Green Plains Inc (GPRE) 2014 Q2 法說會逐字稿

Good day, everyone and welcome to the Green Plains second quarter 2014 financial results conference call. Today's conference is being recorded. For opening remarks and introductions, I will turn the call over to Mr. Jim Stark. Please go ahead, sir.

Thanks, Debbie. Good morning and welcome to our Second Quarter 2014 Earnings Conference Call.

On the call today are Todd Becker, 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. 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 & 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 these 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 joining our call this morning.

2014 is shaping up to be a record year. The second quarter was also our second best quarter in our history and puts us in an excellent position to end 2014 very strong. In the current market, Green Plains should report stronger 2014 second half results, more than the $1.88 earnings per share reported in the first half of 2014.

For the second quarter, we generated net income of $32.3 million or $0.82 a share. Our ethanol production reached a record 242 million gallons or approximately 95% of our expected daily average production capacity for the quarter. We also produced a record amount of distillers grains totaling 653,000 tons in the second quarter and also produced a record amount of corn oil at 58 million pounds. Overall, we generated $66 million in total segment operating income before corporate costs. It includes a nearly $20 million of additional income from inter-segment eliminations that we discussed with you during the first quarter conference call.

If you remember, we pointed to net realized margins after eliminations, and for now this impact is generally behind us as inventories and in-transit volumes have adjusted back to more normal levels as fleet velocities made progress this quarter. So net realized ethanol margins are really a combination of ethanol segment operating income and the inter-segment eliminations and per gallon, we're actually similar on that basis. Both Q1 and Q2 were approximately $0.25 per gallon, when looking at it this way.

We always had inventories and have inventories in in-transit gallons. The end of the first quarter was filled with both margin volatility and transportation issues, which led to much larger swings than normal. While we don't expect this to be the norm, it will not be the last time we run into this issue. Jerry will give you a detailed look at this in his presentation, as well.

We made good progress on several fronts in the quarter with our 12 million bushel grain expansion on track to be ready for the sizable corn crop that we expect to be harvested this fall. We expect to have over 43 million bushels of storage as a company for this crop year. The plan is to continue to expand in this area as discussed previously.

We were successful in completing the refinancing of five ethanol plant term loans in the second quarter as well. The new agency rated credit facility provides Green Plains with a platform to refinance other ethanol plant term loans as they mature and also provides refinancing vehicle for other potential acquisitions and/or initiatives we may have in the future. The refinancing, along with the cash generation, we are experiencing puts our balance sheet in the best position in our history. Our long-term, often applauded, often criticized risk management philosophy, is one of the reasons Green Plains was able to clear the market with an offering like this. As illustrated in the past over the five-year operating period, we cut margin volatility in half at the long-term cost of less than $0.02 per gallon.

Now I'll turn the call over to Jerry for financial performance and I'll come back to close the call with some additional Company and industry comments.

Thanks Todd and good morning, everybody.

We're pleased to report a solid second quarter with net income of $32.3 million or $0.82 per diluted share compared to $6 million or $0.19 per share last year. We reported consolidated revenues of $838 million in the second quarter, which was up 4% from a year ago. Volumes sold for each of our primary commodities increased substantially, while average prices realize declined. For example, volumes of ethanol sold increased 26% to over 303 million gallons, while the average realized price per gallon was 22% lower than last year's second quarter.

The acquisitions of the plants at Atkinson, Fairmont and Wood River accounted for the majority of the increase in ethanol volumes year-over-year and it was also the primary reason for a 35% increase in distillers grains production and a 47% increase in corn oil production compared to the second quarter of last year.

Our consolidated operating income for the quarter was $58.9 million versus $18.6 million a year ago, as a result of these higher production levels and overall better margin environment in the ethanol industry.

In our segment results, the ethanol production segment generated $30.1 million of operating income for the second quarter compared with $7 million last year. In addition, our inter-segment eliminations turned around as expected, contributing about $19.8 million of additional operating income to the quarter. As we discussed on the first quarter call, we anticipated about 75% of the $22 million deferred profit in the inter-segment eliminations to turn around and be realized in the second quarter. Our marketing and logistics group was able to do a little better than that as we managed our ethanol inventories down to close out the quarter.

