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Green Plains Renewable Energy Inc. (NASDAQ:GPRE)

Q1 2012 Earnings Call

April 26, 2012 11:00 AM ET

Executives

Jim Stark – VP, IR

Todd Becker – President and CEO

Jerry Peters – CFO

Steve Bleyl – EVP, Ethanol Marketing

Jeffrey Briggs – COO

Analysts

Farha Aslam – Stephens Inc

Michael Cox – Piper Jaffray

Matt Farwell – Imperial Capital

Patrick Jobin – Credit Suisse

Craig Irwin – Wedbush Securities

Brent Rystrom – Feltl & Company

Operator

Good day and welcome to the Green Plains First Quarter 2012 Financial Results Call. Today’s call is being recorded.

At this time, for opening remarks, I will turn the call over to Jim Stark. Please go ahead.

Jim Stark

Thanks, Matt. Welcome to our first quarter 2012 earnings conference call. On the call this morning are Todd Becker, President and Chief Executive Officer; Jerry Peters our Chief Financial Officer; Jeff Briggs our Chief Operating Officer; and Steve Bleyl, who is our Executive Vice President of Ethanol Marketing are here on the call today to discuss our first quarter financial results and recent development for Green Plains.

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

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

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

Now, I would like to turn the call over to Todd Becker.

Todd Becker

Thanks, Jim. And thanks for taking the time to join our call this morning. We issued earnings release yesterday after the market closed. We hope you all have had a chance to read it as to discuss our results this morning.

Our revenues in the first quarter of 2012, were $775 million, we reported a net loss of $12.7 million or $0.39 a share, after 3 profitable years of operation one negative quarter does not change our long term outlook or view for the company’s prospects.

We have one time charge of approximately $2.4 million after tax or $0.08 per share related to a legal settlement for litigation that was fully described in past filings. We felt it was in the best interest of our shareholders as the cause of a long protracted legal battle could have easily outweigh the settlement reached, which by the way was less than $0.10 on the dollar of the original claim, this charge was recorded in the ethanol production segment.

The first quarter 2012 did prove to be challenging for the company following a period of peak ethanol margins in the fourth quarter of last year, margins compressed significantly and remained compressed throughout the quarter. As we indicated on year end conference call with you we did slowdown our ethanol production during the quarter. We produced a 176 million gallons, which was about 5% below our plants full capacity. We sold a $170 million gallons in the quarter and held a remainder as the market provided an opportunity to hold inventory and earn a return on storage.

Since the end of this quarter those returns have narrowed and we’ve begun to liquidate these higher inventory levels. Our plant has 16 million gallons or 380,000 of onsite storage and we took advantage of that holding inventories off the market.

In addition, we also had several long term offsite storage agreements in place and use those as well. Our strong liquidity position allowed us to take advantage of this opportunity. Excluding the onetime settlement charge, which generated, we generated $1.1 million of operating income before depreciation or about $0.01 per gallon in the ethanol production segment, this is certainly the low mark for profitability in this segment for us.

But considering, there were about 10 days during the quarter where margins were at or breakeven EBITDA, we feel that we took maximum advantage of what the market was offering. We saw some of the lowest spot margins in the industry had experienced in the recent history. We also came into the quarter with very little coverage for the margin. There is a reason for that and I’ll discuss that later in the call.

We did experience a better yield in our Ethanol Production segment, reaching 2.84 gallons of ethanol per bushel of corn on average. Some of this was due to slowing down production and some was from recent capital projects. We are working on more projects to continue improving conversion rates and I will again comment more on this later in the call.

The diversification was important for us again in this quarter as we generated $9 million of non-ethanol operating income from our corn oil production, Agribusiness, and marketing and distribution segments, all with a positive operating income in the quarter. While this $9 million contribution was lower than the fourth quarter of last year, I would like to remind you that our Agribusiness is somewhat seasonal and traditionally has a lower first quarter compared to the remaining three quarters of the year.

In addition, in the marketing and distribution segment had a lower than expected quarter, but we still remained and expect to be on track to equal or exceed last year with an excellent Q2 coming up, possibly a record quarter for that segment. We are very much on track to deliver $50 million of non-ethanol operating income in 2012. As we mentioned in our earnings release yesterday, we redeployed a portion of our rail car assets in the first quarter for other uses and we are increasing that redeployment to about 11% of our tank car of 180 rail cars or 180 rail cars.

We currently run a fleet of over 2,200 rail cars between Tanks and Hoppers. Recently I’ve seen lease rates and tank cars increased due to increased demand for domestic oil production. While we certainly could have just leased cars to other counter parties, we saw the opportunity to use our strong financial position, expertise in trading and risk management and our advantaged position of rail assets to launch a new initiative to capture more value for our shareholders by injecting ourselves as a counterparty and the movement of the commodities.

As we slowdown plans, we are able to repurpose some of our fleet for this initiative and should start to see greater financial contribution over the next several quarters in our marketing and distribution segment.

In addition, because of our ownership in nine blending terminals, we are positioned well to refocus more cars for this initiative. We will continue deploy these rail cars in this manner as long as the opportunity is available.

Returning to ethanol margins, we believe the weakness experienced in the first four months of 2012 is attributable to a couple of things. Significant blending of ethanol in the fourth quarter of 2011 as blenders and refiners took advantage of the expiring tax credit and number two lower overall gasoline demand. The combination of these two items and the ethanol industry producing at record rates, during the peak margin environment in the fourth quarter of last year and continuing that reduction into this year has created an overhang depressing the market for ethanol.

