Green Plains Renewable Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Green Plains (GPRE)

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

Q1 2014 Earnings Conference Call

April 30, 2013 11:00 AM ET

Executives

Jim Stark - IR

Todd Becker - President and CEO

Jerry Peters - CFO

Analyst

Brett Wong - Piper Jaffray

Farha Aslam - Stephens, Inc.

Patrick Jobin - Credit Suisse

Lawrence Alexander - Jefferies

Craig Irwin - Wedbush Securities

Paul Resnik - Uncommon Equities

Operator

Good day, and welcome everyone to the Green Plains First Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Jim Stark. Please go ahead.

Jim Stark

Thanks, and good morning and welcome to our first quarter earnings conference call today. On the call will be Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; Jeff Briggs, Chief Operating Officer, and Steve Bleyl, who is Executive Vice President of Ethanol Marketing.

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

Our comments today will contain forward-looking statements which are any statements made that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains’ management team, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risk and uncertainties, Green Plains’ actual results could differ materially from management’s expectations.

Please refer to Page 2 of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause different outcomes. The information presented today is time sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted, or redistributed at a later date, Green Plains will not be reviewing or updating this material.

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

Todd Becker

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

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

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

We took the opportunity to sell out the natural gas that we had already purchased and sold it in the spot market for a much higher value. It was much more economic to do this than to run the plant. This is a prime example of the optionality of our platform provides us around the commodities we process here at Green Plains. It was also a direct result of building a natural gas procurement and trading team within the company, it also has benefited our ethanol production segment.

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

Overall we generated $85 million in total segment operating income before corporate cost, but this result does not -- does include approximately $22 million of interest segment eliminations that Jerry will explain a little later in the call.

Eliminations were due to gallons sold and shipped but for accounting reasons cannot be included in our current quarter operating income. These will predominantly come back in the second quarter, Jerry will also cover individual segments later in the call but I will give you a quick comment on corn oil, the market fell a bit during the quarter to around $0.32 a pound but has recovered into the range of $0.35-0.37 a pound for the rest of 2014. We did start corn oil production at Atkinson in the quarter and as we brought [indiscernible] back online in early January we now have all 12 plants producing corn oil and we should see a pick-up in production closer to 60 million pounds per quarter going forward.

I will cover specifically our marketing and distribution segments as it had a significant contribution in the quarter with 32.5 million of operating income. Our merchant trading programs all made a strong contribution in the quarter, more ethanol and fuel rack business to natural gas daily pipeline activities through all of our agricultural merchant activities, they all contributed. We do not expect this to repeat in the second quarter which will retreat back to normal historical levels or below. It was a unique quarter with unique market dynamics, I’ll give you a few examples but we cannot predict when these market conditions will be there again.

In our fuel distribution and rack business we fully monetized our optionality that we always knew existed in our BlendStar terminal business by having the ownership in terminal assets we were well positioned when the market exploded higher during the quarter. We always maintain a pipeline of product to service the demand around these assets but because of the tightness in supply and dislocations that existed last quarter, having these assets in the portfolio allowed the company to enhance the production margin structure throughout the supply chain.

In fact approximately half of the segment operating income was due to the great performance in our rack business. The rest of the performance was scattered throughout many of the initiatives we have started over the last several years and our merchant businesses, specifically our natural gas business and agricultural products business which all had great results. As I said in the release, the size, scope and scale of our business have provided us with a low cost production platform, it has the ability to produce significant results particularly in a stronger margin environment, it also provides us with significant optionality.

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

Jerry Peters

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

On a consolidated basis for the first quarter, we reported revenue of $734 million, which was down 4% from a year ago. Revenues were lower as a result of a 21% lower average price per gallon of ethanol sold, but all of our key volume driven metrics increased as a result of the acquisition of three ethanol plants during 2013. Our ethanol production increased 35%, distiller’s grain productions by 32% and corn oil production increased by 33% compared to the first quarter of last year. Our consolidated operating income for the quarter was 78.3 million versus 12.7 million a year ago. In short, our platform is much bigger and margins were much better in 2014 versus 2013.

Next, I will touch on some key highlights of each segment performance. The ethanol production segment generated $66.2 million of operating income, which for this segment is $3 million more operating income in the first quarter than we generated for all of 2013. Taking a look at Slide 4 of the online presentation, you will see that we generated operating income before depreciation and amortization in the ethanol segment of $0.34 per gallon, compared to $0.05 per gallon realized in the first quarter of 2013.