On Page 4 of the presentation materials, we've included some additional information on our realized ethanol production margins. When you focus on ethanol production sold externally, you will note that we sold 8 million gallons less than produced in Q1 and 12 million gallons more than we produced in Q2. This inventory build and then subsequent liquidation, which was caused by transportation constraints earlier in the year, caused reported margins in the ethanol group to fluctuate between the first and second quarters. But this was then offset by inter-segment eliminations. As Todd said, putting the two quarters together, you see a relatively consistent realized margin for volumes sold to external customers of $0.25 to $0.26 per gallon for the first half of 2014.

In our other segments, we generated $16.5 million of non-ethanol operating income for the quarter, which was down $800,000 from the second quarter of 2013. We've reported increases of $3 million in operating income for corn oil production and $1 million increase in the agri business segment offset by a decline in the marketing and distribution segment year-over-year. Marketing and distribution's lower performance is primarily related to a decline in our crude oil transportation activity in 2014 versus 2013, as nearly all of our tanker cars have been returned to ethanol service. Given the performance in the first quarter of 2014, the marketing and distribution segment has had a very strong first half.

Interest expense increased approximately $1.9 million in the second quarter of 2014 compared to a year ago due to higher average debt balances outstanding. Our income tax expense was $17.8 million for the quarter, which was approximately a 35.5% effective tax rate for the quarter. We anticipate our tax rate to be around 37% for the remainder of 2014.

One item to highlight is that we changed how we account for the [3.25%] convertible notes in our diluted earnings per share calculation. In May, we received shareholder approval to allow for flexible settlement in cash, shares of stock or a combination of each for the conversion of these notes. So beginning this quarter, we adopted the treasury stock method based on our expected use of cash to settle the principal balance of these as they come due. This will simplify our diluted earnings per share calculation going forward and generally result in reduced weighted average shares outstanding. Our diluted share count was approximately 39.4 million for the second quarter, and the share count will fluctuate based on the average share price, but should remain around 40 million shares on a diluted basis for the rest of the year.

Earnings before interest, income taxes, depreciation and amortization or EBITDA was $74.5 million for the second quarter and on a trailing 12-month basis, EBITDA totaled approximately $270 million.

As Todd mentioned earlier, our balance sheet is in great shape. On Slide 7, you can see our net term debt as of June 30 was approximately $115 million less than one year ago. Over the past four quarters, we've invested approximately $130 million in acquisitions and another $40 million in capital expenditures, while reducing net term debt by $115 million. Our total cash and equivalents is nearly $375 million at the end of the second quarter.

We achieved a significant milestone in the quarter with the refinancing of five ethanol plant term loans with a $225 million term loan B transaction led by BMO Capital Markets and BNP Paribas. Transaction, refinanced approximately $191 million of debt at the subsidiary level and enabled the release of excess working capital and trapped earnings in these subsidiaries of over $100 million up to the parent. In addition, the new structure, which is secured by six of the Company's ethanol plants, reduces our aggregate minimum required principal payments by nearly $30 million annually, so less than $0.04 per gallon. The facility also frees up future cash flows to the parent and extends the average maturity of the Company's debt portfolio from 2.9 years to 5.4 years.

The term loan received a double B plus, B2 rating from S&P and Moody's respectively and was very well received by the market. Given the market response and the positive impact the Company's performance will have to our overall credit profile, we anticipate expanding the facility at advantageous interest rates to refinance some or possibly all of our remaining subsidiary facilities in the months ahead. With this refinancing and the strength of our operating results, we've reduced our term debt to total capitalization to 41% and posted a leverage ratio of 1.9 times our trailing 12-months EBITDA. We expect to continue to experience solid improvement in our ratios and remain on target to reach zero net debt in 2015, absent a significant acquisition.

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

Thanks, Jerry.

So, we are approximately 90% hedged for the third quarter and 25% for the fourth quarter, but let me give you a bit of perspective on the forward margin movement that we just came out of the second quarter, so you can get perspective.

On the first day of the second quarter, when we looked out the curve, Q3 margins were just $0.11 per gallon, and Q4 margins were less than a nickel. We are in a production increasing and stocks increasing environment. We certainly do not believe coming into driving season that this was going to hold. By May, margins expanded in the low 20s and by July in the low 30s for the third quarter.

We have to ultimately make a decision and want to move back into lock margins away and we remain very patient during this process, which is why we can give you positive guidance for the last half of the year after coming off the best two quarters in our history.

