, obviously, China is always the wildcard.

So we would believe that if that were to happen, it will definitely have a structural shift in the price curves overall as a relation to RBOB.

Great. Thanks for taking my questions.

Paul Resnik, Uncommon Equities.

Just a couple of questions. You had started a proprietary commodity trading operation?

Well, we have -- Green Plains [has a] management company, that is correct, that is managing external capital as outlined in the last quarter call.

And how's that progressing?

They're still managing the same amount of capital. They had a good first quarter to kick off the year and have a lot of discussions taking place with potential interested parties.

At Fergus Falls, was Fergus Falls delivering wet distillers grain or is? Is that what they're doing? Or what's the story there?

Yes. So we started the plant right back up. We have, obviously, changed our focus from delivering dry product to wet product. And except for a couple of days here and there where we build up too much wet product, the plant's been running at almost full capacity and while the construction is taking place to fix the dryer building.

What are the economics of dry versus wet or wet versus dry, as it were?

Well, the economics, it just depends on the area where you're at. I mean, basically, in Nebraska, we can sell wet at the same value or even better sometimes than dry. Just depends in terms of the areas that we're at. We don't break out the economics of individual plants in terms of what we get for the realized price of our [corn] products.

I'll just chime in here. It's worth noting that we do have business interruption insurance overall on that situation. So we really shouldn't see a material impact to our operations from that plant.

And lastly, did you comment -- did you talk a little bit about the potential for blends like E11 or E12? And have you seen anything, any of that happening?

No, we don't think E11 will be the blend. We think E15 will be the impetus to get to a national average of E11.

I see. I see.

So a station will sell --

I misunderstood.

-- E15, but the national average will go to E11, because you're not capable of producing E15 at 100% across the US anyways.

Right. Thank you very much.

And there are no further questions. I'll turn the conference back over to Todd Becker for any additional or closing remarks.

Just want to thank everybody for coming onto the call today. Obviously, we're excited about 2014. We think all of the hard work that we've done over the last 5 or 6 years is certainly showing the capability of the platform, and we appreciate you sticking with us over that time as well. Thank you very much.

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