These improved production economics along with transportation challenges caused a significant increase in our intersegment eliminations which are required to defer income recognition until our products are transferred to an outside customer. The intersegment eliminations of gross profit and operating income increased by 22.2 million for the three month ended March 31, 2014 compared to the same period in 2013. This was obviously significant to the quarter and will positively affect future quarters. Well, I will take you through this at a detailed level so we are all clear.

Our ethanol production segment sells all of its production to the marketing and distribution segment. The sales are recorded by the ethanol production segment at prices approximating market and traded as third party transactions in our segment reporting. Beginning October 1 of 2013; the intersegment sales occurs at its produced and transferred into storage tanks located at each respective plant. The finished product is then transported and sold from the marketing distribution segment to external customers. So profit is recognized by the ethanol production segment upon the sales of the marketing and distribution segment but is eliminated from consolidated results until title to the product has transferred to a third party. In most stages this occurs after delivery of the product at the customer’s location.

Turning to three months ended March 31, 2014; finished ethanol inventory levels increased to unusually high levels primarily due to product that was in transit to external customers as a result of transportation constraints experienced this winter. Again this has caused a deferral profit recognition of about $22 million into our inventory accounts. Recognition of those differed profits is dependent on future inventory levels as well as ethanol margins. Based on our current forecast we expect about three fourth of that deferred profit to be recognized in our consolidated results for the second quarter of 2014.

We generated $41.1 million of non-ethanol operating income for the quarter which was up from approximately 21.2 million in the first quarter of 2013. Todd already covered the excellent results of the marketing and distribution segment, which was up 19.5 million over the first quarter of last year.

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

Interest expense increased approximately $1.7 million in the first quarter of 2014 compared to a year ago due to the issuance of 120 million of three and a quarter convertible notes in September of last year. Our income tax expense was $26.5 million for the quarter which was approximately 38% effective tax rate. We anticipate a similar to slightly lower tax rate for the remainder of 2014. Earnings before interest income taxes depreciation and amortization or EBITDA was $94.1 million for the first quarter of 2014 and on a trailing 12 months basis EBITDA totalled approximately $226 million.

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

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

We are often asked, why we maintain so much cash and liquidity on the balance sheet. First quarter of 2014 demonstrates our financial strategy in that regard. We used our balance sheet liquidity to lock in significant levels of cash flow hedges against favourable margins. Those hedges required a significant investment of cash security in our margin accounts. That is why you will see a $70 million drawdown of our cash balances during the first quarter even while we generated a record quarter of profitability. As our hedges roll off in the second and third quarters, the margin deposits will be returned to us and we should see cash balances and overall liquidity move higher.

I would also like to highlight our leverage ratio shown on Page 7. With a strong performance from our ethanol and non-ethanol segments, our ratio of term debt to EBITDA has dropped to 2.3 times and our term debt to total capitalization is now at about 46%. Over the new few quarters, our balance sheet will continue to strengthen as we realized the benefits of our growing platform in a favourable margin environment.

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

Todd Becker

Thanks, Jerry. So looking out for the next couple of quarters, we want to give you some hedge numbers for what our forward book looks like as of last night, so we’re approximately 80% hedged for the second quarter and net realized ethanol production margin will be stronger in the second quarter as a reversal of inter-segment eliminations, which Jerry discussed, will impact positively on the results. The marketing and distribution segment will return to more historical levels over the next several quarters as mentioned. We’ve also seen a strengthening margin environment for the third quarter which developed over the last 30 days or so. We currently have 40% of the third quarter locked away as well.

If you recall over the last several years, we’ve had no visibility to that part of the forward curve which we believe points to the continued favourable environment that exists today. Obviously, there is still volatility in the outlook but 2014 should be a very strong year overall. Demand for ethanol remained strong. We continue to experience solid ethanol demand which has been running at the higher end of the five year average of 135 billion to 138 billion gallons per year. That is significant because at the booked at a 10% plan that puts US ethanol demand in the range of 13.8 billion gallons. Exports for 2014 totalled 152 million gallons so far and keeps us on that potential run rate of 800 to a billion gallons with exports.