The forward cost remains and continues to remain strong because of ethanol fundamentals, which are solid. Domestic gasoline demand continues to run above the five-year average, and consequently the blending of ethanol continues to be stronger than a year ago. The ethanol discount, the wholesale gasoline remains significant and both domestic and export demand is robust. After a low in new export interest for the third quarter, we have now seen a significant pick up in export demand for the fourth quarter of this year and the first quarter of 2015. We have seen new interest in the Middle East, Brazil and even India in addition to the normal channels such as Canada. With that said, we have sold up to 16% of our fourth quarter and 14% of our first quarter 2015 production for export depending on executions into export channels and continue to work very hard to provide backing to exporters for more overseas business.

Much like late last year and early this year, which is the last time we indicated to you our export sales volumes, we believe this environment will lead to a continuing expanded margin structure. With the combination of export demand and potential winter rail delays, it can make for another interesting season during Q4 and Q1.

So in summary to this discussion, we locked in Q3 when margins expanded to a point that made sense for us to make this decision. We are being more patient for Q4 and Q1 margins as fundamentals seem to be in our favor to take a step back and assess when to pull the trigger. At this point, nothing points to a need to be in a hurry. Any slowdown in the rail fleet velocities in the US will lead to additional tightness in the overall stock situation, which will lead to a better margin environment. We expect this will lead to a strong last half overall as discussed.

I want to spend a moment on distillers grains since this has been an area of interest for many of you. While we have seen the price of per ton pull back over the last few months, we have seen an increase in usage of DDGs, our distillers grains and livestock feed rations in the US as a result of the lower price. Interestingly enough, while the contribution to our margins has fallen from the decrease in distillers' prices, the corresponding drop in corn and natural gas prices along with the strength in ethanol is actually lead to an expanded margin environment all since the Chinese market seems to have closed to the US product.

We are pleased to announce the acquisition of Supreme Cattle Feeders in June. We believe that Supreme is a great adjacent business for us, which provides us more insight into the cattle feeding business for which nearly 67% of the distillers sold by the US ethanol industry goes into either beef or dairy cattle. At the end of June, Supreme had approximately 50,000 head of cattle on feed which were mostly customer cattle. We believe this is an excellent adjacent business for the Company and its shareholders. Just the insights gained from the rational inclusions this quarter during the drop in the distillers prices helped the Company make better decisions overall. There are many similarities to the ethanol model, and we have been able to very quickly integrate this business into the Company.

The agribusiness segment this quarter included a small bump in operating income from this new business. As we transition from customer cattle to company cattle, we expect a continued contribution to operating income this year. While this is a business we'd like to expand, it is not our core focus. Green Plains is an ethanol producer and we continue to look for opportunities to expand ethanol production and ethanol distribution or other parts of our value train that bring additional revenue and income streams to the bottom line.

I just give you a quick update on the BioProcess Algae venture. Since we have completed our initial obligation to the DOE program, we have continued to meet the Department of Energy milestones at each step. We are evaluating whether continued involvement will accelerate our commercial development as well. As we mentioned on the last call, the focus of the work with DOE was to provide algae oil for military fuel development and encouraging results also translate to an acceleration of very interesting opportunities for other oil-based opportunities in chemical and Omega-3 applications. We are in final planning stages for the new expansion of production capacity in order to produce products that are in demand.

We have had several development efforts with end-use demand, most recently around our EPA strain to be included in human nutrition products with good result. We need to be able to produce products under current GMP or Good Manufacturing Practices for human consumption. So we are focused on getting approval for that. We have also efforts for our products to be certified for food and feed products which we are working on as well.

So we continue to focus on long-term shareholder value, and we still firmly believe there is significant growth available for Green Plains from the platform we have built due to benefit for all of our stakeholders. The platform continues to generate free cash flows, and we continue to be good stewards of your capital.

With that, I'll close my comments and then we'll open up the call for questions. So Debbie, let's get started.

(Operator Instructions) Farha Aslam, Stephens.

Quick questions on production. In terms of Green Plains, do you anticipate that this 95% run rate is sustainable going into the second half of the year, or should we back -- can you run at a 100% capacity?

I think right now on paper, we're running higher than that. So we're pushing towards full capacity or close to 1 billion gallons run rate. In terms of kind of the go forward, so we're pushing towards that 250 million gallons a quarter. So we're trying to increase that even more.

Okay. And then in terms of the industry, what do you think the industry's sustainable kind of run rate is at this point? Can we stay at this kind of 14.5 billion gallons to [15 billion gallons]?

