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Green Plains Renewable Energy Inc. (NASDAQ:GPRE)

Q2 2011 Earnings Call

July 28, 2011 11:00 AM ET

Executives

Todd Becker – President and CEO

Jerry Peters – CFO

Jim Stark – VP, Investor and Media Relations

Analysts

Mike Ritzenthaler – Piper Jaffray

Farha Aslam – Stephens Inc

Lucy Watson – Jefferies & Company

Brent Rystrom – Feltl

Matt Farwell – Imperial Capital

Luke Beltnick -TPG Credit

Paul Resnik – Resnik Asset Management

Operator

Good day everyone, and welcome to the Green Plains Renewable Energy, Inc. Second Quarter 2011 Financial Results Conference Call. Today’s conference is being recorded. At this time, I like to turn the call over to Mr. Jim Stark. Please go ahead, sir.

Jim Stark

Thanks Jay. Welcome to our second quarter 2011 earnings call. On the call today is Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; and Jeff Briggs, our Chief Operating Officer. We are here to discuss our second quarter 2011 financial results and the recent developments for Green Plains Renewable Energy.

There is a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website at gpreinc.com on the Investor page under the Events and Presentations link.

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

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

I will now turn the call over to Todd Becker.

Todd Becker

Thanks Jim and thanks everybody joining on the call today. Over the last 10 profitable quarters, our strategy was to operate safely, diversify our earning, maintain our focus on disciplinary risk management and lower our operating cost per gallon. This is all to protect our shareholders during a times of ethanol margin compression and to prove we have a sustainable business during the cyclical downturn.

This explains what happened in the second quarter of 2011. We did earn $0.14 a share in the second quarter, which was a direct result of our diversification strategy where we earn enough from other segments to maintain profitability across the whole company.

Corn oil production made a significant contribution in our profitability generating $6.3 million of operating income and the sale of 21.5 million pounds of the product. Eight of our nine plants are in full production and the ninth plant will be producing corn oil by the end of the third quarter. We expect to be producing over 25 million pounds per quarter going forward with the additional plant and improved yield as we line out our equipment and debottleneck that process.

Because of the significant contribution corn oil makes to our business, we’ve broken it out as a segment for reporting purposes and remember we report corn oil as a net number after keeping our plants whole for the storage grains revenues and covering expenses related to the production of oil.

We again reported profitable segments across the board in this quarter, as we generated $22.6 million of operating income before corporate expenses. Total EBITDA for the quarter was approximately $30 million, which was also an improvement over the second quarter of last year. We sold and produced a record 184 million gallons of ethanol and a record 514,000 tons of the storage grain, which we sell for all segments from livestock as well as for export.

Even with the compressed margin environment, we’re successful in producing good results in our ethanol production segment. I’ll get into a broader discussion on margins later in the call. Year-to-date, our Agribusiness is performing in total as expected and we continue to work on driving up profitability by focusing on cost handle and margins.

We have taken some steps that should begin generating better result and believe that as we close our 2011, we will see a strong finish in the Agribusiness. We are finishing our Tennessee grain storage expansion and also have the opportunity to build an additional 1 million bushels space in Iowa which we have not yet reported. This will be in an expansion of our Gruver and Langdon facilities and should be ready for harvest.

In total, we should have 37 million bushels of own storage in our Agribusiness segment by the end of 2011. We did complete a small acquisition of a country elevator in Hopkins, Missouri in June that increased our grain storage capacity as well and we continue to actively pursue acquisition opportunities in this segment.

As I mentioned earlier, corn oil production is now its own segment, removed from the marketing and distribution group. We did see good growth opportunities in our Marketing and distribution segment as we focus on expanding Glen Star’s platform and as we become more active in the bio fuels and blended fuel markets. We believe the opportunities for downstream fuel distribution are substantial.

Now I will turn the call over to Jerry to review our financials in more detail and I will come back to cover industry topic, the ethanol margin environment, and our current outlook for the company.

Jerry Peters

Thanks Todd and good morning everyone. I will cover a few of the financial highlights for the quarter which are summarized in the presentation on our website. Turning to the consolidated income statement for the second quarter of 2011, our revenues were up 90% to $861 million for the quarter compared to 2010.

Due mainly to an increase in the volume of ethanol sold and higher commodity prices overall. Our own ethanol production increased 41% due to the acquisition of the Lakota and Riga plant last October and the Otter Tail plant in March of this year.

Corn oil production contributed $10.5 million to total revenues and $6.4 million operating income in the second quarter based on 21.5 million pounds of production.

Volumes in our Agribusiness segment, volumes were also higher in our Agribusiness segment in the second quarter, but commodity prices account for greater portion of the revenue increases in that segments business. Commodity prices are up considerably this year which affected revenues and cost of sales in each of our segments. In ethanol production, we experienced a 96% increase in the average cost of corn per bushel in the second quarter of 2011 compared to 2010.