We have 19% of our production sold for the second quarter and 5% so far sold for the third quarter into export channels. We are seeing interest every day for more offshore demand to expect a later quarter commitments to start decline. I want to take some time to discuss some of the future growth initiatives. Our grain capacity expansion is on track with a target of being completed by the fall harvest. The plant should additional 12 million bushels of storage in 2014. Our total lending storage capacity will be 43 million bushels by year end. We are also on track to be at least 15 million bushels by the end of 2015. We believe this plan is quick as a critical component to maximizing the opportunities in our supply chain in the future.

Since we now grind over 10 million tons of corn the storage capacity still only represents a small portion of our overall demand. We will continue to examine the right mix needed but I can tell you at this point, we have expanded our processing capacity; we will need additional storage beyond our stated goals outlined to you. As you saw by the results from the first quarter, the marketing and distributing segment was a significant contributor to the bottom line. Today, we have 20 traders working in a variety of different commodities continue to search for individuals and teams to come in to our well-developed platform, maximize the opportunities that exist within and adjacent to the commodity flows we own.

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

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

First with regard to the Department of Energy Grant, we have produced the required on spec biomass and extracted the required amount of oil from that to meet our initial obligation in the program. We are determining the next steps and whether we continue on with this project or not. While the initial focus was on providing algae oil for military fuel development, based on the encouraging results, we have found this oil to be very interesting for other fuels and chemicals which we own, the result solely for our use. DOE fuels have not been a diversion as the findings help accelerate other initiatives that can now be developed because of the very encouraging results.

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

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

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

Again everything we see and believe today is to keep going because we are seeing solid results on the projects and I am confident that we can achieve profitable product results in the near to medium term on the progress we continue to make. We’re planning to build an integrated autotrophic to heterotrophic system that can move in both directions depending on the strain the product we are producing.

The CapEx required for this will be between an initial $8 million and $20 million depending on the size and scope of the project. The initial capital required may either come from the partnership or from new external partners both commercial and financial. This is under determination. Once again we believe the development efforts will determine the cost and the scope of the project. We want to have a clear pathway to profitable operations when we build this project.

The key component is the use of sugars we create in the ethanol plant, combined with the expertise in fermentation we possess to combine this into a system that can be very versatile and low cost all starting with the original autotrophic systems we’ve developed. We’ll keep you updated as we step though the next several months and as to where are we with bioprocess algae.

Our company has built a solid diversified platform that can produce significant results here at Green Plains when the environment is right. Growth remains the central focus for us. That growth will continue to be around the areas we are confident we can deliver even better results.

Growth opportunities maybe in adjacent handling and processing businesses that we can apply our management team experience and expertise to it. That would also diversify our revenues and any constraints for Green Plains. We hope that our shareholders continue to appreciate the value that has been created over the last six years. We will now lose focus on our mission of continued and grow long terms shareholder value.

Our plan remains to have zero net debt by the end of 2015 and this is clearly in sight.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And we’ll take our first question from Brett Wong with Piper Jaffray.

Brett Wong - Piper Jaffray

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

Todd Becker

What we’re talking about how we’re thinking about is, it’s kind of the net realized margin, while the margin in the first quarter was in the mid-30s, roughly the 22 million off of the eliminations then we kind of rolled that to the second quarter and as a combined entity, sequentially including the eliminations will be better. But the overall segment margin is a little bit lower but the net of all of it overall will be better. That makes sense?

Brett Wong - Piper Jaffray

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

Todd Becker

So across the platform in Q3 we’re seeing margins in low $0.20 per gallon of EBITDA, and we’ve seen a little bit higher and we’ve seen a lot lower, even though over the last several months. So up in this range is where we started to lock the margins away, we still have 60% open. We do expect a little bit of elimination to return in that quarter as well as the pipeline gets back to normal and overall we’re starting to see margins and where we started to lock away margins was in the mid-20s. In the fourth quarter we have very, very little on at all margins right now are in the low double-digit high single-digits but again that’s still under development.

And we’re seeing those margins pop as high as $0.20 a gallon but at this point just because of the new crop rally in corn. And a very, very flat ethanol curve out in the forward, we’re not seeing any reason today that we would go and lock margins away. The stock situation from our standpoint but while it got a little bit better today with the demand and with the export program that we’re seeing we don’t necessarily believe there will be stocks filed by that time. So we’re going to be patient on the fourth quarter and while the opportunities exist, we'll start to lock that away as well.

Brett Wong - Piper Jaffray

Thanks very helpful colour and what are your plans for the pay down as the year progresses?