The industry has lowered production rates over the last 120 days by 98,000 barrels per day, which put in perspective is nearly equivalent to 1.5 billion gallons per year. But that number needs to go lower to bring supply and demand back in equilibrium. We’ve seen overall U.S. stock stabilize over the last several weeks, yet we need to start to see those come down over the next several months in order to see more reasonable margins, which could be helped as we approach summer driving season.

We are encouraged by U.S. ethanol exports totaling 151 million gallons for the first two months of 2012, which is actually ahead of exports by 29% with the same period from last year’s record exports. Ethanol continues to be the cheapest motor fuel in the world, so this trend should continue for some time. We may see a drop in our exports during the Brazil ethanol season, but we should have strong last quarter, as we believe the U.S. will be the only major source for ethanol still has a significant discount to wholesale gasoline.

We continued to experience historically high basis levels for corn in the U.S. and the summer will be quite interesting as the farmer has a tight grip on stocks and the world needs that corn to come in the market. The structure of the U.S. corn market is for this old crop corn to move before new crop, is just a matter of what price incents that to happen.

Now, I will turn the call over Jerry to review our financials in more detail and I’ll come back on the call and discuss forward ethanol margins, industry fundamentals, E15 and BioProcess Algae, Jerry.

Jerry Peters

Thank you, Todd. First I’ll provide a quick review of the operating results and then spend a few minutes on our liquidity positions and our balance sheet. Our consolidated revenues for the first quarter were $775 million down 4.5% compared to the first quarter of 2011. Total ethanol market has dropped by 26.1 million gallons or about 9.4%, and average realized ethanol prices dropped slightly as well between the periods.

Lower ethanol margins, affected volumes we marketed for both third-party and company owned ethanol plants. Revenues were higher for both of our corn oil production segment and our Agribusiness segment. Corn oil production contributed $13.5 million in revenues on 33.5 million pounds of production compared to $4.3 million in revenues and 10.1 million pounds respectively.

We continue to see good values for our corn oil in the marketplace. Consolidated cost of goods sold decreased by 8.1 million mainly due to the 9.4% decrease in the ethanol volumes sold. This decrease is net of $23.7 million – of a $23.7 million increase in our all ethanol production segment COGS. We consumed 1.5 million bushels more corn in the ethanol production to produce almost 4.7 million gallons more ethanol. In terms of ethanol produced the first quarter volumes were higher due to a full quarter production from our Otter Tail plant, which we acquired in early March last year offset partially with the production slowdowns, Todd mentioned.

Our average cost per bushel per corn increased by 4.5% in the first quarter of 2012 compared to 2011. The increase in cost of goods sold for the ethanol production segment also includes the one-time charge for legal settlement recorded in the first quarter of 2012. Our gross profit for the first quarter was $8.8 million which was down $28.9 million when compared to the first quarter of 2011.

We reported a consolidated operating loss for the quarter of $11.1 million or a decrease of just over $31 million from last year’s first quarter. As you can see on slide four of the deck, excluding the one-time charge taken for the legal settlement we generated operating income before depreciation in our ethanol production segment of $0.01 per gallon in the first quarter of 2012.

Slide four also shows how severe the margin compression was in the context of the seven previous quarters with operating income before depreciation ranging from a low of $0.12 to a higher $0.25 per gallon. The income tax benefit for the first quarter was $8 million compared to an income tax expense of $4.4 million in the prior year quarter.

Our effective tax rate increased slightly in the first quarter related to the company establishing a presence in states where we had not done business previously. As a result, the tax rate for 2012 should be in the range of 38% to 39%.

Earnings before interest, income taxes, depreciation and amortization or EBITDA for the first quarter of 2012 totaled approximately $1.5 million. Our trailing 12 month EBITDA for the period ending March 31 was $118 million. We ended the quarter with a strong liquidity position with total cash as of December 31, I’m sorry, as of March 31 of nearly $116 million on the balance sheet. And we had a $152 million available under committed loan agreements at our subsidiaries.

During the first quarter, we utilized about $13.1 million of cash for principle repayments on our long-term debt, about $7.5 million for capital expenditures and acquisitions and utilized $10 million in cash in conjunction with our share repurchase. As we previously announced, we acquired 3.7 million shares from NTR for $37.2 million, issuing a note for $27.2 million for the remaining balance. We believe the shares were repurchased at an attractive value and the transaction will be accretive to 2012 results.

Our book value per share now stands at $14.25 over $5 of which is comprised of cash. Our strong liquidity position is providing us with more flexibility to run the business in the current margin environment and take advantage of opportunities that may arise.

As of March 31, our total consolidated debt was approximately $740 million. It’s important to recognize, however, that figure includes over $142 million in short-term working capital borrowings that are used to finance inventories and receivables in our Agribusiness and marketing and distribution segments. These balances fluctuate significantly during the year and are supported directly by current assets, such as, grain inventories of these two businesses. Historically, usage is highest in the first quarter of each year due to significant inventory levels in our grain company.

Ethanol debt was $445 million at the end of the quarter or $0.60 per gallon compared to $494 million in the prior year first quarter or $0.67 per gallon. Overall, we believe the balance sheet and our liquidity position are in good shape to address the challenges and opportunities that lie ahead of us.

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

Todd Becker

Thanks Jerry. We’ve continued to make positive strides on several projects for 2012. The construction of our 96 car unit train terminal in Birmingham, Alabama is making good progress and is on scheduled to generate revenue for us beginning in the fourth quarter of this year. We are in the process of selling out the capacity of the terminal and continue to believe this will be a very successful project.