We were in the sweet spot of kind of rail movement and capacity and with really no significant major downtime for maintenance, which is what we saw in the second quarter of the year as we saw production volumes go down.

As the season continues and we get towards new crop again, I mean, we will start to continue to see -- we will start to see maintenance turnarounds again impact weekly production. So I think overall, between maintenance and potential winter issues around rail movements that could happen again this year, I'm not sure we can maintain [950,000 barrels], we've averaged [911,000 barrels] since a year ago or since October of last year. And if you kind of look over that whole time period, we're probably closer to a [911,000 barrels to 925,000 barrels] sustainable run rate, much more than [950,000 barrels to 960,000 barrels] every single week.

And then when we look at additional ethanol capacity coming online, do you anticipate any new plants to be commenced given the market environment we're seeing?

In terms of built capacity already?

No, new capacity coming online. How much do you think you can see incremental capacity creep in existing facilities and do you anticipate any new facilities for the industry?

Okay. So, I'll answer three different things here. So the first thing is, I don't anticipate anybody is going to build a new facility. I think that there is still couple of facilities that could come online, couple of hundred million gallons. Potentially, we know that one Indiana facility is coming back online and I think there is still one in Nebraska that could probably come back online fully at some point. And then beyond that, capacity creep at this point, because you start to bump up against your baseline. It's very difficult, unless you want to fully just make an export gallon and then you could push a little bit harder, but still at this point, we don't see significant capacity creep to the upside from these levels.

Great. And my final question is just on the export markets. How many gallons do you think the US is going to export through this year in totality and any color on outlook for next year?

I think, we're still going to push between that 800 million gallons and 1 billion gallons unless we see something significantly different than what we see today in the fourth quarter. The third quarter, we didn't see as robust interest as we saw in Q1 and Q2 of the year, but we are starting to see the real big pick up in Q4 and Q1 of next year. So I think we're still on that 800 million gallons to 1 billion gallons of export.

I think when you look at potentially 2015, you can see that same thing happen as ethanol continues to compete very well as a molecule globally. More importantly, we have a potential for this dry weather to continue in Brazil. I think that's something we have to watch very closely as it could become a real problem, if we don't get some moisture down there of having to back-to-back potential issues down there, which then is obviously favorable as well from a pricing standpoint in the world market for US ethanol.

So I think when you look at it and based on the current curve and based on the current market, especially the forward curve in ethanol, we are highly competitive in the world all the way through 2015. So, we could see another 800 million gallon to 1 billion gallon, potentially more than that for 2015 as well as long as everything else holds.

Great. My last question is on a spot basis, where would GPRE's EBITDA margins be right now?

On an absolute nearby spot market, in today you're above $0.40 a gallon.

Michael Cox, Piper Jaffray.

I don't want to -- I guess, dwell too much on this, but as you look at the 2Q realized margins, could you speak -- I guess, provide a little more color as to how the movement of inventory moved that margin around from Q1 to Q2?

Yes. I mean Michael, we always carry inventories. So I mean, it's not like we had a significant inventory build in our in-transit or in inventories. What happened was, because of the way that the accounting works on when title transfers depending on how the sales book looks, it could impact profitability between quarters and it always has, but it never showed up in a very large way in the inter-segment elimination, because of the way the Company was set up in the past and the way the Company marketed ethanol in the past.

So what you saw now is because of the slowdown in rail movement and the volatility sometimes in the spot versus next month's margin structure or next quarter's margin structure, sometimes you'll see an impact like this. It's been happening any ways. You just haven't seen the large numbers, because they've been up in the ethanol segment. That's why we said at the end of last quarter, you need to add ethanol production plus inter-segment eliminations and that will get you a net realized margin, and we said, most of that will come back to second quarter to give you a net realized margins. So, when we locked in first quarter margins, our goal was to lock in the mid 20s for the whole first half margins for reach quarter and we are able to do that and it was just a function of when -- if you ship very faster, you ship earlier, you ship late depending in the quarter when things land. If you land before the end of the quarter, it will be counted in this quarter, if you land at the first week of next quarter, it comes to next quarter. And that's really where we saw the big volatility because we couldn't adequately predict rail movements because of the issues around US railroads and the carriers and what they were doing. Typically we can predict when things are going to arrive, when title can transfer, and when we can count them in earnings. And this was just a much more volatile end of a quarter that we couldn't predict that and that's where we had things moving between quarters, but they always do anyways, they were just more pronounced.