While that’s obviously a substantial increase. As you can see on slide 4 of the presentation, we generated per gallon operating income before depreciation in this segment up $0.12 compared to $0.18 per gallon last year that was realized in the second quarter of 2010.

Again, our margins were somewhat impressed our focus of continually locking acceptable margins in when available positioned us to realize profits in these segments even during a cyclical downturn. These margins were sufficient to fully meet our debt service obligations during the quarter while our other segments could provide additional bottom line profits. So as a result of defensively managing our ethanol production margins and our diversified income streams from our other segments, we generated $35.1 million of gross profit for the second quarter, a 14% increase over the prior year second quarter.

Consolidated selling, general, and administrative expenses increased $3.9 million quarter-over-quarter, which is similar to the increase from last quarter and as a result of the larger size and scope of our business in 2011 versus 2010.

To summarize as a result of strong increases in volumes across our businesses our focus to remain a low cost operator and greater diversification of our business, consolidated operating income increased by $0.5 million in the second quarter 2011 compared to last year despite a period of tighter ethanol margins.

Interest expense was higher by $3.6 million due to debt taken on as a result of our acquisition and the convertible note issuance late last year. Our effective tax rate remained at about 36% compared to 22% last year and we don’t expect that to change much for the balance of 2011. Total EBITDA increased $3.5 million for the second quarter to $29.8 million and on a trailing 12 month basis totaled approximately $132 million on 647 million gallons of ethanol production.

Our cash position increased slightly over last quarter end with the balance of $164 million in total cash on the balance sheet. Keep in mind during the second quarter we utilized about $12.3 million of cash for principal payments on a term debt and about $15.5 million for capital expenditures and capital expenditures included about $5.5 million for corn oil extraction facilities and $3.7 million for progress payments for our grain storage projects.

Managing our balance sheet is critical to managing our business particularly in an environment of high commodity prices. At June 30 our total ethanol plant debt was $482 million or about $0.65 per gallon of capacity which is a 16% reduction over last year. We are currently working on a new revolving credit facility and term loan for our Agribusiness operations. We expect to increase the capacity under the revolver, provide for the growth expected in grain volumes from our expansion projects and give us the ability to continue to manage our grain business effectively in the current commodity environment.

In summary, we believe we demonstrated the viability of our strategy that is focused on diversification, risk management, operational excellence, and maintaining a strong balance sheet.

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

Todd Becker

Thanks, Jerry. Ethanol demand remained solid and we have seen a widening of margins for the rest of 2011 and even into 2012. We have not seen this level of visibility on an 18-month curve for quite a while. There is one phenomenon taking place particularly in this third quarter that we haven’t seen for some time in the grain business.

The corn basis around our ethanol plants for the remainder of the crop year is very strong. In some cases, (inaudible) were paying 100 over Chicago features for corn and the Western Corn Belt is seeing end of crop year value strong as well.

The good news, as previously indicated, is we secured a large portion of our physical corn needs for the third quarter, while we still need to be cognizant of the impact of these levels. We have been successful in locking away a significant portion, greater than 50% of production for the rest of 2011 at better margins than we reported in the first half of 2011.

As discussed, corn supplies will remain tight into the new crop, but we do not intend to do anything but run our plants at full throttle throughout. Corn oil now provides an additional motivation for us as well. As you may remember on our first quarter call, margin visibility in the quarter did not exist, but now we firmly believe and we will show better profitability sequentially over the next two quarters than we reported in the last two.

What we see today held us a Q3 will be better than Q2 and Q4 will be better than Q3. With regard to the ethanol tax credit, we have said all along as a company we will be fine when the tax credit of lenders and refiners end.

The ethanol industry has matured and become a permanent part of the fuel supply in the U.S. and is gaining a foothold in international markets as well. Ethanol still remains at a discount to wholesale gasoline over the next 12 months, which will provide blenders economic incentive to continue to blend our product.

Exports remain strong for US ethanol. We believe nearly 90 million gallons were exported in May bringing the year-to-date total for exports to 410 million gallons. That is more than it was exported in all of 2010. We see no signs at exports of U.S. ethanol going to slow down anytime soon. In fact later this week, we’re seeing additional interest for barrels into both Brazil and Europe through the remainder of the year.

Stocks remained high in certain geographic markets for ethanol as well, which is driving overall complex values higher and margins as well. As we have said, there are five main drivers to what we believe, they are very good fundamental story shaping up for ethanol in 2012. The expanding mandate is 13.2 billion gallon, export markets remained strong, CBOB volumes remain strong as more refiners are producing separate gasoline. We should see early adopter E15 implementation in states like Iowa and finally the ethanol curve in 2012 remains a largest discount to gasoline and we’re profitable out there today as well and that is without the tax credit.