BioProcess Algae’s 5-acre production facility is making excellent progress. The project is on scheduled to be completed in the third quarter of 2012 and our analysis continues to provide us with a path to profitability and we believe that our collocation strategy is the best model to optimize the production of Algae. The company is in advanced stocks with uses of the product across several industries around food, feed and fuel as well as discussion with large CO2 sources to provide a profitable solution to cover mitigation. There should be many updates over the next several months on the progress on all fronts for this business.

Now back to the ethanol industry, so for the past three years you’ve heard us say that there will be a quarter where we can lose money and that the dynamics of a commodity processing business will lead to parries of peak margins and then compressed margins. The company just experienced that cycle in the last two quarters.

As I indicted in my opening remarks we went from peak industry production and peak margins to a rapid trough like environment. Part of our strategy over last several years was to bulk up the balance sheet for just this event. We ended the quarter with a strong cash balance and possibly a better liquidity position than we’ve ever had. We came into the quarter with very little coverage of forward margins.

On paper there may been opportunities to lock margins away before we got to the quarter, securing the physical corn was the bottleneck. For the entire balance sheet and the growth of on farm storage securing physical supply is critical. Blocking financial margins while in effect is short in the U.S. corn basis is just too risky. Typical farm marketing patterns will not apply until we have rebuilt the balance sheet and grown out our crops.

For example, we currently are able to lock margins away in Q4 of this year because we are able to buy physical corn around harvest. So at this point, we are over 20% locked away at favorable levels even to our last three years average in Q4. While some may criticize that we start too early when we see margins and we are able to secure physical supply, we will all start to lock them in. We have also locked away most of May and we are beginning to look at June.

While these margins are narrower than we typically like, we don’t expect a repeat of the current quarter. Margins are still challenging but at least somewhat stable at this point. We believe that the strong incentives for blending ethanol remain, ethanol remains a large discount to gasoline even more interesting for you to think about is there is a change in U.S. ethanol market structure that the end users need to think about as well.

As discussed earlier in the call, the value of rail cars have spiked higher. We had seen plants leased their cars out and either focus more on truck markets or try to maximize fleet utilization by selling unit trains. The effect on the single manifest market is starting to be seen. With such an incentive to blend those markets have seen an uptick because that the overall fleet has shrunk and some small markets are very tight. We have seen this across many of our BlendStar facilities. It is interesting that the lack of takeaway capacity in the Bakken may drive out the marginal gallon of ethanol production causing producers to lease their cars and make more money shutting down their plants down or selling trucks of ethanol.

There is a satiable demand for tank cars at this point with limited access capacity in the fleet overall.

E15 continues to make progress into the marketplace even with all the challenges from big oil and big food. A significant number of plants have registered with the EPA and more coming on every day. Our plants have all registered and we’re waiting for approval to produce ethanol for E15 blending and sale.

We’re making plans as well to switch all of our company owned stations and pumps in Iowa to sell E15, while this volume is small going through the process, getting approved to sell will be a valuable exercise for our customers to emulate and get product to market.

One bottleneck has been the requirement to implement a national fuel survey, the fuel survey is required annually and we will be collecting more than 7500 samples each year of all gasolines available nationwide to ensure E15 meet federal fueling standards,. The survey is now funded by a combination of growth energy members, RFA members, independent plans, even a small number of blenders and even a refiner.

I don’t think our detractors thought we would organize to get this done, but we have and take this one step closer. We didn’t just do a state or two, the industry paid for a national survey so that any market can sell the product. E15 is significant to our industry, and we will be working diligently to see this fuel blend introduced broadly into the market place.

We continue to work on improving our yield in the ethanol segment and going after the last 7% starch in the corn kernel that remains after the production progress. Improving our yield while operating our plans even more efficiently will result in improving our bottom line performance. So again our margins are showing some improvement, and we believe that our second quarter will be better than our first quarter of 2012, the year again is shaping up to be a second half of year story for the industry.

While we’re frustrated that evaluation is suffering in the current environment, we believe that some of our parts were not are truly represented. We have strong platform of assets. Our grain handling business has amassed almost 40 million bushels of first handle storage space and has doubled our earnings over the last two years. With current valuations being paid in recent public and private transactions, our Agribusiness has grown significantly in value for our shareholders.

Our Birmingham terminal will be representing a new era for our BlendStar corn business when completed, it will be one of the premier unit train receivers in the U.S. with long-term value creation for our shareholders as well. We are probably the largest producer of commodity grade corn oil for feed and biodiesel in the U.S. at this point. I feel this has given our shareholders a very stable unencumbered cash flow during the times of margin compression.

Our investment in BioProcess Algae is one of the exciting future value prospects of our company with great progress while we consider to be best in class Algae technology. Finally, there are several other growth initiatives in the Hopper and then we will keep you updated on incoming quarters.

In summary, we ended the quarter with a strong balance sheet, a positive outlook at the end of the year, and a company that will continue to focus on creating long-term shareholder value.

I want to thank everybody for calling in today. And now I’ll ask Matt to start the question and answer session.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) At this time we will go to Farha Aslam with Stephens, Inc. Please go ahead.

Farha Aslam – Stephens Inc

Hi, good morning.

Todd Becker

Good morning.

Jerry Peters

Good morning.

Farha Aslam – Stephens Inc

Todd, you mentioned that you anticipate that the ethanol market production is to go down further from current levels for the end of the industry to get healthy. How much of a decline from current levels do you anticipate is required?

