Green Plains Inc. (NASDAQ:GPRE)
Q2 2016 Earnings Conference Call
August 02, 2016, 11:00 AM ET
Jim Stark - VP, IR and Media Relations
Todd Becker - President and CEO
Jerry Peters - CFO
Jeff Briggs - COO
Steve Bleyl - EVP of Ethanol Marketing
Adam Samuelson - Goldman Sachs
Jeff Nolan - Jefferies & Company
Farha Aslam - Stephens Inc.
Craig Irwin - ROTH Capital Partners
Sandy Klugman - Vertical Research Partners
Selman Akyol - Stifel
Pavel Molchanov - Raymond James
Andrew Weisel - Macquarie Capital
Good day, everyone and welcome to the Green Plains Inc., and Green Plains Partners LP Second Quarter 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, sir.
Thanks, Lynette. Welcome to the Green Plains Inc., and Green Plains Partners' second quarter 2016 earnings call. Participants on the call today are Todd Becker, President and CEO; Jerry Peters, our Chief Financial Officer, Jeff Briggs, our Chief Operating Officer and Steve Bleyl, Executive Vice President of Ethanol Marketing.
There is a slide presentation for you to follow along. You can find this presentation on the investor page under the Events and Presentations link on both corporate websites.
During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in yesterday's earnings press releases and the comments made during this conference call and in the risk factors sections of our 10-Ks and Form 10-Qs and other reports and filings with the SEC.
You may also refer to Page 2 of the website presentations for information about factors that could cause different outcomes. Any reported returns of Green Plains Asset Management are not intended as an offering or solicitation in past performance is not indicative of future returns. We do not undertake any duty to update any forward-looking statements.
Now, I would like to turn the call over to Todd Becker.
Thanks, Jim and good morning everyone, and thank you for joining us today. We reported a net income of $8.2 million or $0.21 a share. We also reported EBITDA of $47.7 million for the second quarter, which was our best quarterly performance since 2014.
Obviously, we've a lot more gallons today, so that speaks to how the law of largest numbers can bring big gains from small increases in the cross margin. I remember, our acquisition cost of more gallons have been very opportunistic over the last couple of years.
As we had indicated on our last earning call, we did see a bounce back in our market and distribution segment and operating income. A higher operating income related to the timing of the forward business that was fully hedged during the first quarter and our corn oil, natural gas and distillers merchant business. And the segment is on track to be in a range of $25 million to $30 million of operating income for fiscal 2016. In addition, Green Plains Asset Management contributed to the quarter with a 5.18% return on asset under management.
Our agribusiness segment turned in its best operating quarterly performance since 2012, mainly driven by our cattle business. As the industry sees more feeder cattle availability, feeding margins have expanded. While last year was more of a breakeven environment for us, this year has seen a move back towards historic profitability levels for this yard and where we expect it when we made this acquisitions.
Most interesting about this business is the lower volatility around the crush and the ability to lot for margins 6 months or so in advance. We continue to work on improving our operating cost per head and increasing the average daily gain per head at the feedlot. In fact, we've been averaging over 70,000 head under pit as we have changed the square footage per head to expand a lot of capabilities. We are exploring a 10% to 15% organic expansion that comes at a very minimal cost overall for that lot and we expect good performance for the next several quarters in our cattle division.
The partnership segment, which is our ownership and Green Plains Partners turned in its best quarterly performance since they went public in June of 2015.Green Plains Partners generated $16 million of adjusted EBITDA with distributable cash flow of $15.4 million driven by approximately 275 million gallons of ethanol storage and throughput volume during the second quarter.
For the third consecutive quarter, we increased the quarterly cash distribution by raising it by $0.05 from the previous quarter to $0.41 per share and the coverage ratio for the quarter is the strongest we have reported at 1.16 times.
Keep in mind, we were only increasing in the last several quarters by quarter cent, so this increase is double the amount we’ve previously reported. Hopefully this illustrates our optimism for the future of this business.
Now I’ll talk further on the growth and drop down opportunities later in the call. The consolidated ethanol crush margin which again is operating income before depreciation and amortization from the ethanol production segment including corn oil plus intercompany fees such as Green Plains Partner storage and transportation fees was $45.5 million or $0.17 per gallon for the quarter. We’ve broken that out separately for you in the press release so you can see how we calculate this number.
