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Green Plains Renewable Energy, Inc. (NASDAQ:GPRE)

Q2 2010 Earnings Call

July 29, 2010 10:00 am ET

Executives

Todd Becker – President and Chief Executive Officer

Jerry Peters – Chief Financial Officer

Steve Bleyl – Executive Vice President, Ethanol Marketing

Jeff Briggs – Chief Operating Officer

Jim Stark – VP, Investor and Media Relations

Analysts

Farha Aslam – Stephens, Inc.

Michael Cox – Piper Jaffray

Lawrence Alexander – Jefferies

Lucy Watson – Jefferies

Matt Farwell – Imperial Capital

Paul Resnick – Olympia Capital Markets

Matthias Ederer – Goldman Sachs

Anna Pena – TA McKay & Company

Tom McKay – Simplon Partners

Brent Rystrom – Feltl & Company

Ian Harowitz – Rafferty Capital

Operator

Good day Ladies and Gentlemen, and welcome to Green Plains Renewable Energy Second Quarter 2010 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I would now like to hand the conference over to Mr. Jim Stark. Sir, you may begin.

Jim Stark

Thanks. Good morning and welcome to our Second Quarter Earnings Call. Todd Becker, President and CEO; Jerry Peters, our Chief Financial Officer; and Steve Bleyl, our Executive VP of Ethanol Marketing are all on call today. We are here to discuss our second quarter financial results and recent development for Green Plains Renewable Energy.

Please remember that a number of forward-looking segments will be made during this presentation. Forward looking statements are any statements that are not historical facts.

These forward-looking statements are based on the current expectations of Green Plains’ management 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 expectations.

Information about factors that could cause such differences can be found in this morning’s earnings – yesterday’s earnings press release on Page 2, and on our 10K and other periodic SEC filings.

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.

Todd Becker

Thanks Jim. And thanks, everybody, for joining us today. We have a lot of topics to cover with you, so we will get started right away.

We are pleased to report our fifth consecutive quarter of profitable results and a strong finish to the first half of 2010. It is a great accomplishment for a young company and management team that was formed about a year and a half or so ago.

A milestone achieved in the second quarter was producing over 129 million gallons of ethanol. This is the result of our operations team’s continued effort, combined with the incremental investments we have made in process improvements which are now paying off with higher baseline production capabilities.

We now have a six plant platform capable of sustained production of over 500 million gallons annually. We continue to refine the production process with the goal of achieving more production from our plants in a safe operating manner. A key benefit to achieving this increased production was the low capital investment required. The company now has 20-40 million gallons of additional annual production that cost pennies per gallon in relation to purchasing assets for a much higher cost.

We also made solid strides in our Agribusiness segment during the quarter as we completed the acquisition integration of the five grain elevators in Tennessee, which expanded our grain storage capacity by 63%. We are glad to get this transaction wrapped up and we expect a positive financial contribution from this acquisition beginning next quarter.

The retail fertilizer chemical business was impacted this quarter by lower prices which translated in the lower margins compared to 2009. We have seen a slight uptake in prices, which translate into a slight recovery to for the fall and spring sales margins as well.

It is a still a critical piece of our Agribusiness strategy, giving in the company early access to origination of bushels for both our grain handling and ethanol production business.

We are looking at our new Tennessee operations as well as there’s no agronomy business in place, and contemplating entering the market down there as well in 2011. We believe that every place who handles grain should have a full-service Agribusiness operation with multiple revenue and profitability strains.

As we in indicated in the press release yesterday, we’re also expanding our grain storage capacity in Iowa by adding another 1.1 million bushels of grain storage from new construction. Once completed this fall, we’ll have over 31 million bushels of storage to increase grain flow in our Agribusiness segment. We are looking around, all of our ethanol assets to buy or build addition grain storage tributary to our production. The U.S. Farmer will continue to grow more grain on the same amount of land through the continued expansion of yields. We want to be a part of that production expansion and increase our grain and agronomy business footprint.

Another key strategic step announced last week, was the addition of corn oil extraction at our ethanol plants. We’re very excited about this project and believe once the equipment is in place it will enhance operating income by $15 to $19 million annually based on a production of 75 million to 90 million pounds of corn oil. This is a substantial recurring revenue and free cash flow stream to our business.

In all, the steps we have taken and the capitol we have invested are focused on growing our company and diversifying our revenues and income strains. We believe that we can best serve the interest of our shareholders by focusing on a long-term sustainable business model that includes all of the current elements of our business and will potentially include more growth in all segments, whether organic or acquired.

For the trailing 12 months we have produced 483 million gallons of ethanol, generated $1.7 billion in revenues, $53 million in net income, and over $117 million EBITDA. These are strong results and Jerry will go into more detail on the numbers later in the call.

Risk and margin management was an important factor for us, again, this quarter. We were successful on generating operating income in our ethanol production segment of approximately $16 million.

Ethanol margins are still weaker than the previous two quarters, but we have continued to lock in margins at each of our plants. As of June 30th we had 71 million gallons of ethanol production for the last six months of 2010 locked in, and we expect to remain profitable for the balance of 2010 as well.

In addition to the production with margins locked in, we had an addition 48 million gallons of physical products sold based on index pricing. The importance of this total is the fact that we had about half of our remaining 2010 production physically placed. Since the end of the quarter we have continued to make progress on both of those numbers, as well.

The third quarter for us is typically weaker due to the agribusiness segment seasonality, but we do anticipate good results from agribusiness in the fourth quarter of this year. In addition, we believe the higher mandates for renewable fuels next year, combined with the profitability of blending ethanol should allow a margin recovery going into the fourth quarter of 2010, compared to where our margins currently are in the third quarter. Over the past couple of weeks we have seen a gradual improvement in margins in the third and fourth quarter as well.

There will be times when industry margins are tight but even through the latest compression our outperform model continues to generate margins that pay our bills and service our debt obligation. We have not experienced any cash burn from operations related to ethanol margins. On the other hand there will be times when margins expand and we will generate significant profits.

We are managing this business from the long term which is why it is important for us to be margin agnostic and execute our margin management policies to minimize the down turns and take advantage of the up swings of the market.

Now I’d like to turn the call over to Jerry to review our financials in more detail.