Todd Becker

I think we will know when we start to see the summer driving season and see if we can draws out of storage. So we’ve taken it down from high of about 970,000 a day to about 863,000 barrels a day as reported last week and saw a slight drop in inventory level.

So I think if we can continue to see that and get inventory down from the levels that they are at and we’ll start to see margins improve, but we can maintain 863,000 and with a 132 billion gallon kind of demand run rate over the year for gasoline and the export number that we’re expecting we should – at least start seeing draws based on all of these numbers and we can get production, a little more production out of the market as an industry I think you’ll start to see a good improvement in the ethanol margin because we are trying to see some tightness in some markets.

Farha Aslam – Stephens Inc

Okay, and then in terms of the export number and how much E15 you anticipate will use this year?

Todd Becker

We’re still running that export number as we were saying between 500 million and 700 million gallons. It could be higher, I think you have to watch to Brazil, while everybody thinks Brazil will be exporting lot to the U.S. as their ethanol season come down coming late in the third and all of the fourth were kind of the only game in town for the world. And at the price spread that ethanol is trading we expect some good strong demand at the end of the year, much possibly like we’ve seen last year. And so our number while remain 500 million to 700 million is running at a higher pace than that as we speak.

In terms of E15, I think we will see some implementation of E15 whether it’s going to be 20 million gallons or 200 million gallons or whatever the number is any of its going to be fine. I think we have challenges still but we are getting closure to the retail where we’re starting to see a lot of interest from retailers understanding how did they sell it, how did they make sure they are complying with all the EPA regulation, do they sticker their pumps, what’s their misfiling and mitigation plan, all of those types of things are all under process of – and the final stage is being worked out.

We’re doing a lot of work around. What we want to do is meet the way even though we are a very small retailer in the state of Iowa, we want to lead the way by being the first one to – one of the first ones to make sure our proms are compliant and we re-label them. We’re actually going to switch all of our stations from E10 to E15. We won’t even sell E10 anymore and we think that is in the next potentially 60 to 90 days. Steve, do you have any – Steve has been working on that. And what you think Iowa will be and then possibly where you think the demand will be for the year.

Steve Bleyl

I think we will start – we’ve started in Iowa to solve some of the problems that Todd alluded to get them into the marketplace. And as you go further into the season, you will start to see the demand pick up as we go back into the fall driving season, you have people preparing more for a September 15th and beyond kick off date to try and get it whether they have the top royalty piece of one of the driving season, so that’s when you start to see a true large demand pick up or it’s going happen.

Todd Becker

I think and finally we’ve seen some of our independent terminal owners to get ready for the full switch to E15, and I think that’s very important as well. So it’s really a function of where do you secure the base fuel stock from and then how do you get that from a market, and then touch the economics of the plan. But there is definitely economic reason to get to market and I think the best that we move as an industry the more we can get solo.

Farha Aslam – Stephens Inc

Thank you. And my final question is around your rail initiative. I really don’t understand kind of the opportunities in terms of the size of the opportunity, how long it’ll left, what are the dynamics and puts and takes. Could you flush that out a little bit more and give us some more outlook on what that marketing and distribution segment can earn over the next few quarters, because the earnings in this quarter were quite surprising.

Jerry Peters

Yeah. Well those are some that were timing issues, which we can clarify, but so when we look at our fleet, the first thing you have to look at is we have a fleet that averages a pretty low lease rates per month. And so we run about 1,600 tank cars at this point. And so when we looked at our fleet and we said we saw the market starting to tick up and everybody knows that at least tank cars is that the market have picked up from $800 to $1,000, $1,200 to $1,500 to $2,000 even up to $3,000 a month being offered for some short-term leases because of the lack of takeaway capacity for all the new crude oil coming online around the U.S.

And the best way to move it is in a tank car that the ethanol industry uses. So while we looked at that we said to ourselves, okay we can do one of two things, we can either lease the – just lease some of our tank cars out and make good money. You can actually make very good doing that and if your marginal producer, a small producer, you can actually lease your tank cars out to make more money doing that because the least tank rates right now – tank lease rates right now are about and they are going to take more like $0.40 a gallon, you’re going to earn that on the margins, you’d actually earn that by leasing your rail cars out and actually slowing or shutting your plants. So there is potential that some plants will do that.

So, when we examine that, we said, well that’s interesting, but we’re really not interested in just leasing cars out and we want to get more into the actual trade of the commodity. And so with our balance sheet and our capability and the size of our fleet we started to dabble and trying to at least move that commodity and get in the middle of the trade and we are seeing some opportunities to do that. We have about 180 cars right now running in service. It’s a margin business, but it’s a long-term planning.

And we can’t just go up and start putting stuff in cars, it’s a long term, you’ve got to have – you got to know where the wells are, you got to have terminal positions and we’re even looking at (inaudible) our assets up in some of these areas so that that we could have, we can help with the takeaway capacity. So, it’s a process that’s evolving, but we think it will add margin to their marketing and distribution segment in Q2, Q3, and Q4 as we continue to ramp up that program.

While we have 180 cars running right now, we expect that we could potentially double that and before we actually have to look at the economics of the ethanol business, just by fine flexing step around using our BlendStar asset in the South to actually get better turn times on our overall fleet and see if we could – see if we could make – basically your arbitrage and the value of your railcar against the margin of an ethanol plant.

And you are saying that if you could actually maximize that by getting evolved into actual trade of the commodity and with the strong balance sheet that we have we are able to actually get into the trade of the commodity.