During the quarter we produced almost 275 million gallons of ethanol, 734,000 tons of distillers grains and 64.5 million pounds of corn oil and we reported a yield of 2.87 gallons of ethanol per bushel of corn which is one of our highest on record.
The Hopewell, Virginia plant did begin producing corn oil at the end of the second quarter and the plant generally overall is performing to our expectations. Export sales accounted for 13.1% of the company's ethanol production for the second quarter. While this is down from exports in Q1 it is in line what we expected based on the seasonality of some international markets.
We also exported 16% of our distillers grains and an impressive 72% of all our corn oil produced was shipped overseas. Moving with a solid turnaround in the ethanol margin environment during the second quarter, gasoline and ethanol demand remains strong running 3% higher year-over-year in the U.S. And ethanol exports for the first five months of the year are the highest on record for that time period. The turnaround actually started about midway through the quarter which is what allowed the expansion in the margins to take place.
As daily industry production run rates have averaged approximately 1 million barrels per day over the last eight weeks, the days of demand continue to remain in a good range for the industry as it appears to service the higher U.S. export demand, a higher amount of inventory is needed.
Visibly the recent breaking crude oil is pointed all energy products down but that doesn’t affect the fact that U.S. ethanol remains the cheapest and best source of octane on the planet and with the current spread between sugar and corn prices we are even starting to see Brazil reengage with recent purchases of U.S. ethanol.
As I said days of demand have continued to remain steady through the quarter and last week we finally broke through 20 days with the draw that was reported by EIA which is totally ignored by the market. Yes the industry is producing 1 million barrels per day but the demand is clearing this supply and nobody is taking notice. We expect further draws over the next 6 to 8 weeks as export demand clicks in again, so our margins have been pressured as of late eventually this will have to rationalize itself.
Our CRM program, customer relationship management program affect - continues to be effective for us. For the first full quarter of having the initiative in place versus last quarter when we reported a partial quarter, we were able to purchase 67% of our grain direct from producers. There will be times when the producer disengages because of significant downward price pressure in corn but we feel the program still in its early stages has been a great success.
All of our employees who have been ahead - all of our employees have had a hand in developing and launching the CRM have done an excellent job in creating this tool, as a significant enabler for our grain, procurement and trade.
Now I’d like to turn the call over to Jerry to review both Green Plains Inc., and Green Plains Partner's financial performance and I'll come back to discuss further our strategy going forward.
Good morning everyone. Before I get into the numbers, I wanted to highlight for you the fact that we added and modified some of our disclosures in the earnings release yesterday. We've moved all of our key operating data into a single table to simplify our release for you. In addition as Todd mentioned, you'll find the consolidated crush margin table that provides more visibility on that calculation. Finally yet importantly, we included an expanded balance sheet and condensed cash flow statement in the release.
Now on to our results. For Green Plains Inc. consolidated revenues were $888 million in the second quarter which was up $145 million or 19% from a year ago driven by higher volumes of products sold. Volumes of ethanol sold for the quarter were up nearly 18% to $356 million gallons while the average realized price per gallon was 2.8% higher than last year's second quarter.
Our utilization rate for our ethanol production assets was approximately 90% for the second quarter of 2016 which was actually slightly lower than a year ago. In this margin environment, we expect to see utilization rates to climb into the low to mid 90% level for the rest of 2016.That should benefit the third and fourth quarters for both Green Plains and for the Partnership.
Our consolidated operating income for the quarter was $27.4 million versus $24.4 million a year ago primarily because of better performance in our agribusiness and our marketing and distribution segments. Agribusiness results benefited from stronger cattle margins realized and increased volumes through the lot during the second quarter of 2016.
The marketing and distribution segment results were driven mainly by corn oil and natural gas trading in line with statements about these business lines in the first quarter. Earnings before interest, income taxes, depreciation and amortization or EBITDA was up 20% over last year's second quarter at $47.7 million for 2016 quarter compared to $39.7 million last year. We ended the second quarter with total cash of $406 million, total capital expenditures in the second quarter were $10.7 million, our estimated full year growth capital expenditure levels currently stands at about $50 million to $55 million including the partnership.
Our total debt now stands at $731 million at the end of the second quarter. This balance includes approximately $246 million on our commodity revolvers which are secured by significant working capital investments in marketable inventories and trade receivables.