Jerry Peters – CFO

Thanks Todd. And good morning, everyone. On a consolidated basis for the second quarter of 2010, we reported revenues of over $453 million, which is an increase of almost 60% over the second quarter of 2009. The increase is driven by ethanol production assets added in July of 2009, higher revenues from expansion of our third party marketing business, and increase production from our existing plants.

Consolidated gross profit was $30.7 million for the quarter, which is a $16 million improvement over the second quarter of 2009. This increase is primarily the result of higher ethanol production volumes, as well as better ethanol margins realized in the second quarter of 2010, compared to 2009.

Consolidated SG&A expenses were $13.6 million in the second quarter, which is $2.9 million higher than the second quarter of 2009. But again, most of that increase was a result of the addition of the Nebraska ethanol plant, as well as the recently acquired agribusiness assets in Western Tennessee,.

Our corporate over head, which we break out in the release, was $3.4 million in the second quarter of 2010, or about 2.6 cents per gallon, which is consistent with our goals to tightly manage our cost structure.

Segment operating income, which is total operating income before cooperate expenses were $20.5 million for the second quarter, compared to $7.4 million last year. This improvement is largely attributable to the ethanol production segment.

I’ll now take a few minutes to drill down into each of our business segments.

Our ethanol production segment reported revenues of $241 million for the second quarter of 2010. That was an increase of about $88 million versus the second quarter of 2009. The increase was driven by an increase in ethanol sold of 53 million gallons in 2010, compared to 2009.

Again, that was mainly due to the addition of the two Nebraska plants in July of last year, as well as our profits-improvement projects across our six plants.

To isolate the impact of the process improvements, I can tell you that the ethanol sales from, what I’ll call our, legacy plants, which, basically, is our four plants excluding the Oregon and Central City Nebraska plants, in the second quarter of 2010 was over 92 million gallons, which is a 20% increase over the 77.1 million gallons sold in the comparable quarter of 2009.

Operating income for the ethanol production segment was $15.8 million for the current quarter, versus an operating income of $2.6 million for the second quarter of 2009.

We incurred approximately $7.9 million in depreciation amortization in the second quarter for the segment, compared to $5.5 million for the second quarter for 2009.

So for the second quarter of 2010, operating income before depreciated expense was $23.7 million, or about $0.18 per gallon of ethanol sold.

Our Agribusiness segment generated $62.6 million of revenue for the quarter, compared to $58.8 million for the second quarter of 2009. Revenues were higher as a result of the addition of the five grain elevators in Western Tennessee, which was offset by lower grain prices and fertilizer prices when compared to last year.

Lower prices for fertilizer resulted in somewhat lower gross margins in the current quarter, so in spite of nice increases in grain and fertilizer volumes, gross profits for the Agribusiness segment declined by $1.7 million to $5.7 million for the second quarter 2010.

Operating expenses for the segment increased by $1 1/2 million, primarily related to the acquisition of the Tennessee assets. The combined effect was lower operating income for the segment in the second quarter of 2010, compared to the same period in 2009.

For the marketing and distribution segment, revenues were $397 million for the second quarter compared to approximately $231 million for the second quarter of last year. Our volumes in this segment increased by about 90% or nearly 108 million gallons to a total this year of 228 million gallons for the quarter.

The volume increase is split fairly evenly between the third party marketing and our own internal productions with 55 million of the 108 million gallon increase due to third party marketing and the balance caused by increases in our internal production.

This increase in volume resulted in a nice increase in operating income for the segment to $2.4 million for the quarter. With the solid performance from each or our segments, consolidating operating income was $17.1 million in the second quarter of 2010 compared to $4.2 million in the second quarter of 2009.

As expected, interest expense was $1.8 million higher in the second quarter of 2010. That was due to the expanded scope of our operations. Consolidated income before income taxes was $11.4 million, and we continue to provide income tax expense at an effective tax rate of 22% for the quarter.

As I mentioned on our first quarter conference call, our effective tax rate may change during the year, depending on the timing of the recognition evaluation of certain tax assets. We will be monitoring that closely as me move through the year.

In summary we are pleased with the second quarter results, with net income attributable to Green Plains of $8.7 million or $0.27 per share on a diluted basis, compared to net income of $627,000 or $0.03 per share in the second quarter of last year.

In terms of EBITDA, we generated $26 million – $26.3 million of EBITDA which was a $16 million increase over EBITDA last year.

As Todd mentioned earlier in the call on a trailing 12-month basis we’ve generated $117 million of EBITDA and that is against the total ethanol production for that period of 483 million gallons.

As a reminder, EBITDA is non-gas financial measure and I would direct your attention to additional information on the news release and on our website including reconciliations to our gas net income.

We ended the second quarter with a strong liquidity position of $181 million in total cash and $43 million available under our committed loan agreements, bringing our total available liquidity to nearly $224 million at the end of the quarter.

Our total cash is down slightly from where we were the end of the first quarter because we repaid $21 million in debt and net of financing expended some of our cash on our Tennessee acquisition, as well as a small amount on process improvements.

We have continued to strengthen our balance sheet with our total debt related to our ethanol plant down to under $390 million, or about $0.78 per gallon of capacity. With our focus on operational efficiency and risk management, combined with our strong liquidity position, we believe we are well positioned to manage through tight margin environments such as we experienced this quarter.

I will now turn the call back over to Todd for his closing comments.

Todd

Thanks Jerry. I want to reiterate the point that although margins have depressed we expect to remain profitable for the last half of the year based on current business conditions.

As I stated earlier, over the last couple of weeks we have seen an improvement in forward margins through the fourth quarter of this year. When you look at 2011, mandated gallons will increase another 5% to 12.6 billion gallons of corn-based ethanol. And the forward price of ethanol is still discounted to gasoline between $0.30 to $0.40 per gallon.

We are optimistic the obligated parties will blend the required amounts and a discretionary blender will continue to blend as well, which should be positive for the margin environment even with some additional production expected.

There continues to be a fair amount of discussion around the status of E15, or the status of the E15 Green Jobs Waiver before the EPA. We believe that the EPA will come out with their ruling on E15 this fall, and instead of speculating what their ruling is and the timing of it, we’ll just say the increase blending level of ethanol on our nation’s fuel supply is a positive step in the right direction for our industry.