So, it’s been a process that we’ve been looking at for several months. It takes a long time to get started. You have to be very resilient because it’s a hard business to get into. There’s nothing easy about it, but as it continue to knock down walls – use all of our assets which includes BlendStar assets, includes out rail assets and includes our trading risk management asset in our balance sheet. Then you have a – an opportunity, so we’ve taken that opportunity.

We think that next quarter you will start to see that. You are normalized back even, even within the market and distribution segment. And we believe that our market distribution segment is still on track to earn what we typically have indicated that that segment is capable of and possibly even now more through the next several quarters.

Can I give you an exact amount that we will achieve? No, but when we say we potentially gave a record quarter in Q2 in market and distribution, it’s definitely more than what you have seen in the past. And we will keep you updated on it as we go along, but we think there is a great opportunity at least during this time of margin compression to flex our fleet to do other things. If margins comeback and it comeback in a big way.

We always pull it back and use those cars to do other things, but at this point we’re going to wait see what happens, but just keep in mind that crude oil production in the U.S. could drive the marginal gallon in ethanol and that’s something that we’re seeing right now.

Farha Aslam – Stephens Inc

Okay, great. Thank you very much.

Operator

At this time we will go to Michael Cox with Piper Jaffray.

Michael Cox – Piper Jaffray

Thanks a lot for taking my questions. I’d like to dig into this rail car strategy a little bit more, if we could because of the time it takes to get involved and you talked about the difficulty in this, but yet you have a more optimistic view on where margins, production margins will be and even what you are locking away, how long are these lease terms on these cars and what – it seems like a of sort of a short-term oriented strategy against the backdrop of what could much better ethanol production margins in just a few months time, could you may be walk me through the rationale behind it.

Todd Becker

If margins got better in a few months time, we would still be able to run both programs. It would just be a function of we use any more of our fleet over and above kind of 300 cars because we could find efficiencies to better utilize our cars and this is not a three month program though.

When you look at – and the numbers are out there, when you look at takeaway capacity out of all those new crude oil production and you look at the need for tank cars in the U.S., you can see that this is not a three month, four month, five month deal. This is a multiple, this is a potentially multiyear deal until tank car production catches up with current needs.

But you kind of go couple of years down the line, you say okay, tank cars catches up with today’s needs. But it’s not going to catch up with tomorrow’s needs as you see more and more production coming out of the ground. So while today maybe, say the Bakken, for example produces 600,000 barrels a day, but it’s expected to go 1.5 million barrels a day and you look at what everybody is doing, which is gearing up whether you are U.S. pipeline or a U.S. carrier or rail carrier, they are gearing up for that number to happen.

This tank car thing could be on for many years that’s why you are starting to see – you have oil refiners buying 1,000 tankers at a time. And it’s 2013, 2014 delivery and meantime they will have takeaway capacity and that’s just based on today’s expectation of what’s coming out of the ground.

So, it will be very interesting on that does to ethanol because when you have a single manifest market that everybody wants to run unit trains which by the way leads into a very positive disposition to our Birmingham terminal because it is a terminal that can take 96 unit trains and turn very quickly.

When you kind of look at the future of that and you say, okay if we go down to 860,00 barrels a day a production, we see any pop in demand and we see any drop from stocks and we are flexing as an industry, our fleets to other places. We are not the only one, we might be one of the only ones that actually are trading in the physical commodity, but there are a lot of plants that are leasing their cars just for the rate. And when we look at that overall you can end up, and it’s not happening today, Mike, so, it’s now like right now this is like the whole story.

But you could end up down the road with a potential shortage of rail capacity in a market that needs product because it’s significantly cheaper than the alternative and this will be a very interesting time. So, could that shape up like that? Yeah. Is it like that today? No. We are taking advantage of what we call kind of rail arbitrage between these two worlds coming together.

Michael Cox – Piper Jaffray

That’s interesting. The infrastructure you are talking about and difficulty or processing, it seems like E15 could present a challenge in and of itself. There is obviously been a lot of talk about the labeling side, but you had mentioned that some of the independent terminals are starting to gear up for that. Do you feel like the channel is prepared for E15 given that price disparity between ethanol and conventional gasoline today?

Todd Becker

I think the channel is preparing for E15. So, I think like markets that could draw E15 the quickest are preparing as we speak. So – like some of the Pennsylvania markets, some of the Northeast markets. Iowa, we’re going to figure where we at the blend stock from or the fuel stock, low RVP gas, but we’ll bring that in if we have to because the economics are so compelling. So yes, I think some markets are gearing up, some aren’t even thinking about it.

But overall, you have the independent refiner, the independent terminal and the ethanol industry, and the independent retailer; all are trying to do this. We are defiantly getting pushbacks from the big oil, we’re getting pushbacks from even some of the mainly bigger terminal systems in the U.S, yes, because they’re so driven by profitability of that other side of the industry that – but in general we’re going – we are definitely winning some of the battles and making progress in a lot of markets. Steve you want to just comment anymore on what you know.

Jerry Peters

It’s been driven by some of the retailers that to see the spread, and they are the ones that are pushing – been pushing back up to the terminaling companies to be registered and certified and capable of dispensing E15 and that’s where it’s going come from. They’ll get the retail asset in line so that they can dispense E15 and then they push back upstream to their supplier – to their terminal to their suppliers to supply blend stock and the ability to blend. So that’s where it comes from, the retailer receives the spread right now.