Todd Becker

We have our normal principle payments which we’re always focused on and beyond that we’ll just have to wait and see other things come about in terms of suites and those types of things that we have from last year. Jerry you want to comment on this as well?

Jerry Peters

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

Todd Becker

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

Brett Wong - Piper Jaffray

Okay and then one last one from me, any thoughts on increasing the dividend or authorizing a share buyback as another use of cash?

Todd Becker

No. Not at this point. That is something that, if we make that decision, it will be at the board level and what we think the best thing to do is, we’re still looking at allocating capital for growth opportunities and while we’ve certainly initiated dividend last year. Let’s wait and see what the rest of the year plays out, what opportunities are around growth and at that point I think we will make the right decision for all of the stakeholders at that point.

Operator

And our next question comes from Farha Aslam from Stephens, Inc.

Farha Aslam - Stephens, Inc.

Just going back to bioprocess algae. What is your ownership of bioprocess algae now?

Jerry Peters

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

Farha Aslam - Stephens, Inc.

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

Todd Becker

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

Jerry Peters

I think that’s again on the intersegment eliminations. That’s where – we are basing that forecast on a return to more normal inventory levels as well as profit margin levels, and so that’s why we're projecting about three fourth of that $22 million should return to us in the second quarter.

Farha Aslam - Stephens, Inc.

And so outside effect, what should be effective EBITDA margin?

Todd Becker

I don’t think it is fine we guided towards the segment EBITDA margin, have we Jim?

Jim Stark

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

Todd Becker

Well, that’s okay. So we started for the third quarter. That was the third quarter.

Farha Aslam - Stephens, Inc.

That was third quarter.

Todd Becker

That’s correct. The margins were across the third quarter, so can kind of give you indication we’re locked in a lot of our second quarter and you add back the eliminations to that and so your net realized margin will be higher overall.

Farha Aslam - Stephens, Inc.

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

Todd Becker

So first I'll comment on the domestic market. Well certainly it feels mature, I would say it’s not quite there yet, in terms of our initiative as an industry to use E15 as an impetus to get to expanded blends across the U.S. You got to remember we're not -- we don’t have the capability to blend E15 in the United States today broadly. But we do have the ability to blend E11 or E11.5 broadly across the U.S. using E15 as the way to get there. So we are starting to see 15 to 20 states have E15 approved and have got major change that have gone and started to look at it or has have implemented it like NAFCO did in the Southeast.

We’ve seen extensive work being done by many different size of convenience store chains. And so we do believe that the market will continue to pull product to higher blends because they’re capable of doing that especially as you start to get the new 2015 fleet rolling off the production line. And you get another 15 million to 17 million new cars coming off that are approved by EPA and a lot of them are actually approved by their own manufacturers. So we think that we’re going to work very hard as an industry and I would say it's a very well developed cooperation across the industry. We've worked very hard to drive higher blends in the U.S. so I would say that while the industry may feel mature at [indiscernible], I would argue that with the expanded blends we’ll continue to see better base demand here. If that happens obviously then it becomes a very interesting time, and the world still needs the ethanol as well and how price into the world. So we’re seeing good demand globally, a lot of its driven by the price of corn versus the price of sugar and how Brazilian ethanol plays into that calculation, but when you’re sitting there on a forward curve at $1.85 to $2 gallon and you're the cheapest molecule in terms of a feedstock for octane as well as for the clean air initiative globally, we think that broadly we’re just tipping the iceberg. We’re seeing global growth between 2% and 3% a year without really any production growth offsetting that.

So overall we think ethanol plays very well. To me it's ebb and flow, but I think as long as we continue to grow corn corps in the U.S. and broader crops globally with sugar prices where they’re at we shall remain very-very competitive throughout this year and even in the ’15. When we’re sitting in 2015 on the curve at $0.50 to $0.80 a gallon under [indiscernible] which then also puts us very, very competitive against the forward sugar curve.

Farha Aslam - Stephens, Inc.

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

Todd Becker

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

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

Operator

And next we will hear from Patrick Jobin with Credit Suisse.

Patrick Jobin - Credit Suisse

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

Todd Becker

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

So from the standpoint of going forward, I would say still be in that $5 million to $7 million range and we will have some exceptional quarters and the [indiscernible] while we pretty well standard to what we’re thinking overtime. We think that will start to -- the volatility of the numbers will start to be much more that in a standardized, but at this point we’ve had some good quarters last year as well like you saw but then we returned to a normalized quarter very quickly. So it’s all really depending on what the opportunity is in the market that quarter.