Our reported leverage ratio of 4.4 times term debt to last 12 month EBITDA has increased over a year ago due to the lower margin environment we’ve been operating in. I will point out using normalized mid-cycle margins our leverage ratio has remained at about 2.3 to 2.4 times over the past few years. We believe this is a conservative capital structure for our business. Our balance sheet remains strong and well positioned to take care - to take advantage of near-term growth opportunities.
For Green Plains Partners who reported adjusted EBITDA of $16 million, an increase of 15.1% from the first quarter of 2016 which was $13.9 million with a primary driver being 11% higher throughput volumes on our ethanol storage assets. Green Plains Partners had $274.3 million gallons of throughput volume at the storage assets which was approximately 27 million gallons more than the first quarter of 2016.
Distributable cash flow was $15.4 million or $2.1 million higher than reported in the first quarter. Maintenance CapEx increased approximately 100,000 in the second quarter compared to the first related to routine tank for our maintenance at a couple of ethanol storage facilities and terminals.
The $174,000 of maintenance CapEx for the partnership for the first half of the year is in line with our ongoing expectations for that business. Partnerships distribution coverage ratio as Todd mentioned is 1.16 for the second quarter and I pointed out for the combined period since the IPO, the full fourth quarter period it's 1.06.
With that I'll turn the call back over to Todd.
Thanks, Jerry. So as ethanol margins improved towards the end of the second quarter and continue a bit through July, since then the margin curve has pulled back with recent downward movement in energy prices. We came into the quarter with a little over - third quarter with a little over 50% of our production gallons hedged for the third quarter, have about 14% of the fourth quarter hedged as of today.
We're in the spot market for about the last 100 million gallons are sold to third quarter’s production over the high degree of volatility in ethanol crash it's hard to give you guidance on how the quarter will close. We wind back seven years ago as we mentioned and this 100 million gallons would have been one-third of our yearly production and less than a total month.
The fourth quarter does not have much visibility but the fundamentals do, as we’ve discussed earlier in the call and we still expect to have some good margins through the end of the year. Looking at the second half of 2016, we expect our agribusiness, marketing and distribution and partnership segments to finish stronger than the respective first half of 2016 results. The agribusiness continues to be positively impacted by the cattle feeding operations and we have no plans to slow production at our at this point, which is also positive for Green Plains Partners.
With regard to growth, we continue to evaluate our options for our unit train terminal in the Little Rock area. We were hopeful that we can determine the final location in the last -- in the several coming months. The Maumelle, Arkansas site we chose is a great one, but we got in the middle of a local communities fight, which put this site as a bargaining chip for which we had no influence on.
Local policies got in the way, which just shows how short sighted a small town can be. We still want to build this project and there are other communities that have been very welcoming towards us, but we expect to have a final location chosen shortly.
As most of you saw, we did announce a joint venture partnership with Jefferson Terminal to build an import export terminal in the port of Beaumont, Texas. The $55 million Phase One development should be completed within 9 to 12 months. The Phase One development will be sized to handle up to 15 unit trains per month with initial ethanol stores of 500,000 barrels completed with four to five separate tanks that will allow for storing multiple spec ethanol products.
Jefferson Terminal is currently served by three Class 1 railroads, has blue and brown water barge capabilities. The terminal will have dual tracks, one for offloading, one for staging ethanol trains allowing more throughputs for this facility on a daily basis. This project was welcome with open arms as compared to Maumelle, Arkansas.
The Abengoa asset bid update is that there is no update. The current timing of the process is as follows. On August 18, the final bidder registration deadline is due with the bankruptcy court the 22 August. The auction will take place and on the 29 August, the court will hold a hearing to review the winning bidders.
As we've said we are the stalking-horse bid on two of the ethanol plants and we'll have to wait and see what the final result is after the August 22 auction, but we fully expect that we will be there to continue to bid on those plants. If we're the winning bid, we expect to close no later than September 30, subject to regulatory approvals.
When we do, if we do win the process, we anticipate dropping down the storage and transportation assets to the partnership simultaneously with the closing of the plant acquisitions. We're looking diligently for other opportunities to expand our company as well. Growth remains a key part of our capital allocation strategy.
We continue to have a very robust business development pipeline along the whole supply chain and we'll focus on adjacencies that add value to something we produce, distribute or have common customers from origination, throughput auction through distribution.
We're now in the process of finishing Phase One expansion gallons and have current plans have us completing all the projects by the end of 2016 and the Phase One project will add about 80 million gallons at a cost of approximately $0.50 a gallon across the platform.