Michael Cox – Piper Jaffray

Okay. My last question, I’d be interested in your thoughts on production levels at your facilities here as we look at 2Q and I guess in this third quarter, do you expect to ramp up closer to your run rate capacity or will you still continuing to run at this more curtailed level?

Jerry Peters

We’ve started to ramp up a little bit, but not very much, I mean I expect that Q2 will be similar to Q1. But we probably won’t see the same opportunity around the ability to store and earn money. If you – which is interesting because in the middle of Q1 at the downside, at probably at the bottom of the cycle, we’re starting to see $0.02 a month, given a little bit more to actually store ethanol which we look at. We have 280,000 barrels of storage in our own plants and you have $0.02 a month, your interest carries about $0.06 per months. So there is definitely return on face that we were earning.

We don’t see that same return on face, so that the real question is why and so it’s the question why because inventories are starting to come down and we’re starting to see production come down and so the market is same, we’re not going to start to carry it. And may be something that underlying the market is changing and we were looking at that closely. But in general we expect we are at this point, we’re going to run very similar in Q2 that we did in Q1.

One thing- so there is a few benefits, when you run a little bit, so you have to – in markets where margins are narrow, you have to examine your cost or your slowdown cost versus your yield gain. And these are really some – when margins are good, you run full out and you might lose a little bit of yield, and but that’s paid – you’re being paid for to do that because margins are so good like they’re 18 and 20 and 30 something a gallon and you run full out and you don’t, you don’t have to focus on yield as much because you’re earning so much of the marginal profit.

When margins are tight, then you would say to yourself, okay if I can go, I’ll slowdown, but then I could I get a lot more yield out of it and between the initiatives up slowing down and some of the other initiatives we’ve put into place going up for yield that really paid off during the quarter and we should see some – and we’re seeing benefit of that in the second quarter.

So I know when you look at kind of the third quarter, Michael, it’s not just similar to last year. We didn’t see any visibility of third quarter until about June 20. That’s when we started to see the third quarter shape up. We wouldn’t sell any – and we won’t sell any ethanol in the third quarter today. If you want to buy our physical ethanol, you’re not going to buy from us just like last year, making a determination of number one, where we’re going to get the corn from during that kind of that 45 day window of potential real tightness in the corn market, and number two, where you’re going to get the ethanol from.

So it’s got to be a wait and see in the third quarter, but third quarter looks almost carbon copy of what the third quarter look like last year at this time, which we have no visibility at all. So – but at this point, we are running everything like we were last quarter, margins are better than last quarter and has been consistently at least positive from the EBITDA standpoint.

And so we’re just running like we were last quarter, we haven’t increased anything. I think you have to look at last quarter and you got the lows of double-digit negative EBITDA margin at some point in this industry last quarter. And we saw the lowest margins we’ve actually ever seen for spot, it didn’t last very long, but it got down to double-digit negative EBITDA, which we never thought was possible, but it certainly got there.

Michael Cox – Piper Jaffray

Okay. Well. Nice work managing through this tough environment.

Todd Becker

Thanks, Michael.

Operator

At this time, we will move to Matt Farwell with Imperial Capital.

Matt Farwell – Imperial Capital

Hey. Good morning. Just curious, could you just reaffirm what your debt service cost is per gallon this year?

Jerry Peters

Matt, it’s $0.10 per gallon, it remained right at that level.

Matt Farwell – Imperial Capital

Okay. But some of the scheduled principle repayments are related to revolvers and cash flow sweeps?

Jerry Peters

Right. The $0.10 per gallon doesn’t include cash flow sweeps, which would come from cash flows well in excess of $0.10.

Matt Farwell – Imperial Capital

Okay. So then when you are locking in margins for the second half, are you still using debt service coverage as a criterion or are you locking margins below that level.

Todd Becker

For the second half of the year, we are not – second half of the year especially the last three or four months of the year you are in high teens, low twenties. So, you don’t have to use any of that thought process and we are locking margins away. So that’s how we’re kind of thinking of that. That’s historically better than our three-year average. We are seeing the opportunity to do it.

We will only do it when we secure physical corn and the farmer has started to let go some physical corn for new corps as these kind of coming out of the field. It’s weird to say that, but coming out of the field in April with a corn corps fully planted, even coming out of the field in March with a corn crop fully planted, they started to look for the corn.

So, it’s just one of those things that as the farmer gets more comfortable that he has the acres in and he feels like he is off to a good start. We will see more corn move. I think what people have to understand is that on June 1going into kind of that summer season, even though we’re going to end the year at 800 million bushels, there is still 3.8 billion bushels or so on June 1, there is a billion bushels demand per month.

So there is still plenty of corn out there, but the farmer is going to control those stocks and as he comes out the field we will start to see him selling – potentially selling more new corp. Now don’t get me wrong, the demand is robust, but as he comes out of field and he is selling new crop or old crop, he is actually considering his new crop numbers as well. So, we’re just using that as a proxy to lock margins away.

Jerry Peters

But we are not doing anything beyond, not much beyond like we normally would lock beyond our physical purchases. We would not be afraid to do that, except that we won’t do that anymore for a while, we will lock away where we buy from physical corn standpoint, we’ve seen too much – there is actually sometimes more volatility in the bases than there is in the underlying.

Matt Farwell – Imperial Capital

What’s your expectation for the bases, do you think it could break in June or do you think that will see and also is it moving higher from where it was in the first quarter? And do you think it could break in June or will we have to wait until new crop?