Patrick Jobin - Credit Suisse

Okay, last question. Just once more colour on the transportation issues, I think you highlighted that that drove some of that deferral of profits and just kind of what the constrains were and how they’re being alleviated now? Thanks.

Todd Becker

Yes, so when we shift product sometime the product, sometimes title transfers at the point of shipment at our plant and we can recognize the profit. Sometimes we have a large delivered book on where we can’t recognize the profit until it gets to the destination. Typically we’ve been managing through that. This was just a quarter where because of the railroad congestion we had a very large in transit inventory that was not at the destination yet to realize that profit until -- ethanol probably produced in the last five days of quarter loaded on a railcar on its way to somewhere or sometimes it gets there very quickly, sometimes it [indiscernible] but when it’s all delivered this was one of those quarters where because of the congestion it just slowed everything down and it just bought a very larger inventory in transit number than we had expected.

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

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

Patrick Jobin - Credit Suisse

Okay that makes sense and then just lastly the rail car initiative, I assume all of your cars are being used for your own production, given your capacity utilization?

Todd Becker

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

Operator

And we’ll move on to Lawrence Alexander with Jefferies.

Lawrence Alexander - Jefferies

Good morning, couple of questions, to the extent that you get to the zero net debt, does that materially change your hedging opportunities or how far out you can lock in margin, or is there no impact there?

Todd Becker

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

So we actually reach a point where when we run our models we say, if it moves a certain amount of standard deviations, we will start to stress the balance sheet and we’re not willing to go that far. So naturally because of the size and scope going from 330 million gallons five years ago to a billion plus gallons today, you’re getting more exposure to that.

From a standpoint of changing our strategy, so we look at things in much longer periods than one quarter at a time, and so when we go back five years and we look at it, the five year average realized margin for Green Plains, is about $0.16 a gallon. The average daily spot market and this is including the drought, so we take into consideration the drought, the daily average spot market that we ever realized would be $0.17 a gallon if we were in a spot every single day including the drought and the other thrust years.

The volatility to standard deviation of hedging was 9%, and the standard deviation of staying uncovered was 18%, so for twice the amount of risk we would have realized $0.01 more over a five year period while certainly we sometimes sit on the outside and get criticized for our hedging programs during a quarter where margins might go exceptionally high, and we are as often applauded during our margin and during quarter one where margins are under pressure, yet our forward hedge book worked well for us, so the absolute risk of staying unhedged over a long period of time doesn’t pay for the return, but obviously that doesn’t help in the quarters where margins absolutely blow out to the top side, but again we’re not going to change the strategy of the company on what we’ve built this on, which is lowering volatility for our investors giving you predictable and sustainable cash flows which I think we’ve proven over six years that we’ve been able to do that.

Lawrence Alexander – Jefferies

Then when you were a much smaller company you also had a fairly low tolerance for value add risk, if memory serves, has that changed? Or does that (in all) [ph] necessity have to change with scale?

Todd Becker

You know your bar is going up with scale but it’s not in terms of -- when we look at years ago, when we were 330 million gallons, we actually started the company with a $250,000 daily bar. Our bar average as a company which is three times the size is in the range of about a $1 million daily bar on average, some days ago it was a little bit higher, some days it’s a little bit lower so when you look at how we scale the company we still have the absolute same philosophy of not taking directional risk and not taking flat price risk and really just locking the margin away and that hasn’t changed at all. Even including the addition of all of our merchant programs has not added a significant amount of bar because most of those programs are very short dated back to back margin trades that are available to us and so, we have not changed that philosophy at all.

Lawrence Alexander – Jefferies

Okay and then two, hopefully quick ones, on the bioprocess algae side, as you’ve looked through the difference between the heterotrophic and autotrophic systems, is the impact on product quality or is it on the CapEx cost of the potential expansions and how do you balance those.

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

Todd Becker

Okay so I’ll answer those. The first answer to your question is when we talk about heterotrophic, it’s a combined system that starts the algae in an autotrophic sense, goes through the mesotrophic process where you add sugar into the reactors in the evenings to boost yield and our heterotrophic system is a very fast stressing system where you can take the cell, and really increase the lipid contact very quickly, so we’re not starting in the dark, we’re finishing in the dark so it’s a finishing system which as we believe is the right formula, it’s low cost and you can get a lot of product out of in terms of product as we used to say tons per acre. So we have seen that as a bit of a “supercharging the yields” in a very quick stressed environment which then pops out the capability to produce high lipids. Interesting thing about it is that we have actually been able to start heterotrophically and finish autotrophically for higher quality products as well.