We also support the Growth Energy Fueling Freedom Plan. It is not prudent to expect the blended credit to last forever. The key is equal access to the consumer, and we believe a redirection of this credit over time to help build infrastructures such as blender pumps and additional E85 automobile supplies is the best and the most responsible plan out there today.

I also wanted to spend a few minutes discussing our announcement on phase two of our Bio-Process Algae Grower Harvester’s Technology.

We announced the groundbreaking on Phase 2 last week and we are excited about the prospects of this project. We continue to experience 100% uptime since inoculation in October of 2009. We continue to harvest algae on a daily basis. Our vision continues to be the same; we’re providing a solution to be sequestering industrial carbon dioxide while producing a high quality feed stock for fuel and feed.

We are pleased that the Iowa Power Fund has given preliminary approval for an additional $2 million matching grant for Phase 2, which we estimate will cost around $4.5 million. We will keep you updated on our progress as we move forward on the launch of our Grower Harvester Technology Phase 2.

In closing, Green Plains is in the best shape that it has ever been in. We have a strong balance sheet, an operating platform that is sustainably producing over 500 million gallons of ethanol per year, one of the lowest operating cost per gallon in the industry, a low debt service per gallon, and a more diversified earnings portfolio with Agribusiness on the front end and marketing distribution and terminals on the backend.

Despite all that, our stock value is often looked at as proxy for current margins in the industry. We do not believe this valuation reflects the quality of our assets or the of the parts value equation. We’ll plan to continually prove we’ve have built an outperform model that is capable of maintaining positive cash flows even during down turns, as we believe the longer-term view of our performance is warranted.

Thanks for calling in today, and we’ll ask to start the question and answer session.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions)

Our first question comes from Farha Aslam from Stephens, Inc.

Farha Aslam – Stephens, Inc.

Hi. Good morning. A couple of questions; starting with your smallest division marketing and distribution, the gallons sold were maybe 10 million more than what we estimated from your current four outside plants plus what you produced.

Did you sell stuff out of storage or have you added a new plant?

Jerry Peters

Farha, this is Jerry. There would have been some that was in transit at the end of the first quarter that would have come through in our volume. So it increased our volumes sold in the segment. And then in addition, I believe our third-party plants were producing above their stated 360 million gallons of capacity.

Farha Aslam – Stephens, Inc.

Thanks. And then on Agribusiness, the decline in profitability, would you be able to break it out between what portion was due to cost related to the Tennessee acquisition, and kind of what portion was due to lower profitability in the fertilizer business?

Todd Becker

Yeah, this is Todd. In agronomy, we saw between $1.5 million and $2 million of lower fertilizer margin. Some of that based on price difference between 2009 and 2010 on the retail and the wholesale level. A lot of that was on potash side drop in price and nitrogen drop in price on the wholesale and retail level. We finished stability of price here as of late, and in fact, a small increase of price coming into the ’10-’11 kind of season. And so we expect some recovery there as well. But when you go back to 2009 and you had pot ash at $800 and DAP at $1,000, margins were very robust back then and they came down significantly in ’10.

So but overall, I mean, basically what we’re doing is we’re not just focused on the margin, we’re focused on growing our volumes. So for the long term, we’ve seen a growth in our volumes, in our sales volumes.

We’re opening up a new site in Gruber, Iowa was well, so we expect in ’11 we’ll see a continued growth in those volumes. So hopefully that offsets some of that going forward in terms of the total gross margins because of price.

Farha Aslam – Stephens, Inc.

So when you look at profitability for the second half of the year in Agribusiness, would you think it’s kind of similar to last year, or should we be more conservative?

Todd Becker

I’ll have to look at the year-over-year comparisons. We typically don’t give guidance. I mean, we have basically said in the past we believe that our Agribusiness operation, with the addition of Tennessee assets will be capable of producing somewhere between $10 and $15 million EBITDA. And I would stick with that number, looking at obviously the weaker second quarter of ’10.

So this year it will probably be on the lower side of that, but when we look at the recovering in ’11 in both volumes and potentially margins, I would say we would still be towards those numbers, between $10 and $15 million of EBITDA.

We’re expecting a pretty good forth quarter because the addition of the Tennessee assets. The crop has held pretty well. We have handled soft wheat down there, and the margins of soft wheat, and the carries in soft wheat have held pretty well for us. And then we expect that we’ll handle our normal amount of corn.

So overall, I don’t think that the fourth quarter will be lower than last year because of the addition of Tennessee, and depending on how the Tennessee assets perform, whether they realize the margin in Q4 or Q1, it would be a bit of a – still a bit of a number that we’re waiting to see about. I don’t expect it to be lower than what we’re expecting.

Farha Aslam – Stephens, Inc.

That’s helpful. And then just on ethanol, you were really helpful in giving us kind of natural gas year over year. Would you be able to give us what DDGs in ethanol pricing you’ve realized versus the year-ago period? Just how much up or down it was?

Todd Becker

No, actually I don’t know that we can give that right in this phone call. We can look at it and get back to you on that. As we always say – we haven’t given any real guidance on natural gas or any of the prices. I mean, what we look at is more on the margin side of the business. So we can look at that year over year and get back to you.

Farha Aslam – Stephens, Inc.

Okay. That would be great. Thank you.

Operator

Our next question comes from Michael Cox from Piper Jaffary.

Michael Cox – Piper Jaffary

Good morning, guys.

Todd Becker

Good morning, Michael. How are you?

Michael Cox – Piper Jaffary

I’m doing well, thanks. In terms of your comments, I just want to clarify about the profitable in the back half of the year. Is that for each quarter, or would that be cumulatively for the back half of the year?

Todd Becker

As of right now, it both. So where margins are standing and what we’ve been able to do, we feel like we can be profitable in both Q3 and Q4. And it’s still, obviously we still have some margin volitility. Margins have held pretty well with this recent quarter rally, maybe dropped another – maybe dropped a penny, but they were up pretty well from a week ago, or ten days ago.

So at this point, our models would show us profitable in both Q3 and Q4.

Michael Cox – Piper Jaffary

Okay, that’s great. And in terms of internal expansion plans, you’ve made really nice progress on that to this point. Is there still room to go of expanding within the six plants?