Todd Becker

We’re seeing nothing right now that’s going to see that this domestic bases has any fundamental reason to go down. So is it higher than the first quarter? Yeah. It’s higher than the first quarter, but the spreads are very different too, so you have major like corn spread that is inverted instead of any carry, so just changes. It’s not a single question that you can answer.

We do see actually even with a higher corn bases, we do see better margins, so it’s – and part of that is DVG returns have gone up a little bit as well. So – and natural gas come down. So net-net we’ve seen overall better margin structure with a higher corn bases, so you can’t just look at – you can never just look at the corn bases and say that that’s going to impact your ethanol margin because if you look at last year, we had record high corn bases during a peak margin environment. So – but it does have definitely have an impact on the way that think about the market.

Matt Farwell – Imperial Capital

Got it. And just big picture, looking at E15, you’re suggesting that big oils pushing back on rolling it out, but when I look at 2013, it seems like there, you can back into kind of a required amount of E15 in the market around 10 billion gallons, if you believe the mandate will be fulfilled with 13.8 billion gallons next year. So how do you reconcile the two, what could happen?

Jerry Peters

What you’re looking at is the 13.8 on the RFS for 2013?

Todd Becker

Right.

Matt Farwell – Imperial Capital

Right. And if you look at it based on demand and where it is, it’s a higher percentage than 10% of what the U.S. ethanol demand is probably going to be?

Todd Becker

Yes, so it will get reconciled through – potentially through E15 or through potentially if there is a waiver, but I don’t think the U.S. is setup to do. I mean, they are setup to fund more ethanol, and so that will have to get reconciled someway share reform. Now, I don’t think anybody is calling for higher gas demand next year. So that’s – is not going to come from there.

So E15 is really the only the way to get there, that’s why we’re working so hard and on doing it, that’s why they are working so hard and on not having it. Because it just takes away from more, more and more of typical gas based business, if we burn more ethanol, so every gallon of ethanol that gets burned a gallon of gasoline that don’t over and above the 10%.

Matt Farwell – Imperial Capital

Right.

Todd Becker

So it’s a battle and we have to be very well prepared to fight the battle.

Matt Farwell – Imperial Capital

It means are you seeing in gasoline demand, exports are – comprise a large source of demand and they have in previous years. Are those exported gasoline gallons they blended with ethanol?

Todd Becker

Some are and some are not. If the numbers kind of vary on what is going offshore with it right now. The majority which is all leading was unblended ethanol, was unblended gasoline.

Matt Farwell – Imperial Capital

Okay.

Jerry Peters

What you’re seeing though, you could actually put up now and still not be a blended gallon to be, correct me if I’m wrong, you put above 1%.

Jerry Peters

Yep.

Matt Farwell – Imperial Capital

1% of ethanol and still have it disqualified as an export gasoline without being a blended gallon.

Jerry Peters

(Inaudible) gallon.

Todd Becker

And we do see people doing that as the economics are favorable, so that’s not also and kind of does it, it might be in the overall export number, but it’s nothing as people miss.

Matt Farwell – Imperial Capital

I see. Okay, well thanks a lot for answering my questions.

Todd Becker

Okay, thank you.

Operator

And next question will be from Patrick Jobin with Credit Suisse.

Patrick Jobin – Credit Suisse

Great. Good morning and thanks for taking my question, some exciting opportunities with the railcars. I guess just turning back to ethanol briefly, I wanted to touch on the comments you made about yield improvements unlocking that 7% starch. And how much do you think is obtainable and what should we expect investments to be made or is that something that could hit 2012 or 2013 or just some sense around that will be helpful.

Todd Becker

Yeah, I just do a quick comment and I’ll let Jeff kind follow-up. We’ve done – we’ve been working several years on increasing yields at our plans and some is slower than other – some have gone slower than others. We have seen and it’s going to kind of going to come either biologically or mechanically. And so we’ve been working more on the mechanical side of it to see where and how we get more while companies like Novozone and Genencor worked on the biology side of it and they’re making improvements as well.

So, in the combination of both of those as well as continuing to even a variety of corn makes a difference as well. So we have plants right now that are pushing 294 yield and we have some plants that are lagging behind still under 270, but overall from the average we’re at 284. And so we just need to get those laggards continue to get those improving and those – I think we will see that overtime. I think that’s where the USDHS doesn’t have a good understanding of what our yields are as an industry using 271 and their numbers for the balance sheet. So Jeff, do you want comment about on what we’re doing.

Jeffrey Briggs

Yeah. It revolves a lot around the enzymes that we’re using, the rates, some of the processing and grinding processes that we do use and when we look at everything in total, also some of this around the technology. One of the things that we’ve learned is that our delta tea plants can actually be pretty efficient yield animals compared to some of the previous ones that we thought.

And so after operating for two years, that become a very good platform for us from a yield standpoint. The opportunities in the nearby, certainly give us some insight into what we had in terms of our chemicals, our chemistry rates, the grain rates, all those things have really brought down to the bottom line, very focused on chemical usage as well.

And without disclosing a lot of details around that process, chemicals in terms of our actual usage, in terms of our pricing strategies everything has really gone to the bottom line in the first quarter and that’s become a big help for us. And so, when you look at the projects technology wise, ICM and others and so there has been quite a bit around that for benefits.

Patrick Jobin – Credit Suisse

Okay. Thanks. And then lastly could you I guess go back and maybe quantify some of the margins that you have been able to walk away for May and I guess going into early June, and then what you have seen in Q4, just you mentioned it’s positive, it’s better than Q1, but any color on the magnitude will be helpful. Thanks.