So that’s what we’ve learned and by doing the DOE experiments we’ve actually learned how to use the system for all of our human nutrition and animal feed needs as well. So by supercharging yields in a quick stress environment compared to the normal fermentation times, we believe that will drive CapEx lower, get us to a much higher ton per acre at a lower CapEx and allow us to compete very well. So when we talk about a $6 million to $8 million build that will give us 3 tons to 4 tons per day of capacity. And those tons are profitable in terms of the cost structure to do that. So it’s really supercharging and stressing the yield we used to take, and let’s say it would take $1 million in acre to build our reactors, you might have -- you less than that per acre but higher yield per acre.

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

In terms of the M&A discussion, your M&A question you had, our centre of gravity will remain around commodity processing businesses. Whether that’s processing corn into ethanol, whether that’s looking at adjacent opportunities to process other agricultural products into finished products, we are grounded in that. We understand the process very well. We understand the risk management. That could be in the feed markets. That could be in the animal nutrition markets, but it is still going to be processing a base commodity into a finished product. And I would say that we will -- our goal is to continue to lower the beta of the company by looking at adjacent processing opportunities which will give you more steady and predictable cash flows over time, while using the ethanol segment certainly as a growth engine as well and as a cash flow engine as well, understanding that that brings more volatility in it. So we will focus on the algae business as well because that is another or the -- when we look at algae business that’s another taking a base commodity and producing it into something else. But I would say it won’t be the centre of our universe unless some magnificent breakthrough comes out and we see that the opportunity is great but at that point we'll have to make the decision on what to do with that company.

Operator

Moving on, we will hear from Craig Irwin with Wedbush.

Craig Irwin - Wedbush Securities

I wanted to ask about your merchant trading, if maybe you could share with us a little bit more detail. So the 14.5 in profit contribution in the quarter, is a really solid number. I know you said that's unlikely to repeat. But I was hoping you could discuss the risk management there beyond just the bar discussion. Some investors out there are cautious that when you have trading operations, that they can go both into the black as well as into the red. I know that you have a specific discipline and focus on short-term opportunities. I was hoping you can give us some colour about the risk management and how you would avoid potential loss on that operations?

Todd Becker

So when you go back in to -- when we look at the terminal business and you go back into late December and the market at that point was sitting in a carry position in ethanol. And so you had the opportunity to fill your pipeline up and on a return against that capital invested, as long as you had the money and the capital to invest in inventory it was a very-very low risk utilization of our asset base. What happened then, if you go into -- start to go in to the first quarter and then into second quarter, you saw by -- and what we looked at is, when we looked at an opportunity to utilize our system, we were able to buy product on a return on the system.

But beyond that we also saw that stocks were getting tighter and tighter and tighter; demand was getting better and better and that this was a unsustainable position for the market to be in to be at such a -- give you an opportunity to earn a return. And so what happens, we obviously took the opportunity to put inventory into the pipeline against the carry. Market went highly inverted at that point. We are able to sell out that inventory with our hedges and earn a very large return and the only reason we’re able to do that because we possessed this large inventory asset position that we own through BlendStar. That was the first way.

And by the way the bar associated with that was extremely low because all we were doing is treating it as -- we were basically reverse treating our dual terminals much like we thought about the grain business in the past and utilizing those to earn the return on space and then at that point a return on the pipeline at that point, we saw that the markets systematically change on our behalf. So that was the first time, but again very-very low risk allocation much like a normal hedge position.

Same thing with natural gas. We saw the same opportunity there. We were -- we saw the demand on the forward curve. We injected with a small injection position against the forward crush and we were able to utilize that injection position when the market went to $50 or $100 in MMBtu, we sold out that inventory position and made a great return in the market in this recent segment again extremely low risk allocation, very little balance sheet allocation at all but it was just one of those opportunities that we’re able to see the forward curve in ethanol utilized our adjacencies on seven pipelines and actually were more like 10 pipelines, five to seven major utilities.

We have positions in there. We’re in the daily market every day and because of that we’re seeing opportunities to enhance our opportunity within the segment, again started out with a very small injection position against the carry and you saw what happened in the first quarter. So there was literally almost a mirrored image, ethanol and natural gas had almost the same exact thing happened at the same time where the curve became highly inverted and its spot markets were extremely high.