Todd Becker

Yeah. We actually believe there is still room to go. If you look at it, what we’re saying is our platform is a 500-million gallon sustainable prep platform. The annualized a quarter, we’re running more towards the 520 rate. We’re starting – the low-hanging fruit is much harder to find. So now it may take a little more capital investment. I mean, it’s literally been pennies on the gallon to get to this point. And I think if we improve from here, it will be a little more expensive but still a lot cheaper than acquisition costs so I think we have the possibility of upside as we run towards that 520.

And really what we’ve seen is over the summer, we actually ran at a reduce rate to what we actually thought we were capable of at 129 because of the hot weather this summer. We feel like when it cools off, potentially we could actually get higher than that, but we’ll wait and see, and see when some of our projects come to fruition.

Michael Cox – Piper Jaffary

All right. That sounds good. And I guess then on the M&A side, how are those discussions progressing? Any thoughts on timing of commencing one of these guys to sell?

Todd Becker

Well, I mean, we’re in constant talks with lots of people on lots of different projects. The harder part is exactly what you said, which is convincing somebody to sell. And we think we’ve provided – continued to provide a path to liquidity, an ability to go into the public market so you can determine when you want to stay in and when you want to get out of the ethanol investment.

We are looking at a lot of different options right now. We’re in discussions with several different parties on acquisitions. We’ll just have to wait and see what comes. It’s easy to get into discussions and a lot harder to close.

So in the current margin environment, we’ve seen a little more activity pick up. We’ve seen some plants that are still under distress, even in kind of the first six months of the year’s results. And we’ll have to just wait and see if we can get something done in 2010.

We are optimistic we will get something done in 2010. I just can’t tell you size or scope at this point.

Michael Cox – Piper Jaffary

Okay. And then my last question on the algae technology, now that you’ve broken ground on the second phase, have you started to formulate a plan for commercialization, or what that might look like?

Todd Becker

Yeah. We are looking at that now. What Phase 2 will tell is do we have a path to commercialization or not, which we feel like what we’ve seen so far, there is a path. The question will be, kind of cost – or will be cost and then operating costs per ton as well. And we’re doing a lot more work around that. The technology is improving. We are looking at different types of uses of our grower harvest systems. We have interest in the algae from everywhere from high-value pharmaceuticals, nutraceuticals, all the way down into the biodiesel space once we can grow significant amounts. And all those are positive-relative operating costs. But again, we have got to make sure that we can – the CapEx is something that’s controllable, and we can build these things out efficiently. And at some cost, it makes sense relative to CapEx economics.

But what we’ve seen so far, we’re very optimistic in Phase 2, that we’ve announced here. It’s going to be 20 times larger than Phase 1. It will be in its own building, outside of the plant. It will be, again, taking the industria CO2 off the stack, which we again think is one of the only places in the world where that’s happening. And overall, everything we’ve seen is optimistic or we wouldn’t continue to invest. I can assure you of that.

Michael Cox – Piper Jaffary

All right. Very good. Thanks a lot, guys.

Todd Becker

Thanks.

Operator

Our next question comes from Lawrence Alexander from Jefferies.

Lawrence Alexander – Jefferies

Hi. This Lucy Watson on for Lawrence today. I just wanted to clarify some of your comments between spot and contracted volumes. Of the ethanol volumes that you’ve locked in for the back half of the year, are those margins above Q2 levels?

Todd Becker

Well, as we indicated, Q3 and Q4 margins are weaker than Q2. So it wouldn’t be any better than that, but they aren’t significantly worse than that either. The 72 million gallons at the end of the quarter that were locked in were basically locked in at a full crush margin, or the full margin for the plant. The rest of the gallons we sold are not locked in, that were index gallons, but then since the end of the quarter, we moved to lock some of those in as we saw margins expand.

So as we kind of moved, since the end of the quarter, we’ve actually had a larger percentage of our last half locked in. But again, we haven’t seen as robust margins as there are in Q1 and Q2.

Lawrence Alexander – Jefferies

Okay. And then moving to the corn oil extraction technology, how quickly do you think this will ramp up as an earnings contribution?

Jerry Peters

We are hoping that the first plant will come on within 90 days, or the beginning of the fourth quarter with the second and third plants not to long after that in the fourth quarter. We might see a slight contribution in the fourth quarter, but then we would expect by the end of the fourth quarter we could have a fourth plant running. And then by the end of the first quarter of 2011, we should have all six plants running.

We have immediately started to deploy resources. We have construction crews that are, right now, getting ready to start. And I think that we should see some progress. We would expect a minimum contribution in the fourth quarter, and then you’ll start to see a better contribution in First Quarter 2011.

Lawrence Alexander – Jefferies

Okay. And the what was your net debt at the end of the quarter?

Jerry Peters

Our net debt at the end of the quarter was 450 less 180, or approximately $270 million of net debt. But in that $450 million is included a lot of revolvers that are backed by inventories and receivables. And when you look at just our ethanol debt, we are now at $390 million. And if you took the cash related to that, then we’re down to around $200 million of net ethanol debt, not including revolvers, which then is about $0.40 a gallon, and we feel like that is a great position to be in. We feel like that is a great position to be in with a very low risk profile at that point.

Lawrence Alexander – Jefferies

Okay. And just to follow up on that if I may. With $180 million in cash, I’m just wondering how you balance M&A against deleveraging going forward? Thank you.

Todd Becker

Well, in terms of deleveraging, our intent is to pay our debt down under normal terms that we have with the banks. Because we were profitable and because we had a successful last 12 months and 2009, we were subject to sweets in our loan documents. Jerry maybe you just want to talk a little bit more about how we got to the $21 million?

Jerry Peters

Yeah. Roughly about $7 million of that represented sweets under our loan documents related to 2009 profitability. And then in addition, some of the revolvers at our plants expired for another $6 million or so. So in total, we had $21 million during the quarter of reductions against that debt.

But I think going forward, we’re very, very focused on liquidity and maintaining that liquidity position and maintaining that cash balance. So we’re paying our debt down, delivering, as you say, as we need to. But at the same time, maintaining that liquidity position in a very strong way.