Okay, that's very helpful. And you commented on removing some of the sub-debt or moving towards a model like that. How would that change your flexibility with your cash and the flow of cash to corporate and your ability to use that cash in different ways?

Yes. Michael, this is Jerry. With the term loan B, we have an awful lot of flexibility of moving cash up to the parent company. It's a 1% amortization and then we have an excess cash flows sweep and once we satisfy that, everything else can move up to the parent company level versus the old subsidiary financing involved working capital covenants and other restrictions that basically cause us to get a lot of cash strapped down in those subsidiaries. So we've seen a pretty dramatic shift just on the plants that we've done so far and would expect an additional amount of flexibility where basically that cash is sitting in the corporate treasury rather than in the subsidiaries' treasury gives us a lot more flexibility as a whole.

Okay, that's helpful. And just last question on, you had commented, Todd, on DDGs and obviously we've seen corn prices come under pressure and as a result we would expect DDGs to come under pressure as well. But as that situation calms down and potentially gets resolved, where would you see DDG pricing trending over the next six or nine months?

It really comes down to whether we can open that Chinese market back up or not or whether we find a new market for our products, which we've seen another markets step in at these price levels and these relationships to corn. So, we saw a significant drop and we have to work through that and some areas below 100% the value of corn and even lower than that. When the Chinese market was robust and we had that demand and predictable demand, then DDGs were trading at 120% to 140% the price of corn just depending on the spot.

So I think we've stabilized. I think as, if there is any uplift in the corn market, I think you'll see significant coverage happen in the distillers market. I just don't think the market is very worried as corn continues to make new lows that distillers are going to move in opposite direction of that today. Most importantly though, I think the market understood the impact of distillers. So a $50 drop in distillers is a $0.15 a gallon hit into the margin structure with natural gas dropping $1. That's a $0.03 gain and then the rest of which is made up of corn going down and methanol remaining stable. So consequently for the ethanol industry, we work right through that and margins have since actually expanded since that overall -- since the Chinese, I would say quote-unquote, embargo of our product.

Laurence Alexander, Jefferies.

I wanted to touch on two things. First the studies that you're doing for the Algae JV, are you expanding the scope of the studies or are there other reasons why it's taken as long as it has? Are there any end-markets or applications that you have already crossed off?

We're still focused squarely on human nutrition and animal feed. We do have some applications in chemicals that we think we can, we can get to as well. I mean we can all make the same -- it's not hard to make that same oil molecule. And so a lot of [it was equipment] and we've had to get our dryers back. Some of it has been centrifuges. We've had to get order new centrifuges for size and scope and scale and as really just long lead time some of the equipment and CapEx that we needed to do.

And during that time, what we've done is we've done work with other companies in Omega-3 applications, EPA applications, pigment applications, human nutrition applications, animal feed applications and we're still focused on all of that. What we're really focused on now is supercharging our yields through expanded use of our autotrophic, heterotrophic and mesotrophic reactors and we're designing right now the kind of the final phases of the next CapEx, which we think -- our goal is to break ground somewhere in the next 60 days on this project and be completed with this new next step-up of production sometime late second quarter of 2015.

So nothing is telling us to stop just yet. But we would like to have some kind of joint ventures/JDAs/product deal inked prior to breaking ground, if we can get that done. But part of it is being hindered by the fact that we need to be GMP certified in order to get back in human nutrition products or human application products and that's where we're working on very hard right now to get that done through the process that we have.

And then if you do have -- if the industry can sustain several more quarters of comparable margins, what would you like to flex or lever the cash flow into in terms of changing the footprint of the Company or the product mix?

As we indicated to you, we should sustain several more quarters of these margins because we indicated that the margin structure is better than we saw in the first half. So that's the first point. Second point is at this point, this is our first real quarter that we've been able to get a good view on free cash and available cash after investing a lot into our hedging programs and margin calls after freeing up capital from our term loan B, we've finally been able to now at this point see a much stronger corporate cash balance and a much stronger company cash balance.