As we noted in the earnings release, we did repurchase $6 million of stock in the second quarter and we have repurchased $10 million or 515,000 shares since the program was announced in the third quarter of 2014. Approximately 90 million of the authorization remains open and we'll continue to be opportunistic with that part of the strategy.
As you can see, we're willing to step in if they're buying more aggressively last quarter as we had good visibility on free cash flow generation.
To close, the second quarter was much improved over the first quarter as we recorded solid results across all segments of the business. The second half of the year is stronger than the first half obviously, but there is volatility in the consolidated ethanol cost over that time period.
So that will end our discussion here and we'll call -- we would like to open up the session for question and answer and we'll ask Lynette to start that as of right now.
[Operator Instructions] We'll take our first question from Adam Samuelson from Goldman Sachs.
Thanks. Good morning, everyone. So maybe first Todd I just want to be clear on your prepared remarks you talked about what had you hedged for the third quarter. Over 50% was hedged today or over 50% was hedged entering 3Q…
Over 3Q, above 50% was hedged for the third quarter when we started Q3 on July 1 and since then obviously we have about 100 million open still gallons than we produced 285 million to 290 million gallons this quarter roughly in that range.
So we still have plenty open for the quarter, but we came into the quarter hedge and just have been hedging on a daily basis for us for the quarter..
Okay. That’s very helpful. And then maybe talk a little bit about that export environment as you look into 4Q, I know this time of year can be a little bit slower, but maybe talk about some of the inquiries from Brazil, how the demand from Asia shaping up and if you see China coming back into the market from the U.S. for the fourth quarter?
Yes so for the first part of the year we obviously exported about 400 million gallons for the first five months of the year. So it was a strong environment. Since then we've been slowed down a little bit during the last couple of months of which some have been reported.
But we expect a strong finish for the fourth quarter. We have Brazilian interest around Philippine, India, China is nosing around. We have actually done some India business all the way through 2017 as well even in the fourth quarter of 2017. So you can see that we have had some advantage on pricing.
We're starting the price and starting to see more demand here come in for late in the third and the fourth quarter, which I think we do need to hit that 800 million to 1 billion number, which we still believe is attainable.
China has been strong in the first part of the year. We haven’t seen a ton of interest from them as of late, but we still expect them to continue to look for some stuff, but we haven’t seen aggressive pricing there yet.
So overall we still expect the same type of number which we think between the domestic demand that we're seeing and the export interest that we're seeing against the somewhat about a million barrels a day production and don’t forget we'll come into turnaround season as well. So we think those production run rates will start to come down a bit in late August and early September.
And so we expect draws all the way through about the third week in October where we believe that we will see inventories get down into 18 million and 19 million barrel range, but obviously until then, we have some work to do.
Okay. And then maybe finally -- maybe I missed I apologize, can you talk about the CapEx outlook for this year with all the projects that you guys have going on for the full year is going to shape out and at the end of '16 what your capacity would be as we look into next year?
Yes, this is Jerry, the CapEx guidance that we talked about for this year is we expect to be in the $50 million to $55 million range for total CapEx in 2015. The total gallons capacity today we're at a 1.215 billion and we have small amount of increase that is left out of our Phase One expansion.
Yes there is approximately close to 50 million, plus to go at the finish of the project. So during Q3 and Q4 we should.
Exit 2016 somewhere around 1 billion 1.260 billion.
Got it. That’s very helpful. I'll pass it along. Thanks.
We'll hear next from Laurence Alexander from Jefferies
Hi is this is Jeff Nolan for Laurence. Could you talk about your yield. You consistently have higher than average yields. How much further can you push it and can you talk whether or not Energen Corn might be a strategy for the remaining half of the plan?
Yes, so 2.87 yield was one of our best quarters if not our best quarter we've ever had, driven by a lot of different factors all of the improvements that we've made over the last several years and going after more yields whether mechanically or through enzymatically or now through Energen we have -- we're evaluating the rest of our Energen roll out at this point.
We haven’t committed to do that yet. I think there is again positives and negatives, but the positives outweigh in our favor and so we like the product and so we evaluate it case by case basis, plant by plant basis what the growers are doing in each of the areas.
I would say it does have some impact on some yield impact for us also on corn oil yields as well, but more so what we've gone after is mechanically and enzymatically other things that we've worked on in the plants to go after yield as well.