Todd Becker

I think an important point is that at the corporate level, where we raised the additional $80 million of cash in our offering in Q2, after the investments, but yet then add back in the other profitability of what we’ve been able to achieve, we actually have more unrestricted cash at the corporate level than we had even after the offering.

So net of the offering, we’ve actually achieved better results.

Operator

Our next question comes from Matt Farwell from Imperial Capital.

Matt Farwell – Imperial Capital

Hi. Good morning. I’m curious on the M&A front, given the operating of the plants, of your fleet above name plate, and working capital requirements, do you have a modified view of how we should be thinking about valuations per gallon, and the value that Green Plains may be able to extract once plants are added to the class form?

Todd Becker

I mean, we feel like – if you actually go back to the history of this business, the purchase amount of capacity is 430 million gallons. We’re running at above 500 right now, and at an average run rate of right around 520 for the quarter.

You know, we feel like when we purchase a plant, if it hasn’t had a lot of recent improvements done to it, i.e. being a very good operator who does some of the same things we do, we feel like even above the plant capacity, especially on the ICM, ICM technologies, by making these small capital expenditure, we think we’re going to add another 5% to 10% of production, if not more at some times depending on how the plant’s operating.

I think the key to this is that because of the tight margin environment that the industry experienced off and on over the last year and a half, they’ve been very relucent to spend over and above their normal R&M and spend into CapEx to improve their production capabilities. Yet, some plants have, but I’d say on the most part, a lot of plants have not.

We have been very willing to do that and have seen great returns from that. So I think, overall, in the acquisition mode that we’re in, especially on the ICM Technology, we feel like what we do on a daily basis can enhance any of the acquisitions we make. In addition, as of right now and most days, we have somewhere between 10 and 12 types of process enhancement things going on at the plants. And as we always have said, once we find one that works, we’ll roll it out to the other plants.

So there might be two enhancement experiments, or things like that going on, and if it works, we roll it out quickly and it becomes a very low cost improvement. We see very quick paybacks on most of our investments, some as quickly as 30 days and not much longer than six month on anything we’ve done in process improvement.

Matt Farwell – Imperial Capital

So would you say a majority of the plants you’ve evaluated have had the potential for 5% to 10% capacity increase?

Todd Becker

I would say if we make the proper CapEx, then the majority of the plants we evaluate would have that potential. And that’s mainly around the ICM technology. And the Delta-T technology we don’t feel like – well, it depends on the plant. I mean, we think we’re running our Delta-T plant very well. We’re running that – we have kind of figured that out, it took about a year, and it took a lot more CapEx per gallon to get that done versus an ICM technology. But I think if we looked at the Delta-T plants, if there’s one or two out there that have special characteristics of location or maybe possibly some other thing that we like about it, we’ll look at that. But overall, we are not actively looking for anything but an ICM technology. But we have seen some interesting Delta-Ts in interesting locations with interesting economics around them. But in general, most of them don’t shoot where we’re looking for.

Jerry Peters

I think the other benefit that we have, really, with the scale of our operations, you know, we – it is a scalable platform at this point, where depending on who we’re looking at, a single plant is obviously going to have higher operating costs just for their administration than we would have bringing it into our platform. So we should be able to see some advantages there as well.

Matt Farwell – Imperial Capital

Okay. And on the product yields, I calculate 2.8 gallons per bushel in the quarter. Is that a seasonal issue, or is that something that may continue into the future?

Todd Becker

Actually, we were a little bit lower than that, but they’re right into that range. No, I don’t think there’s a seasonal issue. In fact, I think between kind of 275 and 285. In our business, we feel like that’s a sustainable number at this point, without any additional improvements to yield, or yielding technology. So from that standpoint, we expect that we’ll continue to be in that range.

I think that there’s this view of low test weight in the United States today caused a lower yield. But we didn’t really see that fall through because the starch held in the corn kernel. And so from that standpoint, our yield held even on probably two pounds of lower test rates this year.

Matt Farwell – Imperial Capital

My final question is regarding the Clean Air Act. And I’ve written about this, but I’m wondering if you have any opinion on whether or not an additional ammendment to the Clean Air Act would be required in order to accommodate the re-vapor pressure issues with ethanol-blended gasoline once E15 is hopefully allowed by the EPA?

Todd Becker

Steve do you have a comment? Then I’ll make a comment after you.

Steve Bleyl

No, I don’t think so. I mean you’re looking at different grades of seed that are coming out now for blending. You should start to see some of those for September, the incremental markets, where they’re going to start blending ethanol. It is a different refined gasoline to accommodate the RBPs.

Todd Becker

Well, what we’ve seen in the past, and we talked about this through growth energy. When the DOE or the EPA changes a grade, or changes a fuel, you know, from 10 to 12, or 12 to 15, or even 8 to 10 in the past, most of the automakers have responded and have not fought against that.

There’s a lot of legalities to saying that E10 or E12 has impacted or voided a warranty. But once DOE or EPA makes that shift, you know, typically most of the downstream follow in line pretty quick.

So I think overall, when we look at the Clean Air Act, I think it will come through, most of it will come through the RFS and then just the expanded blends. And then it will just be a new fuel grade that’s added to the market.

Matt Farwell – Imperial Capital

Great. Well, congratulations, again.

Todd Becker

Thanks, Matt

Operator

Our next question come from Paul Resnick from Olympia Capital Markets.

Paul Resnick – Olympia Capital Markets

Good morning.

Todd Becker

Good morning, Paul.

Paul Resnick – Olympia Capital Markets

One of the advantages of being late on the list, everybody asks your questions. But there was on question with regards to the Ag business, and the costs particularly of the increased costs from the Tennessee acquisition. I’m just wondering whether there was any costs in the quarter that you’d say were part of a one-time integration of those assets. Or is what we’re looking at what we got?

Todd Becker

Well, I think there’s a small cost in relation to integration of the assets, but I would say that because of the way that purchase accounting works, and we bought inventories, and other things like that, since there was a start up at a certain point, there wasn’t a lot of profitability tendency in the second quarter relative to cost. But we would expect that to change then going forward. So it was pretty equal between IT profitability and cost. But we would expect under those costs in Q2 of next year, there would be added profitability because of the timing of the acquisition.