2011 and 2012 crop is in good shape in our areas around our locations and we believe that crop will get harvested and produced providing a little more stability to input prices. In both Tennessee and Iowa on recent tours, we believe crops tributary to our elevator system are better than last year.

And crops tributary to our ethanol plants are in great shape as well especially in Nebraska and Minnesota. BioProcess Algae Phase II is making solid progress down the path of producing food, feed, and fuel. We should finish up a 1.5 acre outdoor reactor system in the next 60 days, which can produce finished products to provide into various downstream markets.

Our early focus is on high value nutraceutical omega 3 oils and animal feed market, specifically fishmeal and poultry. In fact we are currently in poultry feed trials of two universities as we speak. The company will break ground on a 5 acre farm this fall and our Shenandoah ethanol plan and complete the construction in the spring of 2012. We believe this farm will be capable of producing some of the first commercially available algae products at competitive cost points.

We only continue to invest and build alongside our partners because we believe we have a past of profitability even on our early larger farms. While we found that the fuel market is one of the last markets to focus on as other mentioned provide a better value proposition today. We are still focused on this market and we have continued development there as well.

In closing, I would like to say that we are on track to producing the $50 million of non-ethanol operating income over the next 12 months. Certainly the 42% of operating income coming from non-ethanol crush related segments in the second quarter is a strong start to delivery on that goal, to help you understand how we have been able diversify our income streams this often cyclical margin downturns remain profitable.

We are very much so a growth company with focus on growing the front end agro business segment and a downstream marketing and distribution segment from our platform and we’ll keep you updated on our progress there as well.

With that, thank you for calling in today, and now I would like to ask Jay to start the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Mike Ritzenthaler with Piper Jaffray.

Mike Ritzenthaler – Piper Jaffray

Good morning guys, congratulations on a nice quarter in a tough environment.

Jerry Peters

Thanks.

Mike Ritzenthaler – Piper Jaffray

My first question is around the corn oil extraction income that was well above our expectations and I guess my question is two parts, one is where there any outside surprises that you saw in the quarter whether it’s volumes or pricing or some mix or some other industry trend that might be a factor and I guess the second part is if you consider doing food grade oil?

Todd Becker

To answer your question on things that impacted the quarter, I mean what we did is we are getting all of our plants online and we started to push yields higher a little bit in the equipment as we were again lining it out and debottlenecking, so we saw a little bit of production but we also saw a very strong fats and tallows and soy oil complex and while we don’t quite get soy oil prices, they will remain strong during the quarter and then they competed well – and corn oil competed well in the fats and tallows market which actually had an uptick against the oil market.

So, in general, we are able to achieve a bit higher pricing at a little more volume than we thought we are going to get. In terms of food grade corn oil, this is actually at the backend of the process and well we look at those markets a lot from a pricing perspective. This is not an oil that can actually hit that type of market that would have to from our perspective in the plants that we run that would have been within application and the frontend recognition, we are not focused on food grade at all.

Mike Ritzenthaler – Piper Jaffray

Okay, all right. Thanks for the clarification. And then I guess my second question is around the noise and thanks for the commentary on the 2011 and 2012 outlook. The noise around the Brazilian blending rates being lowered, I believe they are talking about 18% and whether that actually happens if anybody guess I guess but has that been incorporated into your thoughts about how you look at margin support through 2012?

Todd Becker

Yeah. I mean I think if we look at 2012 and even if they drop, they drop to 18% before and they were still importing. I think there is other structural issues in Brazil going on. It still needs to import gasoline. So whether they are importing ethanol or importing gasoline they are going to have to import fuel based on kind of their current run rates on demand. In general, though we don’t view that that would give them an exportable surplus of any consequence.

And so while we believe that maybe that lowers demand from Brazil a little bit. It still keeps world demand coming to the U.S. for our product through 2012 until they can come to a point where they have a bunch of exportable surplus. I think they structurally have difficulty exporting today both politically as well as price wise and I think that will continue on through next year which will hopefully keep our exports strong out of the U.S. for quite a while.

Mike Ritzenthaler – Piper Jaffray

Okay, great. One last quick question is, can you give us a sense for what hurdles there might be in getting the Shenandoah ethanol produced approved as an advanced bio-fuel. Is there some sort of process you have to go through at the EPA to get there? Is that something that you’re looking at doing to be able to capture higher end values, that type of thing?

Todd Becker

Look I think that question comes down to the algae farm that we’re building down at Shenandoah from the partnership of Bioprocess. One of our early focus is on why we are focusing on algae is that when we take a third of that corn kernel and we capture the CO2 that was originally coming out of the stack and we grow on harvest algae into food feeding fuel that that capture then should have reduce your carbon footprint.