With that said, we are not on any massive changing event in terms of the company strategy. Right now, our Company strategy is to do as well as we can with what we have today. I would say that on the acquisition front, there has been interesting things that have crossed our path, but nothing that I would say we would want to make any kind of significant investment in at this point. So we're steady as she goes on cash generation, we're steady as she goes on the business. If we see adjacencies around our supply chain, we've always said we will invest their whether it's more grain storage or terminals or potentially usage of our product. But there is no significant event that I would say changes the focus of this Company other than strong cash generation for our shareholders today and a continued strengthening of the balance sheet.

So hopefully we'll have more quarters of good news around the balance sheet and getting to a zero net debt and at that point, we can determine what the best capital allocation policies are, but I don't see any significant event right now taking place other than continuing the same progress that we've made.

Patrick Jobin, Credit Suisse.

Hi, good morning, a few questions. First one, a follow-up on the capital allocation topic. As you approach that zero net debt and have more flexibility to use the cash held at the plants, are there discussions at the Board level about increasing the dividend yield to something more meaningful or is this really keep the cash and wait till acquisitions look appealing or internal growth? Then I have a few follow-ups. Thanks.

Yes, we always talk at the Board level of our capital allocation, what is the best thing to do for our shareholders. And I think, like I said, this is our first real quarter of seeing a significant build of cash under the balance sheet and potential free cash flow generation for the next several quarters. I think at that point, the Board will do what is right for the Company and right for the shareholders and I think that it's not unreasonable to think that anything is on the table, but I would like to get through, potentially, a couple more quarters here, get to our targets that we've established and determine what the best allocation of capital is. And if it's not to grow the Company, we will make the right decision on behalf of our shareholders to make sure that we do the right thing.

I think that, like I said, we have the goal -- we still have a lot of debt. When you look at our balance sheet, there is still $600 million of total debt, but a lot of that is working capital. We can still finance our working capital if we want to and use our capital for that which saves us interest, but we don't pay a lot on those lines or we can continue to look at the overall debt structure as well. But I think our goals are in sight of the zero net term debt and at that point, we can make better decisions.

Okay, then just two questions. One, more fundamental for the industry about exports and then one on margins for the back half. But on the export outlook, I think I heard you said, Todd, you're thinking about maybe 800 million gallons to 1 billion gallons again in 2015, but with some of the markets like India and Middle East and Canada certainly, why couldn't we see that number significantly higher?

And then just housekeeping, just to make sure we're apples to apples here thinking about EBITDA per gallon for the ethanol production segment kind of what you're thinking about for Q3 and Q4, given the 90% and 25% hedge respectively put in place for the back half? Thanks.

I believe, yes. In 2015, if we see some of these markets that should buy more from us, because of price that we could see even increases over 1 billion gallons. But I'll believe it when I see it and I think we have work to do. I think we have to see where the Brazilians coming on their crop and their usage and the determination of what they will need from a domestic shortfall perspective. I think the news of India, finally making some inroads into the world markets on some ethanol demand, which we've seen both domestically here in the US as well as out of South America is good news. [But they've] been around and hanging around for quite a while, we'll have to see what kind of follow up there is and whether they're really willing to put on the forward deck at these margins or at these levels.

Canada continued to increase all during the year. We've seen other markets come in. We've seen the Middle East come in for distributions throughout the Middle East. So when you kind of add all that up, the two -- I would say the two swing factors for 2015 will be the Brazilians and the India market. And if we can open up those two markets, we could easily exceed 1 billion gallons. That's kind of a wait and see. But the good news is, is what we indicated to you on our potential export sales deck and execution for Q4 and Q1, when we indicated that to you in Q1 of this year and Q4 of last year, that was a telling tale of the fact that we weren't able to build stock through those times as an industry, but we are also producing a lot less as well. So, we'll have to kind of see how this all shapes up, but we do need the demand and I think the demand is coming. I think that's favorable.

In terms of the second question, we're not giving specific guidance in terms of margin structures for what we will achieve except to say that last half will be better than the first half. We did lock in, I'll give you some indication of locking in margins for Q3 and how patient we were as margins continue to expand during the quarter and that will be better than the $0.25 a gallon that we net realized in the second quarter, I would say -- we can't say that. And then in Q4, what we're seeing right now is mid 30s in the forward curve on the EBITDA margin and we're only 25% locked away. So depending on no big incident on corn and no big incident on weather and a continuation of the potential great corn crop that we're going to have, I think you can at least extrapolate from there that margins could be in, at this point based on the forward curve there are in the 30s and we'll have to wait and see what they are, as we continue to make our decisions. But at this point, we're being very patient as we see the export demand shape up for the fourth quarter.