Paul Resnick – Olympia Capital Markets

Okay. And with regard to timing, the transition way in your mind, from a blender’s tax credit, I mean, that’s - I mean, would you be in favor of, for instance, the instruction of the $0.36 leve for tax credit if that was in conjunction with the additional funds available for some of the projects that – for the infrastructure? Exactly how is this going to work in your mind?

I think we have to be realistic that the tax credit continues to be under pressure. So the question is, what can we do as an industry to make sure that we still get access to those funds, those tax credits, yet stop incenting the downstream of blender – or stop giving them a direct tax credit because, real quick frankly, that’s just not in Vogue in Washington at this point.

So we think a continued reduction of the tax credit over time of the blender’s credit, and then a redirect of that credit into infrastructure is a prudent strategy. We’re not saying as Green Plains that it should go away tomorrow. What we’re saying is it should be – we support a phase out as long as it’s redirected. If it’s not redirected, it’s going to become equal access and the question is, does ethanol have equal access in comparison to gasoline to the consumer?

And today, I would say we don’t. And yet, we have the cheapest motor fuel in the world today. We’re $0.40 to $0.50 under our RBOB on a wholesale ethanol-to-gasoline. And even if somebody wants to make the argument that there’s a BTU adjustment, the discount to gasoline today without the blender’s tax credit, takes all of that into account. And today, ethanol is the cheapest motor fuel in the world. Yet, access to consumer is something we’re fighting for, and that’s why the E15 initiative is so important.

Paul Resnick – Olympia Capital Markets

Thank you.

Todd Becker

Thank you.

Operator

Our next question comes from Matthias Ederer from Goldman Sachs

Matthias Ederer – Goldman Sachs

Hi. Good afternoon. Thanks very much for the overview. I just want to clarify one point, and apologies if it’s been asked before. But on the 71 million gallons that you said that you said you locked in, I assume that corresponds to what you report as 15% of ethanol production in your 8K being in a fixed price contract. In conjunction with that, you said that 50% for the rest of the year is locked in. How – can you just walk me through the math here?

Todd Becker

Well, basically what we said is that when you look at the 71 million gallons, then you add in the index gallons that we have sold, over around 48 million gallons, that would get you to close to 125 or so, 120 million gallons. And that’s approximately somewhere in the 50 – a little less than 50% of what we expect to produce in the last half of the year.

So we have the sales on. Some are priced and margin is locked in. Some are index and the margin wasn’t locked in, but we have made significant progress since the end of the quarter continuing to lock away our margins as we’ve see a recent margin expansion to a full-margin lock, not just an index sale.

The importance is not just a lock in the margin, but also having the homes on. And we look at that at lot as well. And so – and then once we have the homes on, and we can buy the corn, we have the ability then to convert those both to fixed price contracts and lock our margin away and move very fast to do that. And that’s why we’ve had the – during a certain quarter, by having enough index on enough corn bases on when the margins expand, we will move instantly to lock those margins away and not wait to buy one or the other side. I think that’s the importance of having 48 million gallons additional index on because we do have corn bases as well bought against that.

Matthias Ederer – Goldman Sachs

And then the second question, you mentioned that you do bottlenecking and you managed to be about to generate additional gallons of ethanol, I think what you mentioned was pennies, pennies per gallon. Can you give us a little bit of sense for how much was spent in terms of on the CapEx of ramping up your plans from 480 to now 500 or maybe even at 520?

Todd Becker

Well, really on a year-to-date basis, our total capital expenditures is about just over $4 million. Now that would be all segments, so that would include some maintenance capital, some small capital in the grain segment as well. But probably less than $3.5 million was spend to wrap up that production.

Matthias Ederer – Goldman Sachs

Surely you already had some costs for that bottlenecking project the previous year?

Todd Becker

In the previous year there could be a small amount, but on the other hand the $3.5 million is all of our CapEx, so that would include the other projects as well.

Matthias Ederer – Goldman Sachs

Okay, thank you very much.

Todd Becker

Thank you.

Operator

Our next question comes from Anna Pena from TA McKay & Company. Hello? Pardon me, your line is open, if you have your phone on mute could you on mute your phone, please.

Tom McKay – Simplon Partners

This is Tom McKay I’m from Simplon Partners. On the subject of CapEx could you just provide the actual numbers for the quarter and the half year? Thank you.

Jerry Peters

Sure. Again, for the half year was $4.37 million and that would exclude the acquisition CapEx. For the first quarter it was $2.3 million. Two-million, three- hundred thousand dollars of CapEx, so we had about $1.7 million of CapEx in the second quarter.

Tom McKay – Simplon Partners

Right. Okay, thanks very much.

Operator

Our next question comes from Brent Ricler from Falto.

Brent Rystrom – Feltl

Good morning. I just had a couple quick questions on the fertilizer business. I’m hearing from a lot of the dealers out there that it the inventory is going into the fall application season are historically light. Are you seeing that?

Todd Becker

Inventory at the retail level or at the wholesale level?

Brent Rystrom – Feltl

At the retail level

Todd Becker

Yes, we have seen some of that. I think people are starting to, as we are, as we had as well, buying some of their needs into inventory now. A lot of that – what’s that?

Brent Rystrom – Feltl

Do you think that’s why we’re kind of seeing Urea pick up a little bit and kind of damp holding in there?

Todd Becker

I think that is part of it. As well as, I think the wholesalers are trying to do everything they can to hold off the market, or send their product to other markets around the world. And because I think there is still enough supply in the world of everything we need, but I think that they’re doing everything they can to keep the U.S. market a very high-value market.

In addition, I think from a standpoint of getting your nitrogen or pot ash in place, you have to take into consideration of transportation.

So I think what we’ve seen here is make sure you get it in in time for spring and fall, or fall and spring. You want to make sure you start to buy it. I think we’ve seen that as well. I think people are a little nervous that they can’t get it in on time. That’s where we’ve seen the improvement, I think both as a wholesale and retail level as well.

We haven’t seen the farmers yet make big purchases for his needs for spring and fall yet, but they’re starting to definitely to nose around, especially with these higher corn prices. They want to make sure that they make the investments, not just for after harvest but for planting next year because of the forward curve.

So I think you’re overall, you’re probably right on what you’re thinking.