Today because we’re not quite – we’re not at scale we’re not capturing enough CO2, we’re not really focused on having Shenandoah being advanced bio-fuel. I think as we grow out the capacity they are moving to more commercial scale operations and we capture more of the CO2, we’ve had early discussions with EPA and DOE and why would Shenandoah qualify then as an advance and break through that corn discrimination clause and while we have nothing to report today is something that we continue to focus on in the future.

Mike Ritzenthaler – Piper Jaffray

Okay. So the right way to think about it is another step in the diversification strategy.

Todd Becker

Yeah. I mean if we can capture the higher rain as we capture more CO2 off the stack that would be great but today our goal is instead of losing that carbon in the air now we create a product out of carbon so we actually have value for our carbon anyways which finance is part of the reason why we’re doing it and then rain will be the extra bonus if that – if we can actually get that cleared but that’s a harder process.

Mike Ritzenthaler – Piper Jaffray

All right thanks.

Operator

We got Farha Aslam with Stephens Inc

Farha Aslam – Stephens Inc

Hi good morning.

Todd Becker

Good morning Farha.

Farha Aslam – Stephens Inc

When you look at 50% of your ethanol being hedged going forward could you just give us some color around kind of which of those two quarter that falls in to?

Todd Becker

Yeah. I mean I will give you color of that in these in the third quarter. We are over two-thirds done in our hedges and are working very fast and furious to kind of finish up the quarter as margins in September have expanded in the last week. One thing to keep in mind though is we cannot use historical corn basis levels to figure out where the margin is. We have to use more recent kind of uptick in corn obviously the margins have remained strong.

In this fourth quarter we are over 50% as we buy more physical corn in the fourth quarter we’ll start to move that up as well but our investment in locking in margins has been made in the third quarter as we saw those expand over the last 60 days from levels that we weren’t very happy about the levels that we felt we needed to lock in aggressively. So once we locked down the third quarter we’ll now – will focus on locking down the rest of the fourth quarter but that’s taking an investment in capital as a lot of it is done in cash flow hedging through financial instruments.

Farha Aslam – Stephens Incorporator

And could you just give us some color on what has caused the margin expansion and if you’re all concerned that where oil companies are buying ethanol forward and there is going to be sort of whole in ethanol demand on the other side of all this buying?

Todd Becker

I don’t think that we have not seen a huge buying program beyond 60 days from consumptive demand and so we are starting to see now that coming for September, but in terms of fourth quarter consumptive demand, we have not seen those are not the biggest market participants out there.

So they are still staying in this kind of 60 to 90 days space and we don’t believe that they are overbuying the third quarter to get into the fourth quarter. We just have seen better demand both globally and domestically. We have seen and when you export all these stocks you have to replace them domestically with production.

We have seen production kind of levels basically maintain themselves and even drop off a little bit and so overall when you kind of put all that together, we saw our days of inventory have kind of dropped form the first quarter end of the second quarter at the high 20s now more into the 21, 22, 23 days of inventory, which is typical when we start to see a margin expansion coming into summer driving season as well as we have seen a very good impact of demand from the conventional gas moving into CBOB which is a sub grade gas and that phenomena is also helping fuel demand.

Farha Aslam – Stephens Inc

Okay. And then there is some question down in DC whether the VTEEC will be part of this budget or whether it’s going to expire naturally at the end of December. Any thoughts on that and how that’s going to impact Ethanol buying pattern?

Todd Becker

Well, VTEEC obviously needs a legislation to get attached to and people thought it would be the budget or the recent debt ceiling legislation. If there is no tax attachment to it, then I cannot get – cannot find a legislative vehicle to attach to right at this moment I am sure they will continue to work on it. Otherwise, it would expire at the end of the year without any other program.

So I’m sure people are working hard to find some legislation to attach to it at this point depending on how this debt ceiling legislation goes if there is no tax application then VTEEC won’t get attached to that. So we will just see if there’s another vehicle.

Farha Aslam – Stephens Inc

Okay. My final question I will pass it on and follow-up to Laurence’s question. Could you tell us kind of how you are thinking about the algae build that kind of what would be the milestones of when you’d make decisions on expanding that algae project?

Todd Becker

Yeah, I mean basically as we’ve gone through we’ve continued to say, if it continues to work and we continue to see a path to profitability at all levels, then we will continue to build out. We are not a – this is not a faster revenue company, and so we want to make sure every investment we make it will generate some sort of return and that’s where we’re at right now.

So, we are building out the one-and-a-half acre infield at Shenandoah to move to a five acre farm facility in Shenandoah. We actually believe that those farms will be profitable, can’t comment on what their level will be, but we are hoping that that’s the case based on kind of early indications of the high value products.