Beyond that, much it was just in the normalized trade that we do where occasionally we see opportunities to when we see supply dislocations or what we see is a mispricing between point A and point B, turn and return on a back to back trade and about a quarter of that came from those opportunities as well. So overall while those opportunities do not exist today, so we took advantage of some of those, what we would say mispricings utilizing the assets that we owned. We take advantage of it and from our standpoint we don’t have much of that on it at all this point.

So very little risk allocated to that, some of it was timing issues where you may see a little bit of a -- on the last day of the quarter, markets continue to make significant highs and some of that came back out of the second quarter but overall for the year we’ll maintain much more towards a normal -- a normal opportunity unless something else comes up and we’re able to utilize our system again. But today, the positions we have do not mirror anything that we had on Q1 because the market opportunity isn’t paying you to do that.

Craig Irwin - Wedbush Securities

Thank you for that. My second question is about Brazil. I had the opportunity recently to meet with some Brazilian ethanol producers and they’re pretty bullish about the very backend of ’14 and ’15. Looking at the increasing probability the price controls on gasoline are likely to be removed, we don’t know if they come off in one shot or if they’re removed -- if it’s removed in increments, but a lot of them see the price controls that are in place down there is unsustainable and that should create a pretty interesting demand environment in Brazil for ethanol above and beyond what’s actually being blended right now. Can you discuss for us whether or not this is consistent with what you see and how you would see this potentially impact your business if it did play out this way in the backend of ’14 or early ’15?

Todd Becker

We haven’t had any direct discussions except to say that we’ve been curious on when price controls would eventually have to get lifted down there because of the rating being printed in terms of gasoline being imported. And so if that were to happen, we hopefully will see Brazil go to 27.5% blend this summer and then from there determine on what’s needed next. So from that standpoint obviously it would be a very interesting market dynamic if Brazil was short ethanol and we saw expanded blends in U.S. We are very cheap on the standpoint on the forward curve in terms of the ethanol blend margin domestically, but also internationally we continue to see Canada increase their demand. We continue to see the Middle East increase their demand Africa, Asia have seen demand from everywhere, and now even Mexico trying ethanol out as well. We’ve seen some interest from there as well that for the first time in a long time they’re starting to popup and then obviously China is always the wildcard. So we believe that, if that were to happen, it would definitely have a structural shift in the price curves overall as a relation to [indiscernible].

Operator

And we’ll take our final question from Paul Resnik with Uncommon Equities.

Paul Resnik - Uncommon Equities

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

Todd Becker

We have a Green Plains Asset Management Company, that is correct, that is managing external capital as outlined in the last quarter call.

Paul Resnik - Uncommon Equities

And how is that progressing?

Todd Becker

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

Paul Resnik - Uncommon Equities

At Fergus Falls, was Fergus Falls delivering [indiscernible] is that what they’re doing or what’s the story there?

Todd Becker

So we started the plan right back up. We have obviously changed our focus from delivering dry product to wet product and except for a couple of days here and there where we built up too much wet product, the plants has been running at almost full capacity and while the construction is taking place to fix the drier building.

Paul Resnik - Uncommon Equities

What were the economics of dry versus wet or wet versus dry as well?

Todd Becker

Well, the economics, it just depends on the area where you are at. Basically in Nebraska we can sell wet at the same value or even better sometimes than dry just depends in terms of the year that we are. We don’t breakout the economics of the individual plans in terms of what we get by the realized price of our whole products.

Jerry Peters

I’ll just try to end here. It’s worth noting that we do have business interruption insurance overall on that situation, so we really shouldn’t see a material impact to our operations from that plant.

Paul Resnik - Uncommon Equities

Thank you. And lastly did you comment, did you talk a little bit about the potential for the (indiscernible) like E11 or E12 and have you seen any of that happening?

Todd Becker

Well we don’t think E11 will be the blend, we think E15 will be the impetus to get to a national average of E11, so a station will sell E15 and the national average will go to E11 because you’re not capable of producing E15 at a 100% across the US anyways.

Operator

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

Todd Becker

So I thank everybody for coming on to the call today, obviously we’re excited about 2014, we think all the hard work that we’ve done over the last five or six years is certainly showing the capability of the platform and we appreciate your sticking with us over that time as well, thank you very much.

Operator

That does conclude today’s conference, thank you for your participation.

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