So that yield improvement -- we invested plenty in yield improvements over the last several years as we noticed through at the Fine Grind, SMT, now through Enogen and a combination of all of those if you put it together in a cocktail has resulted in higher yields.
Now we'll have to wait and see what the new crop looks like and available starts in the ethanol and the corn kernel and so on. But I would say in general across the Board if you put all of those things together, it's what's impacting and not necessarily one single variable.
And then in past you've tailored down production in weaker margin environments and you mentioned in your response earlier that you don't expect to do that going forward despite the pending turnaround season.
If margins were to stay in this current range what would have to happen for you to change your mind on production rates?
We do have turnarounds as welcoming. So in the industry if that turnaround is coming and during those time periods, we typically see low 900s of production for the inventory across the Board and so we're coming into the season.
I think from the margin standpoint and the reason you're seeing a million barrels a day in the industry is because the margin environment is telling you to run just about as hard as you can and the industry is doing that today based on current demand. But even with that said, we saw a big draw last week. We’ve got good export demand. We got great domestic demand every single week.
So overall even though we're producing million barrels a day and that seems to be the headline number that everybody is focused on, we are clearing those volumes in the market as I indicated in our prepared remarks. These markets are -- we are not growing a bunch of inventory at these levels even at million barrels a day because gas demand remains so robust.
So still in general I think our -- when we talk about our numbers it includes our slowdowns anyways, but the market in general has had that season coming which I think will at some point be favorable for the overall margin structure.
Thanks very much.
We’ll move next to Farha Aslam from Stephens.
Hi, good morning. Given the volatility in ethanol margins, could you just share with us relative to that $0.17 you saw in the first quarter what they are today and perhaps what they were on average for June and July?
So when we look at today, it’s definitely – there is been some time during the third quarter where our second quarter and third quarter margins have been better and I would say, there a little bit worst than that today and the consolidated crush, I would say today consolidated crush margins are running $0.05 below that at this point. But we see $0.05 volatility on any given day. We have $0.02 and $0.03 a day volatility moving in this crush right now.
And I think a lot of those is driven by this break in corn oil and -- or not corn oil, crude oil and what we've seen crude oil breaking back into the 40s which has pull down most of the product's pricing right now.
So I would say overall we're in the consolidated crush high single digit, low double-digit at this point, but that’s not to say that during the quarter we haven’t seen a lot higher than that and lower than that. So if you just look at a place in time, you're probably consolidated crush on paper for the rest of the year in that $0.10, $0.11, $0.12 a gallon basis versus $0.17 a gallon. So we just have to wait and see how this translates.
Again we've seen much higher than this as well during the quarter and it’s just a lot of volatility taking place on a weekly basis.
That’s helpful. And then on RIN values, currently RIN values are very elevated. Could you give us your thoughts on how that impacts ethanol demand and your outlook for the biodiesel tax credit?
For the RIN values pushing into these $0.90 plus ranges doesn’t hurt when the discretionary blunder and buy ethanol at a $0.10 premium to gasoline and get a $0.90 cash credit or get $0.90 RIN value and even sell into the market which is why we started to see E15 rollout across United States with the discretionary blunders that’s even arrived in Omaha as of late, the pumps are starting to come in, we have stations now selling full E15 at their station.
So we believe over time that that will result in increased domestic demand and from a standpoint of higher RIN values, certainly we don’t necessarily see the benefit as a company on the bottom line perspective till we don’t get any of that, but we do see from expanded demand, which is why I think you'll continue to see strong demand going forward because of the E15 rollout across the United States.
So we spend a lot of time and a lot of money as an industry, educating the retailer and pushing the product, while they inspect fully that the product will start to get pulled through the supply chain from the consumer as they then start to see the discount of E15 to E10 gas as they pull up their station.
So the RIN is helping that for sure, but it still continues to be a bit of zero some gain. Somebody is benefiting from $0.19 RIN and again it's costing others. So we continue to believe that that’s still zero some gain but we will have to watch it going forward.
That's helpful. And then my final question is on DDGs and China. Do you expect Chinese demand for DDGs to vary if they do put on a tariff and your thoughts around DDG pricing for Green Plains?
Yes. So in general, the Chinese are relative absent anyways from the market. And we're doing the minimal amount. We're not at maximum levels like we've seen in. So DDGs are ranging from this 90% to 110% the price of corn and so without China I think we’ll range on the lower end of that in terms of percentage values versus corn.