And then, at that point once we kind of break ground on the five acre farm, which should be late summer, possibly September, then we will make the decision on the complete scale build out at Shenandoah of what we think will be 300 acres to 400 acres and then that will give us commercial quantities of algae to sell into the market. We’re focused on providing commodities to people that need to use the algae whether it’s in the nutraceuticals the EPA-DHA when you look at Ag and milk and you see kind of high EPA, high DHA applications that’s a lot of times algae oil.

Moving into animal feed markets, we’re focused on the fish meal markets, where we believe it will compete and down into poultry market and finally into the fuel markets. At all those levels, we believe with the technology as we’ve been building out that there is a path to profitability and as volumes we’re continuing to prove that we’ll continue to invest and that will make the decision for the largest commercial scale of next summer.

Farha Aslam – Stephens Inc

Great, thank you very much.

Todd Becker

Thank you.

Operator

We’ll go next to Laurence Alexander with Jefferies & Company.

Lucy Watson – Jefferies & Company

Good morning this is Lucy Watson on for Laurence today.

Todd Becker

Hi, Lucy.

Lucy Watson – Jefferies & Company

I’ve kind of two part question your ethanol gallons produced internally increased by about 7% quarter-over-quarter, but your marketed and distributed gallons declined by about 8% quarter-over-quarter. So I was just wondering maybe if you could describe what drove the increase quarter-over-quarter at your own plants and if production increased at all of your facilities and then what drove the decline in marketed and distributed gallons?

Todd Becker

I will comment on it and then if Jerry has any further comments, we’ll let him come in, but basically as we’ve been acquiring plants and ramping those up and we’re starting to get to our full, what we believe will be 740 million gallons of production we’re producing 184 million gallons this quarter and so that’s just a ramp up internally from acquired assets. We did see a small drop-off in marketed volumes as we terminated a contract with one of the marketing plants last quarter. So that really just explains the up and the down, but net-net we believe that the business will remain strong.

Lucy Watson – Jefferies & Company

Okay and then I guess as you taught about taking 10 profitable quarters behind you. Are you evaluating any options for returning cash to shareholders or any plans to elevate CapEx or I guess maybe a simpler way of asking would just be what are your priorities for cash going forward?

Todd Becker

As we’ve told everybody over the past 10 quarters having a strong balance sheet it’s key to be successful in a commodity business. And the reason we’re able to act fast like we did in the second quarter when we had the opportunity to lock margins is because we had a strong balance sheet and we’re able to invest in the cash flow hedging program that we have.

And so that, and especially with the level of volatility of our underlying commodity markets with the prices moving a $1 in a month either direction we believe we have to continue to maintain a strong balance sheet and have strong capacity. We also have a lot of opportunities that we believe are investible opportunities in front of us and we will have to wait to see what we can bring forward but we’re continuing to look for opportunities to invest in our agribusiness segment as well as invest in our downstream segment.

We are not actively seeking ethanol plants, but if they actively seek us, we’ll talk to them. But today we’re really focused on growing our upstream and downstream. We want to make sure we have balance sheet capacity for that. We believe over the next couple of quarters we’ll continue to generate free cash and pay down debt as well. Look we’ve paid down over $35 million of debt I think year-to-date in terms of principle and we will – if we’re successful over the last half of the year as we think we will be, we’ll have to pay down debt through sweeps as well and that will just continue to de-lever the company.

And when you kind of look at it we’re on track to pay down $50 million of your principle as well as with cash it could be greater than that. So when you look at our debt number today at kind $480 million of ethanol debt if we would kind of look two years out with sweeps and with principle payments we could take that down into low 300’s which gives us great agility to operate. So I think we’re focused on growth, having strong balance sheet to make sure we can manage our risk correctly and continue to pay down debt.

Lucy Watson – Jefferies & Company

Thank you.

Operator

(Operator Instructions). Next to Brent Rystrom of Feltl.

Todd Becker

Hi, Brent.

Brent Rystrom – Feltl

How are you?

Todd Becker

I’m good. How are you?

Brent Rystrom – Feltl

Good, thank you. A couple of quick questions for you, just got of the Bungee call they were talking about sweeping crush margins coming in pretty tight here in the next couple of quarters. Does that have any implications for your corn oil?

Todd Becker

No, I mean if you look at oil we’re tracking today that’s what we compete with whether oil goes to 50 or 57, we are still remaining at discount still profitable in our corn oil segment. So today the curve on bean oil is in the 57 to 58 range and so we based ourselves over there so even if we want to be 50 it’d still be strong but I don’t believe it impacts us at all.