So overall, very optimistic about our last half and even on the forward curve, what we're seeing in 2015, we are seeing a forward curve develop with Q1 right now low 20s, just on the curve. But that's driven by the fact that you have a $0.13 a gallon or $0.10 a gallon inverse between Q4 and Q1, something like that, maybe a little bit greater and you've got a $0.03 equivalent gallon carry into corn market. So all of those add up to, if that didn't exist and if the market was firm around the back and you'd be able to achieve somewhat similar margins in the first quarter, but it's just -- that's just structure of the curve more than it is fundamental to the market. So overall, everything seems to be positive at least for several quarters.

Matt Farwell, Imperial Capital.

Hi, good morning. I just wanted to ask about the export gallons. You didn't -- I don't think you said how many gallons you had for the export in Q3. And then could you give us an idea of how much more profitable -- the gallons headed for export maybe relative to domestic?

The Q3 export volume for us was extremely small, I'd say less than 5% of the total, if not even half of that. I don't have that number in front of me, but it was really a non-event for us in the third quarter. Most of what we did went to the Canadian market as a company.

In terms of export volume for the going forward, I mean, we basically look at that volume and we price it accordingly to having to either run the plants slower or cover the cost of what it takes to produce a different specification. With that said, we do try to earn a return because as margins expand, it takes -- you have to be much more competitive on the export market because you need more to produce that gallon. So, I wouldn't say that it significantly a immediate increase in profitability because we sell export gallons, except the fact that the more export gallons we can get on the books, the better the overall margin structure should be as domestic demand will remain strong, export demand will be strong and that's why you see us with a little bit more open book than we normally would have at this time on a margin structure like that in the forward curve. So I'd say overall, it just gives us a better bias towards a little more open gallons on the forward curve, which overall should increase our profitability.

Got it. And just to go back to the DDGs, you indicated that pricing that you're seeing sort of on the forward basis has come down from 120% to 140% of corn. It seems like you were saying now you're looking at more around 100% of corn on a weight equivalent basis?

Or even lower actually. We have markets that are 80% price of corn, 70% in some markets, because you got to remember a lot of cattle are on pasture now. So until they make their way back to the feedlot after summer, this is one of those summers where the Chinese went absent and cattle are on grass because of the weather in the southern plains, and when you kind of add all that up together, we went back towards a 70% to 80% price of corn in some markets, and 100% in other markets depending on where you were located from a transportation perspective and there are even some markets that are lower than that because you are close to a cattle feedlot, so. But as we mentioned the margin traded right through it and recovered very easily and took the impact of that and actually expanded since the Chinese situation. So that's what you can expect at this point.

Is there anything underlying the Chinese ability to pay more for DDGs just based on feed replacement ratios or other factors?

Yes. Well, yes. Domestic corn prices, which are extremely high there, so they can always pay more. I mean, they have the highest domestic prices in the world today. But I think the per value unit approaching of distillers right now are the cheapest, it's the cheapest protein globally. So, now you have two things out of ethanol plants coming; the cheapest molecule globally and the cheapest per unit of protein globally. And I think that's where we see the step back into the market if you are a global player for distillers and we are seeing a little bit of a pickup there.

But listen, the Chinese did -- this was their fifth event of the year of not taking US product because the market came down, whether it's corn, whether it's soy, whether it's soy meal, whether it's wheat, now it's distillers grains. I think they did it on cotton too. This is the fifth time this year that the Chinese backed away from US products for what I would call price majeure. You've heard of force majeure, this is price majeure. This is a very common event that I think was driven by both politics and price, and I don't think it was driven by anything other than that. If you ask a domestic Chinese feeder, they would love to have their distillers in the rationale especially at these prices. But I think you can expect that if they came back into the market, prices would go back immediately up.

And then a question on the hedging policy. You've said in the past that you believe while you may not always be able to report margins in line with what went on in spot markets, your margins will eventually drift higher to where the markets are. It doesn't seem like that's an expectation that we can have going forward. It seems like on the forward markets we're looking, we're generally looking at weaker margins than we've seen in spot markets this year. Is that fair or can you provide any more color on that analysis?

Yes, really since fourth quarter of last year that has been the case and if we would have been in the spot market, it would have been a different financial result. But with the debt structure that we have and [the billion gallons on the] balance sheet that we've been building, we thought it was still prudent to follow our policy of the way that we've run this business. As you can see, as our balance sheet gets stronger and we have a better view of this curve and how long it will last, and we are sitting there staring at very good forward margins in Q4 and we're being very, very patient.