But we continue to clear all of our supply in the market. Anyway there is not excess DDGs sitting around. What happens is when China comes in they push our contribution margin higher from distillers grain and the overall crush and without China now they don’t quite have the same contribution percentage.
But overall I think somewhere in that historical 90% to 100% the value of corn range without China will happen. Now interestingly enough even with a tariff it still remains somewhat competitive in certain regions, certain functions around why they would be the distillers grain in China, but we would expect that they would be a put a 20% to 40% tariff on distillers into China for the time being resulting in significant slowdown of that demand.
Notwithstanding that, we have seen other parts of the world pick up as well. So the market is taking that access. It's just a matter of relationship of corn to DDGs.
Great. Thank you for the added color.
We’ll hear next from Craig Irwin from ROTH Capital Partners.
Hi, good morning and thank you protect my questions. So Todd, could you comment a little bit about utilization in the quarter, how this progressed through June, where we stand now and your view on how the 3%, 3.5% growth in miles driven gasoline demand shapes utilization for Green Plains and the industry for the rest of '16?
Yes, for Q2 we still have shutdown and we're coming off of a slower Q1 so, as well as we when you produce that much export grade, we slow down a little bit as well on low water specs.
So from standpoint of Q3 utilization, that was just coming off of a slow utilization with turnarounds and so now that we get back into Q3 and we expect kind of mid-280 million galloon range between 280 million and 290 million gallon range for Q3, our utilization is running -- is running pretty hard.
We still have some places actually that we can continue to improve, but some of it is due to lower exports, some is due to just normal mechanical fixtures that we are doing across the platform.
So with the demand that we see, we think the industry is running towards that 90% plus utilization if not into the mid 90s. So we're getting about a max utilization rate about a million barrels a day.
We are not always starting and going to push every day to a 1.1 million barrels and we had indicated it earlier in the year and late last year that we thought the industry will get to a million barrels a day production in 2016 and start the flat line a bit from there.
So for the rest of the year we think our utilization will be as Jerry said in the mid-to-low 90s, which is positive for the MLP. It’s producing somewhere around 285 million, 290 million gallons a quarter and that will continue to improve on that.
So demand is taking everything we produce and any import -- any uptick in exports and downtick in production due to turnaround season and maintenance season, we think is all positive for the margin structure from here, which I seen a bit compression as of late.
And then my second question is about 2017. I know it's a little bit early to break out the crystal ball here, but maybe can you frame out for us what the impediments could be for us to progress from the base scenario-type earnings that we're seeing now to more of a midcycle-type earnings?
We've got growth, we've got strong exports, we've got a corn crop that's working in our direction. What do you see as major deltas that could impede a midcycle learning scenario for '16 and maybe if you could throw some probabilities or color on that, please.
So on the positive side we continue to see $40 to $50 oil which we think is positive for miles driven, gas prices that are on those low $1.25 to $1.40 range, which is positive for the consumer in the pocket.
Ethanol remains a cheap fuel in the world today, even at 5 to 10 over corn, or 5 to 10 over RBOB versus five to 10 under RBOB. Do you see corn pushing forward $3 which is a positive for us, yet the corn basis remains strong, which I would say more or so on the negative side, but not enough to offset the break in corn. We have good outlook on E15 demand in a kind of 150 to 250 gallon range is what we think for 2017.
So if you have your basic gas demand at 145 to 150 billion gallons a, year you can potentially have 14.5 billion gallons, 14 to 14.5 billion gallons of ethanol demand just domestically add a couple of hundred million gallons for E15 and add 1 billion for export and 1 million barrels a day which we don’t think you can do every single day, 365 days a year.
It looks like the world will need our product and especially with $0.19 sugar against $3 corn, if you use a 20 under basis in Nebraska. And so we’re very competitive globally for our products which should be a demand pull which is why we have priced some even full 2017 export values or export sales. We've made sales for full 2017 at this point which is very, very early to start to see that demand show up.
So overall I think the positives for 2017 outweigh the negatives. We’re going to see supply growth by 2% or so and demand growth by 2% to 3% but it should favor the U.S. from the supply standpoint in the world and if you looked at what happening in Brazil, they are crushing for sugar and not for ethanol which is why you’re starting to see them come to us as well.
So, and then we’ll see what happens in Europe. If Europe - at times we did see that our window open as well. So I would say for 2017 all the fundamentals that remain in our favor obviously they all have to play out and I think we’re starting to see at least a base solid demand structure for our products which is not allowing the first quarter to repeat itself when we just had too much supply coming out of most, a lot of cheaper sugar and cheaper ethanol in the world.