Brent Rystrom – Feltl

All right. Kind of an odd question both of the Bunge and ADM have told me that they have seen prices per month in summaries Central South America for a lot of the soy bean oil products because they’ve seen DDG getting price of the markets. So I’m assuming you get pretty good pricing for the DDG right now?

Todd Becker

We are actually this is still the summer gold runs for DDG’s. I mean DDG in the Mid-West, Nebraska I mean this is kind of when the summer hits and they put a lot of (inaudible) and they are not feeding as many DDGs and right now DDGs are actually on the lower end of the range as a percentage of corn than it has been.

Brent Rystrom – Feltl

So what you are talking about is more related to price declines in the crush versus price increases with your DDGs.

Todd Becker

Yeah, I think so – what happened over the phenomenon earlier in the year where DDGs had a point that we priced ourselves out of the soy meal market as a substitute. And so maybe that’s having an impact on them.

Brent Rystrom – Feltl

Alright. Interesting thought, I was thinking about when you look at combination of few things either the drought they have had in South America or actually the freeze. The combination of those two could set back sugar production not just for season, but for a couple of years. It could open up a pretty interesting window for you, any thoughts on that?

Todd Becker

Yeah, I think – yes – I think that’s something that we have been looking at closely. And I think that that has a great opportunity for us. I think a lot of people forget that when you make ethanol in Brazil, you still have to deal with a commodity price and while it might be cheaper to convert it to ethanol, it isn’t necessarily cheaper from a finished product standpoint. I think that’s where the confusion comes from our competitiveness in the U.S.

In addition, a smart trader had indicated to me that they believe that there is even some structural land issues in Brazil that potentially you are not going to get the same yields out of the old land without some improvements on those acres and that’s also a possibility that may reduce sugar over the short term until they reinvest in some of those processes down there as well.

Brent Rystrom – Feltl

Then you could buy now with all those heavy new plant in the last 6 to 12 months and that comes into play too I would assume?

Todd Becker

Yeah, I am not an expert on Sugar in Brazil, but I’d assume that’s part of it.

Brent Rystrom – Feltl

Alright. And then quick question on corn, given your background which is pretty strong in the stuff, are you locking or thinking about locking in corn prices prior to the carryout for 2012?

Todd Becker

Look, I mean again we don’t allocate risk capital and if we find chances to buy corn, so ethanol will do that. I think corn is range mound at this point from our standpoint. We are trying to get towards the upper end of the range.

I think the bigger impact in the world today is the fact and we have mentioned this before that Russian wheat started the rally and Russian and Ukrainian could end the rally because right now Russian wheat is $50 discount to corn and I think they are still trying to find homes and I think when you look at that and look at structurally the corn market where it is that today and the potential for the crop that we have even though a lot of people are trying to – very worried about yields today, I think when we look at structurally in the world there are plenty of feed grains and I think that will probably keep more of a at least a reasonable top line price this year without worry of an explosive market unless obviously the yields in the U.S. degrades to a point where it’s impactful.

Brent Rystrom – Feltl

And the Russian price degrade $50 per ton primarily because of the quality of the wheat that actually plays into your advantage because it pushes more of it into more of industrial use rather than feed base human consumption, it’s right?

Todd Becker

Yeah, I mean look I think we will take a bit for human and/or feed. I think that the issue is that the international market besides kind of Chinese corn buying, international markets for feed grains other than that the Russian wheat will start to take care of that so that’s kind of what we are thinking.

Brent Rystrom – Feltl

All right. Thank you very much guys.

Todd Becker

All right. Thank you, see you.

Operator

We will go next to Matt Farwell with Imperial Capital.

Matt Farwell – Imperial Capital

Hey, good morning. Great quarter.

Todd Becker

Thanks Matt.

Matt Farwell – Imperial Capital

Just curious, you mentioned corn bases in some of the local areas being the dollar oversee but has that offset the strength in Ethanol prices or put differently. What kind of margins are you seeing right now as you lock into the remainder of Q3?

Todd Becker

I think as you look at margins right now, it’s extremely difficult to pinpoint that specifically because it spanned how much corn you have bought versus how much you don’t have bought versus where you are located. I mean I just think when you look at it, it’s a very broad question.

I mean – and you have to look at what you have bought versus replacement. So when you look at it from that perspective it’s kind of all over the place but I think high teens, low 20s is kind of a base number. Spot market is better if you don’t need any corn. If you do need corn the spot market kind of drops down significantly. So in general I mean I think to finish off the quarter we are kind of in that – into that range and we will just have to wait and see.

We stopped a little bit of corn to buy left this quarter but not a lot. So we’re able to kind of margins expand lock away a little bit. But we got as you know, I mean we saw a point where our full platform at one point on average was kind of negative EBITDA in the last 150 days and now we have moved into – we saw the mid-teens into the high teens and into low 20s. We just will have to take into consideration the corn basis. So we move very quickly when we see good cash flows and maybe we miss that last 10 cent move but in general I think you can expect more of a normalized average margin for the quarter.