So I think you'll see some of that pick up in Q3 and then more of that pick up in Q4 as we trend more towards that environment. But again, you go back to April 1 and Q3 margins were $0.11 a gallon with railroad velocities picking up and no export demand on the horizon, it was hard to say what was going to happen fundamentally and stocks were building and production was increasing. But the fundamentals were pointing into this favor, except the fact that the demand continues to increase.

So we're going to do -- we're going to continue on with our strategy, but I would say that, we can be a little bit more flexible because of the quality of our balance sheet and the quality of the underlying fundamentals of the industry right now, which until something points to something different, you'll see us trend more towards some of these higher margin structures.

Craig Irwin, Wedbush.

Thank you for taking my questions. So Todd, in your prepared remarks you mentioned the pending tankers regs. There have been a lot of different parties commenting on these. Obviously, we're going to see comments over the next 45, 50 days come in before the fine rule is issued. Can you talk a little bit about what you think would be most constructive for the ethanol industry in the final rule?

Well, we're going to have to wait and see what that rule is. Obviously, ethanol is getting lumped into the volatility of crude being moved on the rail system. Whether right or wrong, that's -- I don't know that we're going to get past that issue in terms of this ruling. So what's going to have to happen is cars that move crude and the cars that move ethanol will be retrofitted. And then it comes down to how do those costs get passed along and where do those costs continually or continued to get pushed down into the price of the fuel.

And so when you look at the potential here what you have is you've got a car that has to get retrofitted and somebody's got to pay for it, and they got to pay for it over a certain amount of time and then you have to make the determination whether you let the lease roll off as you're paying for it or you go and by some cars on your own or you make a deal to extend the retrofit cost over the life of the car instead the life of the lease. I think the rail companies understand that, I think the industry understands it, both ethanol and crude. I think the issue is we expect most of the cost will get passed on in the rail freight cost to the end consumer anyways. So I mean, somebody is going to have to pay for it, but we don't think it's going to have a significant impact on our forward earnings curve because we believe that either one way or the other it's going to get passed on and the cost of that will get passed on in the freight and/or you will make a decision that you just need to buy your own new cars because it'll be cheaper than leasing old cars that are retrofitted. And I think we're still yet to be determined on any of those.

But overall, I believe all the parties at the table are going to be very reasonable and rational to figure out how to make this work for everybody because what you don't want is the cost of the retrofit to be so high that people drop their leases and go buy or build a bunch of new cars at a significantly lower cost of old lease rates plus retrofits. And I think that's the risk and I think the industry and the customers will work through that.

Great, thank you. My second question is about your internal trading group. Can you update us on the status there whether or not you've been continuing to hire into that group and how you would gauge your profitability of this group in the current quarter?

Yes, what we've said is at the end of last quarter, after having a great first quarter, we said the allocation of capital into that group for the second quarter because of the lack of opportunities was very low and we would go back to a more normalized $5 million to $7 million, I think we ended up at $4.4 million or something like that, but still we expect that marketing and distribution will be a $5 million to $7 million a quarter business.

We have continually searching for new business opportunities in agriculture, in energy and products trading and we continue to focus on that area. But right now because of the somewhat lack of opportunities that we see and low volatility in the markets and in general, flat lining here, we're not allocating a significant amount capital to that group and we'll wait for the next opportunity like we saw in the first quarter.

In the meantime, I think will be very consistent in delivering the numbers that we mentioned, kind of a $5 million to $7 million a quarter on average and not inclusive of that big first quarter, which may skew it a little bit. But I think for the rest of the year, the group will deliver those type of numbers and we'll see where the next opportunity comes, but we are still aggressively looking for traders or teams of traders to come onto our platform and anything that has to do with the types of things that we trade.

Mr. Becker, I'll turn it back to you now for closing remarks.

Thank you and thank you, everybody for coming on the call. We just finished a record first half and obviously, with that said, and the guidance that we've given, it will be a record second half. And so we think we're going to have a very strong year, we have good cash flow generation for our shareholders and stakeholders. We're in one of the best situations we've ever been from a balance sheet perspective and we think the fundamentals are lining up very well for a continuation of the markets that we have seen. So thanks for coming on the call today and we'll talk to you next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.