Brent Rystrom – Feltl

When you look at the soft stock value back, when you go through Iowa, look at fields see a lot of stock value back in the first couple of seed of the plants. I’m assuming it’s really related to the nitrogen leeching, that’s got be a big opportunity for your Iowa operations, I would guess, over next year, just a massive leech of nitrogen with all the moisture?

Todd Becker

Yes. I mean, the moisture is definitely something that – rain is good, mother nature is great, but too much of it is sometimes annoying. And I think that is probably what we are working through in Iowa right now. Nebraska looks incredible right now, in terms of quality of the crop. Iowa still has some work to do even around our area Northwest Iowa, which is – around our assets there is about a billion bushels of production. We haven’t quite seen the same thing happen up there; that’s in great shape right now. But if you drive, as you probably have now, as you drive through the rest of the state there are definitely some issue brewing, but I think overall the crops are in very good shape.

Brent Rystrom – Feltl

What in Tennessee? Any particular ramifications we should think about with what’s to be, you know, that Eastern Arkansas, Western Tennessee weakness in the crop, is that going to inhale possibly higher transportation costs as far as servicing that plant?

Todd Becker

I think – here’s the deal about Tennessee, which I tell people. The corn crop is probably down 10% this year, I would say. But last year was so exceptional that I don’t know that that would have been sustainable two years in a row. And we got that jolt of hot weather, and we did get some timely rain that. We also see the down tick on the soft wheat crop as well, down around 10%. But we did get our share from that standpoint.

I don’t think, necessarily, that it will increase our transportation costs greatly, only because Tennessee produces a lot more than it consumes. Storage is being built there at a rapid pace. We’ll look to add more storage in 2011 in Tennessee as well; built at the plant or around the plant at our assets there.

I think overall, we basically, besides what we buy out of Illinois on trains, we’re trying to get as much into our Tennessee plant as we can from local production both in Arkansas, Missouri and Tennessee. And there seems to be enough of that to continue to ramp up some of the lower levels we were at when we started.

When we started production in Tennessee we were probably on 80% rail in from Illinois, and 20% local. I would say we’re going to move into that 50% to 60 % local and 40% rail, if not even greater than that now. So our commercial replacement of grain is much more local than it ever has been with regard to train replacement.

Brent Rystrom – Feltl

From the prospective of corn pricing in the current price environment for ethanol in your production costs; what kind of is that magic price where corn kind of gets pricing your ethanol more towards break even, is that $4.00 a bushel?

Todd Becker

There is a magic price of corn and a magic price of ethanol. I’m mean, we’re right -

Brent Rystrom – Feltl

Static ethanol price, corn would be where that you would kind of see that?

Todd Becker

Break even EBITDA

Brent Rystrom – Feltl

Yes.

Todd Becker

Static ethanol price, without giving too much away, it’s about half a buck to a buck, somewhere in that range. Depending on – you remember, the problem with that is that if it’s just static ethanol. You’re going to get a big uplift from a dollar rally on corn to your distiller’s grains.

So you have to have the offset of that. So somewhere in that 40 to a dollar up is when you – without any movement in ethanol, but if you look at ethanol today it’s 40 under gasoline, that would be about $1.20 move before you ever get to a breakeven price versus our RBOB, not taking into consideration the tax credit.

So as we’ve always said it takes about six months, or three months to go EBITDA negative as an industry, and about six days to correct. And basically it is basically what we saw on the last two weeks. Margins got pretty tight, we never saw negative EBITDA margins in our model in any one of our plants, but I would imagine the industry did. It took about seven day to correct. And so now we are seeing margins that are generating not just positive EBITDA, but positive net income. We don’t ever take the view that corn moves in a single form against ethanol.

Brent Rystrom – Feltl

From the corn oil project that you’re are doing as far as your CapEx investment, can you give us some thoughts on, again once you reach full capacity, how that will come into the model for both the revenue, and obviously you’ve guided the 15-18 million in operating profit from it, from a revenue prospective can you kind of give us a sense of quarterly basis how that would look right now in current pricing?

Jerry Peters

On a revenue – the cost against revenues are very low. We are expecting a very low percentage of our revenue to be actual real cost because it is so value-add. So the numbers we’ve guided are based on current market and a bit of the forward curve out through 2011. But other than that, we don’t expect anything much different than that today.

Brent Rystrom – Feltl

When you look at the 75-90 million gallons, how’s that translate into revenue? Excuse me 75-90 million pounds.

Todd Becker

Well, we translate it into operating income. You look at it as $0.20 operating income per pound, 15-19 million gallons, $15-19 million against 75-90 million gallons. Okay?

Brent Rystrom – Feltl

Final question. Any particular thoughts on the potential for a lower carry out in corn and how that might impact your green storage processing handling business, particularly late part of Q2 and 3Q next year?

Todd Becker

Well depending on what we see in terms of the carryout, right now it’s still a very robust carryout, still more than 2005 or ‘06 when we started this whole ethanol rally or the whole ethanol build out.

When we look at production where it is at, the carryout a billion-four on a 163 1/2 yield, which could still increase and increase our carryout, we have still a good export program in place. I don’t feel like the crops today in the shape it is in, with the carryout that’s being projected and the yield that’s being projected, which we still think is a little low for our area, we should have any trouble handling the volumes.

Brent Rystrom – Feltl

Thank you.

Todd Becker

Okay, thank you.

Operator

Our final question for today comes from Ian Harowitz from Rafferty Capital

Ian Harowitz – Rafferty Capital

Better late than never, I guess. Good morning, guys. I’m not going to take it personally. Okay. You guys are always pretty good at this. Do you mind just giving us what you think the macro ethanol market looks like kind of capacity idol production? I know your numbers sometimes are a little different from what we can see.

Jerry Peters

I think the industry today is producing somewhere between 12.5 and 12.7 on a run rate. It probably went down a little bit only because there was some slowdown and maybe a little bit of downtime taken in the quarter. Demands, we’ve seen an uptick in demand again towards that 13 billion gallon run rate because we still have a very nice export program, and blend margins are still very good, and we’re still continuing to open up new markets.