Matt Farwell – Imperial Capital

Okay. Great. And then just thinking more broadly, I am looking at production numbers for this year and it looks to me that they are going to average out at about 13.7 billion gallona and so there’s about 12.6 billion of RFS demand.

We think about 700, 800 million going into exports but it seems like the market is well supplied but the next year you have the RFS rising to 13.2. So my question is number one, do you expect exports to grow and number two do you think that the ethanol production capacity could rebound, maybe some of its operating below capacity, how do you think that supply and demand looks for 2012?

Todd Becker

If you look at the run rate right as we speak, we’re not running at a 13.7 run rate, not just the date of the other day it was more like 13.1, 13.2 run rate. I think we could be hard pressed to run towards those upper end of that range that you’re talking about this year. And so when we move into the end of the year, obviously I don’t believe we’re running as strong as we were as an industry, we’re running fine, but I think as an industry I don’t think we’re running quite as – I never believed actually we’re running over 13.5 anyways.

And so I think from when we look at ‘12, when you have a 13.2 base, you got say minimum 400 or 500 exports that gets to the 13.7 base, I think we have E15 implementation as well a little bit extra. And then if you see any strength in export towards what we’re going to see this year, I think you have started to get tightness in the supply demand equilibrium. I don’t believe necessarily that you’ll see huge amounts of new plants coming out, there’s a couple of that need to get finished, there’s a couple of that need to get started and there’s a couple of that are shut down.

But, in general, those might be the kid of those peak margins that you’ll see some plants come online. But when you look at kind of base demand in United States with the blend margins that are in place I think there will be funny update from demand and it would be export demand I think we should be fine for 2012. We’re already seeing in the curve, we haven’t seen a curve at least for a quite while that you can remain profitable for 18 months out and generate pretty good cash, but the thing is you going to watch out is lock your form basis in ‘12 and that’s very hard to buy out fund. So what you might want, if you go financial crushes that’s fine but then it will be short of lot of corn basis and I don’t think that would have worked work very well this year.

So you got to be very careful about that curve but in general if you look at kind of reasonable corn basis numbers, not even down the historical lows, there is a chance even in ‘12 with visibility, so today the market is telling you that they need the ethanol.

Matt Farwell – Imperial Capital

Great. Thanks for the color.

Todd Becker

Thanks a lot.

Operator

We’ll go next to Luke Beltnick with TPG Credit.

Luke Beltnick –TPG Credit

Thanks. Hey guys just a couple of questions. The first one on the $0.12 per gallon margin from the ethanol production segment in Q2, any idea of the range it would have been had you not locked in hedges previous to the quarter, just trying to get an idea on what the impact of your hedging program I know was?

Todd Becker

Yeah, the daily spot crush on our total, you go back to June – January 1st, from January 1st to June 30th the daily average spot crush was $0.11 a gallon. And the range on that was kind zero to couple of days into the high teens, low 20s, that’s the daily average spot crush for those 120 days or 180 days.

If you would have looked at the single 90-day quarter April, May and June, the daily average spot crush was basically right in line with where we were at. We are on 12.9 EBITDA and that was right around $0.13. But that was only because of the last 15 days of the quarter. So if you look at April average alone, and you look at May average alone without the last 15 days of that quarter you wouldn’t have made available to achieve those margins, so we watched it very, very closely.

And we’re – sometimes during quarter, where the spot crush was in the low single digits and there were some times in the quarter where the spot was in the high 20s and low 30s. But you had to have your Corn bought and that was only against having Corn bought if you had to do replacement corn to be significantly less than that.

Luke Beltnick –TPG Credit

Got it, okay thanks. Regarding the E15 rollout in labeling, any additional color on where you’re hearing from the EPA and where that’s out and just in general what your view is on the timeframe and how this gets rolled out?

Todd Becker

Yeah, look the labels down and it has been put out there. I think, from the standpoint of a large rollout, we’ve to get through some of other kind of state issues around pumps and you underwrite as laboratories and things like that. I think if we can get through some of these congressional things and get money from wonder pumps that will be very helpful. But what we’re seeing in the state of Iowa right now is the state of Iowa for example, they put a tax credit in place for E15 and so that was the impetus then for the petroleum markers and Iowa started thinking about E15 because it actually put them into a tax position that earns them some additional revenue.

So, even without VTEEC and then if you add in the Iowa tax credit and you add in the blend margins when the E15 is a very, very profitable thing to do in Iowa and we think that they will be the early adopter state and then from there hopefully people start to realize the same thing and may well see some early adopter states in Nebraska, Minnesota, and South Dakota.