So overall everything remains on track for that mid 2017 inflection point where demand outpaces supply and the world becomes shorter of ethanol.
Great. Thank you for that. Thanks again for taking my questions.
We'll move next to Sandy Klugman from Vertical Research Partners.
Good morning. A question on China. So ethanol exports to China they've surged, through May the region has accounted for more than 30% of shipments out of the U.S. The question is how do you see demand from the region evolving both in the near term and over the long term? And how do the changes to the region support price for corn impact your views?
I’ll let Steve answer that question because he has been the person who has spent the most time over there in China and helping us develop those markets both not our company but also the industry as well.
You see demand, it does seem a little start stoppish if you will but right now we talked to them every month, they look at the values every month. The consistency that we like to see the steady flow we don’t have yet but you do see when they come in, it's big numbers for any given month. So to be able to say we want to see them buy for 12 is the goal but we haven’t seen get to that point yet without doing the forward buying.
Thank you. And then conversely exports to Mexico are down 17% year-to-date. But what's the driver there and how do you view the long-term opportunity for ethanol to displace MTBE as an octane enhancer in the region?
We’ve actually been down there on education and that’s exactly the message we’re talking about is the MTBE replacement for Mexico. The opportunity is huge, I mean at a 10% win rate it’s 1.2 billion gallons, at 5.8 which is what they blend MTBE at, its 750 million gallons or so, right in that range. The objective is as PMX starts to go private is to find everybody's niche in the marketplace. Right now it’s more of an industrial grade export volume is going down there. It’s not as much fuel grade.
And we have made recent sales as a company on the industrial side into Mexico, correct Steve?
Okay, great. Thank you very much.
Selman Akyol from Stifel. Your line is open.
Thank you. A couple of questions on Partners, please. So first of all, since you've announced your JV have you seen additional interest, have people come to you at all and said with projects or anything of that nature?
With projects or…
Or just ideas in general in terms of just getting signed up for taking capacity et cetera.
In terms of at the Jefferson Terminal?
Yes, Steve you want to comment on the kind of the market acceptance of Jefferson Terminal.
So far it’s been very positive. They look at it as a great alterative to the Houston market for several reasons, just mainly for congestion reasons. The ability to have multi raise in a different place other than Houston has really excited a lot of people both resellers and producers alike. So we want to get feedback from all away across and we talked to bunch of people about it. So far it’s been very, very positive about the location.
I got you. Then on the maintenance capital expenditures, is that a good run rate for the second half looking at the first half of the year?
Yes, I think - this is Jerry. I think the first half it might be a little bit light. We’ve typically used 500,000 for an annual run rate on maintenance CapEx. It looks like this year we might be a little light against that but - somewhere in that range.
Okay. All right that does it for me. Thanks.
We’ll move next to Pavel Molchanov from Raymond James.
Thanks for taking the question, guys. A couple of months ago the EPA came out with only a 2% increase in the proposed corn ethanol mandate for 2017. And given your comments about how E15 is looking good and so forth, why do you think they are being so cautious?
I think it was to keep everybody somewhat happy and unhappy all at the same time. They came up with a number they didn’t push to the full 15 billion gallon mandate as the law has indicated they need to do. But they also put it to a level where they’ll try at least to keep the ethanol industry somewhat satisfied as well.
So I think it’s a - they found the happy medium between everybody, everybody is happy and everybody is complaining at the same time. So that means their number must be somewhat in line.
So from our standpoint as a company, we haven't complained at all, I mean, we’re comfortable with 14.5, 14.8 as well because we think organically through the things that you just mentioned which is the 15 and export there will be plenty of demand for our product. It is a needed blend stock, it is a required blend stock from what they're producing at the refineries today. Anyways they can’t just sell 84 octane gasoline across the United States.
So in general think EPA found a number that was at least a happy medium for everybody.
Okay. On your deal with Abengoa, are those two plants currently operating?
Yes, I think the – yes, they are operating, they have never actually stopped operating through their whole bankruptcy. I mean keep in mind, it wasn’t a plant that caused the bankruptcy I mean the parent company in their own problems they had globally is what caused the disrupt across the company.
So these plants are operating, we know them well, we know the location because we have Eastern plants as well. And so we think they will fit nicely into our portfolio and hopefully at the auction we’ll be there and we're successful.