So what we have, and that was my point in the call earlier, which was if we go next year to a 12/6 mandate with the margins that are available for blending, the exports that are still out there because we are the place in the world for ethanol exports, the incremental blending margin and profitability. You look at all that and potentially you’re at a 13 to 13.5 billion gallon demand base for 2011. And I don’t know that production will necessarily be there unless you wrap up some of the marginal plants. But that, again, takes time and you have at these EBITDA rates, or EBITDA margins, I'm not sure that they’re ramping up marginal production at this point. They might be ramping it down. And so we just have to kind of get through the last half of the year.

And then the other is that we see the expanded run rate. But I think between all of that. I don’t know how you can’t look at 2011 and think that it could be a very favorable environment much like late 2009, early 2010.

Ian Harowitz – Rafferty Capital

I agree with you, but I guess what I was trying to kind of go through again, Todd, maybe both you and Steve can comment. You know, you were talking about the EBITDA margin affording these guys the ability to turn back on. What do you think is idol right now, and maybe Steve, you talk a lot to the third parties, what’s kind of the general sentiment for these guys that can’t kind of convert quite as well as you can?

Steve Bleyl

The one’s we’re working with, they’re running flat out above or at their name plate. They’re running well within like we are. You see some out in the industry that aren’t, you know, they’ve made some calls based on their OpEx, but other than that, they’re still running.

And one of the things I talked about, and Todd mentioned, was the demand. I mean, there’s demand that we can’t touch right now just due to some of the CBOB constraints. That was the questions that’s being asked earlier. So that’s one of the things Todd talks about going into 2011, or even into the winter blending season, is their sea bob cocktails, the formula that will come out in the marketplace will enable some of this pent-up demand that we can still touch. So there’s still demand out there that we’re not touching that we can get to as the year goes on.

Todd Becker

And I think in terms of total production, our model’s capable production right now, and then with, obviously we’ve got a couple of bigger plants coming on, the Cedar Rapids Plant, and then a couple of – the one in Indiana, and then another one in Indiana and another one in Nebraska.

You know, I think overall it probably pushes you to a 13 billion production pace at the end of the year against probably a $13 billion demand pace. And I don’t know that there’s ability to bring a lot more of these plants under construction online beyond that.

And then if export continues, it should be an interesting start to ’11. But I think overall, if you built every single thing that’s out there and actually got funding, and ramped them up and did everything, it’s probably closer to $14 billionish. But it takes a lot of money, I think, to get between 13 and 14.

Ian Harowitz – Rafferty Capital

All right. That’s kind of what I was looking for. Great. And then the corn oil business, I mean, this is backend, so this isn’t food grade? I mean, what would the outtake, kind of typical outtake customer look like? What are you going to be – where’s this product going to be going?

Todd Becker

There is really three different streams for this offtake. The first stream is the high-value industrial user. That if he can get this oil in a sustainable quantity, we might see – whether it’s plastics or things like that, just, you know, those types of things that need an additional oil, we have seen some of that demand. That’s very high value. But they’re not willing to take it yet unless you can see a sustainable supply.

The second part of that is the feeder that understands how to use this oil. And that’s really a good market as well. And then kind of the lowest end market is biodiesel in relation to heating oil. This is still a very cheap input to biodiesel and I think at the $0.23/$0.24 a pound, a biodiesel can still make money, or generate positive cash flow at his plants in relation to soy oil, which is significantly higher. But we’ve seen the fats market come down here recently to compete.

So I think those are the three markets. We’ll focus on all of them. Some of it will probably end up going commodity if we see a positive biodiesel outcome, then it definitely takes the value of this oil up even more.

And if not, it is just used in the production that’s in place today, and then the feeder likes the oil a lot. So I think the key here is that what you’re taking is, you’re taking a – what today is a $0.05 a pound DDG and converting it into a $0.20 to $0.25 a pound value-added product.

And so when we reported the $15 to $19 million of operating income, that was taking into consideration the fact that we will take some reduction on our DDGs, and then the net number will be that relative to oil.

Ian Harowitz – Rafferty Capital

Okay. All right. Great. And then I think, last question, the fixed, the locked-in volumes and the index volumes, I would assume that’s primarily weighted into the third quarter?

Jerry Peters

No, not really. It’s weighted in the more third and fourth a bit equally. We got on the fourth quarter earlier in the year when we saw those margins expand out. And so I would say that this time it’s not quite as equally weighted, or not as front-end weighted as we typically have been. And we’ve made a lot of progress since the end of the quarter though. So it’s already almost August 1st here, and you know, so obviously July, or June and July – July and August are done. And then we look at just finishing up set. So we made a lot of – our quarter here is pretty well getting close to being done, the third quarter getting locked in, but we still have some open stuff that we need to get done so that we can be profitable in the third, and then obviously in the fourth we’ve got a nice start there as well and where margins are on the forward curve as well as the Agribusiness segment market distribution. We would expect a profitable quarter in the fourth quarter as of right now.

Ian Harowitz – Rafferty Capital

Any talk of first quarter product yet?

Todd Becker

Yeah. We have actually a little bit of product sold for the first quarter. The curve, I expanded out a little bit and we sold some, but at this point, it’s a little bit of a discount to the fourth quarter. Nobody’s really talking about first quarter right now. We’re still sitting at a $0.40 discount to our bob in the first quarter on ethanol and I think that with expanded mandates and – I will be surprised if at some point here we don’t start to see first quarter activity very quickly

Ian Harowitz – Rafferty Capital

Great. Well, congratulations, guys.

Operator

I would now like to turn the conference back over to Mr. Todd Becker for closing remarks.

Todd Becker

Thank you. And thank you, everybody, for coming on today. We are still very excited about the business that we’re running. We think we’ve performed very well over the last 12 months. We think our business is set up to perform very well in the future. We have one of the most efficient operating platforms in the industry today. We have a great diversified earnings stream that we’re going to continue to work on in the future and continue to grow in the future.

And once again, we think that there a lot of great things to come out this company going forward. So we appreciate all your support and coming onto the call today. Thank you very much.

Operator

Ladies and Gentlemen, thank you for participating in today’s conference. This concludes our program for today. You many all disconnect and have a wonderful day.

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Source: Green Plains Renewable Energy, Inc. Q2 2010 Earnings Call Transcript
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