So, while that’s going to be one-year phenomena, we think as it starts to roll out over the next multiple years as we start to get more flex vehicles on the road and start to get more wonder pumps and we start to use it more in our 2001 and newer fleet and get more market acceptance, it will be a rollout over the next three to kind of 10 years to get full penetration need to year E15.

Luke Beltnick –TPG Credit

And do you have any estimates of what the incremental demand will be in call it 2012-2013 from year ‘15?

Todd Becker

And we think incremental demand could be a couple of hundred million gallons building to a couple of hundred million gallons maybe 200 million 300 million gallons over the next three years and add at that on your 13.2 and then it goes to a 13.8 mandate and then even higher.

And that I pose the fact that exports do remain good, I think we’ll continue to see a good equilibrium between supply and demand, building in 2015 into 15 billion gallon mandate without that production available today.

Luke Beltnick –TPG Credit

Okay. And then last question on the M&A front for ethanol plant, it sounds like you guys aren’t that active at this point is that just because there’s not a lot of outdoors you did add spreads, just any color of what you are seen in the market and how you guys are viewing it?

Todd Becker

Well, no, I mean look if there is an opportunity we’ll look at it. We have good competition, I can tell you that, I mean, and it’s not from weak players and so when every time see something, we’re going to go against the likes of the oil company or the refinery that’s interested in building out their platform.

And it’s different when you can write a check to a farmer-owned plant that has no debt versus us having that kind of go to market rates and debts, equity, are to compete from that perspective. And so yes we haven’t seen any – we’ve seen sale processes, yeah we haven’t seen any sales.

We talk to people directly around acquisitions, but – when margins expand like they have and people get more optimistic that they will continue to make it through that that quarter and then the activity gets a little bit less, but it more we’re seeing is there’s an ageing of the ethanol, single ethanol farmer ownership structure that has paid down a lot of debt and as they sell it for $1.25 a gallon or $1.30 a gallon, we are seeing that in line to monetize their investment again and then invest their money elsewhere instead of having it in an ethanol plant.

That’s what we think will drive acquisition over the next couple of years and when we see that I think we will be able to opportunistically look at growth. But today as we say we are not actively seeking ethanol acquisitions, they are – they still actively seek us, but we haven’t seen any today that fits our profile.

Luke Beltnick –TPG Credit

Got it, thanks for the color.

Todd Becker

Thanks.

Operator

And our final question will come from Paul Resnik with Resnik Asset Management.

Paul Resnik – Resnik Asset Management

Good morning.

Todd Becker

Good morning, Paul.

Paul Resnik – Resnik Asset Management

It means really be statistically meaningful, but I’ve gotten embroiled in looking at improved yield over time and there was just a slight reduction in the – this quarter from little bit over 2.85 gallons to little bit below 2.84 gallons. And then I was just wondering any thoughts about your ongoing efforts to improve yield?

Todd Becker

Well, I think if you kind of look at it from back in 2009 and we are at a 276 yield pushing towards 2.83 yield or 2.84 whatever the number you have, statistically 0.3 and 0.4 is de minimus from our standpoint because some of that could be timing, some of that could just be weather, some of that could be corn in different areas.

We won’t call it for that; it could be a quarter of the shutdown, we have some shutdown and things like that that happened. I think in general we continue to focus on yield. As we run harder and harder and harder sometimes you give up a little bit in the yield to get more in volume, but net-net is still positive. So in general I don’t think that tells you very much in terms of – actually we haven’t about the same anyway, I think statistically within that 0.05%.

Paul Resnik – Resnik Asset Management

You had historically worked on all sorts of debottlenecking incept to improve yields. Are we reaching a point where it’s going to be hard to get yield much higher?

Todd Becker

No I think yield can – you have to give up yield if you want to run hard and then ultimately that will come back together, again as we see improvements in enzymes and technologies and some more debottlenecking.

But we are getting – we watch that very closely and monitor yield versus volume to make sure that we don’t lose any by running hard to give me up too much on yield. So no I don’t think – I think it’s over, I just wouldn’t – it’s hard to say part of it’s the corn crop as well. We had a good strong corn crop with high starch values and that part of it is well. But yield is the magical number that sometimes is hard to explain but in general that we’re very happy with the way that our plants have been running.

Paul Resnik – Resnik Asset Management

All right. Thank you.

Todd Becker

Okay. Thank you.

Operator

And there are no further questions at this time. I’d like to turn the call back over to Todd for any additional or closing remarks.

Todd Becker

I just want to thank everybody for coming on. We continue to prove out the value of our platform with the things that we’re doing to execute on non-ethanol operating income. We’re optimistic for the remainder of the year as well as 2012 as we mentioned and we’ll continue to work hard for our shareholders. Appreciate everybody on the day. Thank you very much.

Operator

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

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