So the seamless kind of transition in other words operationally if you end up buying them?
Yes, if we end up buying them it will be a seamless as anything else we bought close it on Friday and we’re operating there by Saturday without any issues for transition at all. There is very little from our perspective we can move in very quickly and we have enough diligence and research on I know the assets and what they use that it will be literally a seamless transition.
Perfect. Thanks, guys.
Your last question will come from Andrew Weisel from Macquarie Capital.
Hi, good morning guys. Just to follow on that question about M&A if you could maybe talk a bit more broadly, on the last call you describe the market as very inactive. Just more broadly how do you see opportunities for ethanol consolidation today? And then from Partners perspective if M&A doesn't happen either from Inc. or a third party, can you remind us about organic growth opportunities for the MLP?
Yes, I mean, it’s funny because we always say that it’s low but we always end up picking up one or two ethanol plants a year and if we’re successful in the auction as well we’ll pick up one or two more this year. This is a natural progression through an industry that still has significant independence throughout its amount of players.
When you look at a couple hundred ethanol plants that are out there and look at what's owned by the top six or seven players, there is still significant consolidation opportunities that you just don't know when you come into any given year what's going to be for sale or not but we do believe that the market will continue to change hands and we’ve seen other assets besides Abengoa individual assets for sale and they’re starting to come at least starting to get questions around it.
So we think we will continue to have Inc., fee Green Plains Inc., be active in the M&A market for the next several years at least with one to two to three acquisitions a year on average like we have in the past. But we don’t think that’s going to change and we continue to believe that the ethanol industry will continue to change hands overtime.
When we look at organic growth opportunities, obviously doing things like we've done in the past which is looking at terminals, looking at growth and terminals, doing the Jefferson business hopefully completing the Little Rock area terminal as well, and from the standpoint we saw things as acquisition opportunities or the partnership as well are under levered.
So our leverage ratio is great. We do not have a lot of debt on net asset but we've great coverage ratios and we believe that - when we look into - and we evaluate assets and we do that every day, that where can Green Plains add value to the asset that we would purchase for an M&A transaction because we really are not jut focused on some standalone product asset that we would not have any impact on improving via the terms or the volumes going through.
So, we are looking at several different acquisition opportunities outside of our normal - just terminal structure that we have, things that we can add value to us as well with our products. So overall I would say at this point, in any given day we are evaluating somewhere around $1 billion worth of acquisition opportunities, some that make it further and some that get cut-off pretty quickly out of our process. But we have a very robust process going on that we believe we'll continue to grow both enterprises.
Great, that's very helpful. The next and last one I had, nice improvement in the coverage ratio at Partners. I imagine that's what drove the acceleration and distribution growth. Are you still thinking about 1.1 times as a good target for both near and long term? And then are you willing to get any more specific on a multiyear outlook for growth either in distributions or distributable cash flow?
I think 1.1 times coverage ratio is still our target and again most importantly I view that on a four-quarter basis. I don’t like to take just the second quarter, at 1.16 and say, that justifies a distribution increase. I think of it more quarter-to-quarter you put four-quarters together and as I said, we are at 1.06 times, we see that increasing particularly as you see stronger volumes that we have talked about today.
So we see that increasing over time and of course that’s really what’s driving the optimism - increasing the rate of growth in the distribution.
And then the question about long-term growth, any willingness to comment on the outlook?
Long term growth, I think it's really unchanged since our IPO. High single digits, low double digit kind of long term growth in distributable cash flow is what we are focused on generating, whether we distribute that in terms of the actual distribution is another matter because again we want to stay very conservative in our balance sheet, maintain a good coverage ratio on our cash distribution as well as a good leverage ratio on our debt.
So, I think that cash flow generation at a high-single digit, low-double digit range will allow the partnership to meet all expectations.
Great. Thank you so much.
And that will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Becker for any additional or closing comments.
Yes, thanks everybody for coming on the call. Obviously, a good quarter. We are very happy with the results. We’ve got some - positive things are happening around the company. You can see when we increase our production by a little, it has positive impact to Green Plains Partners.
As well overall you can see why the law of large number is very meaningful for us now as we push towards 1.25 billion gallons. And each move has significant opportunity for us to increase our platform, our earnings and our distribution and our cash flow.
So we’ll see you next quarter and thanks for coming on the call today. Thanks.
And that does conclude today's teleconference. We thank you all for your participation.
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