Todd Becker

So what we’ve been able to see is with some margins at the trough of the whole move, we saw Q2 margins, negative EBITDA as well. So as we moved into the kind of the positive numbers with the end, impact of yield improvement, we’re kind of mid to high single digits depending on the plans, some are lower, some are higher. We haven’t walked everything away, it’s very volatile and we’re seeing first standard deviation moves on the margin every day.

I mean, its’ really that’s how volatile this is. So we are trying to lock what we can away, we’ll always go to the best margin on the board. So I mean, I could say second quarter is still going to be a challenge. It will be better than the first quarter, we do not expect a repeat. And then as we get out to late third or early fourth, we have margins in kind of mid to high teens to low twenties depending on the plant.

We have our early Tennessee plant has the best margins in August and Sep and those are in mid high 20s. But the rest of the platform we wouldn’t lock in any other July, august, Sep at all. So, it is just kind of plant specific, it is kind of plant specific and corn basis specific, I mean all and any of the above.

So, second quarter is still going to be a bit tougher than we would like, but overall the improvement in the curve in the second quarter is definitely better than the first and so just got to wait and see how that will impact. So when you kind of combine that with some other initiatives in place, good corn oil, corn oil prices have done very well with bean oil rallying as well as hitting oil and some additional demand from the feeders and the biodiesel guys. So overall it’s going to be a better quarter, but we’re still in a challenging environment.

Patrick Jobin – Credit Suisse

Okay, Todd. And you made one comment, so just one last question. You made a comment in your prepared remarks about some exciting growth initiatives I guess potentially above and beyond the railcar asset utilization, are there other things you are looking at as far as expanding capacity or how should we frame these comments?

Todd Becker

Well, I think we are looking at – when you look at start their ethanol plant and I know we are a grain company, but you have the ethanol plant and first handle opportunities.

We haven’t never taken advantage of the first handle opportunity at the ethanol structure, so we are looking at, are there things that we can do to get that first bushel from the farmer at our ethanol plants at places like Indiana, Michigan where it’s key to get the first bushel and so whether we put the flat store jump in our ethanol plants, look at those opportunities to get more and more of that early bushel at the better prices we are looking to allocate capital, which we think will widening our margins over the long-term and have a better supply structure.

It can happen with any grain business or outside of the grain business, but we see the opportunity there. We see the opportunity in what Jeff is doing in operations. We are seeing great improvements by deploying some of these early kind of yield improvement initiatives that if we can continue to push up from 284 and every point of yield is meaningful to us. And it does, and your cost of that improvement is your best return on capital that we have today. So we spent a lot of time on that.

We have the bottlenecked our corn oil and we continue to the bottleneck our corn oil extraction. We actually got so good at it, we had to push it back to make sure that we don’t degrade the quality of the feed and so we know we’ve managed it very closely to make sure our end used customers get the very best product that we can make for them and without degrading the quality by taking too much of the oil out.

So we’ve reached kind of some capacity there, other plants have a way to go, but I think we’ll see yield improvement there. We’ve got, we are looking for our next big BlendStar project. We think that there is some opportunities there as well to be in, has been a great partner with us, but we’d also think that up in where takeaway capacity is lacking around other liquid fuels or BlendStar terminal plays very nicely there.

And then as well as the grain business, we’re looking at opportunities for growth there and whether it’s buying more assets or moving more corn or what – or having a bigger harvest year I mean we’ve got to make sure that we see the opportunity there and then buy a process LG has been making great strides and so I think you’ll hear some good positive things out of there. The five acres are going to come online.

We have lots of parities that want the product and we have lots of parties that want to look at further into technologies not just for making food, feed or fuel but also carbon mitigation, so a lot of good things happening. Obviously we have to fight through, we have to fight through the ethanol margin, that’s the biggest and the single most important thing that we work on every day to make sure that we try to get it as much as we can as a margin especially in times of compression, but I think overall when you look where we are at we’ll come out of this quarter and hopefully better times are ahead.

Patrick Jobin – Credit Suisse

Thanks.

Operator

And moving along we will hear from Laurence Alexander with Jefferies.

Unidentified Analyst

Good morning. This is Lucy on for Laurence today.

Todd Becker

Hello, Lucy.

Unidentified Analyst

Couple of questions on Algae, have you seen any delays at all in client user testing for the food, feed and fuel applications?

Todd Becker

No, not all actually we get more callers every day for our products. What you need is that we actually have product and we can give the people that want to test it we can give dry wholesale flakes, or we can give them as the BioProcess Algae company can give them more of a toothpaste liquid form depending on what they want. We are being tested in a wide variety of applications right now from food, nutraceuticals and even household pets applications and things like soap and (inaudible) foods and things that people want.

We don’t want to make any of that. We just want to sell then what they need to get themselves. If your company need algae to put into a product, we just sell only algae we don’t on IP, we don’t it want it on the company’s IP, we just want to sell the algae at profitable, in a profitable way. So we’ve got the, we’ve got the projects that’s being operating right now.

We got the five acres coming online, those five acres will end up in some consumer product whether it’s (inaudible) or our food product and we have several opportunities that we are looking at and those ASPs, so the average corn prices are very high. It will contribute also our bottom line not necessarily because we’re still developing costs and our next step is we want to look at how do we rapidly grow from five acres – whether it’s a 100 acres or 500 acres, there is a demand for its which we think there is.

How do we rapidly grow to put out a product of commodity based kind of high value algae flake, but we are in many, many tests right now and talking to very a lot of larger carbon emitters as well as food, feed and fuel companies.

Unidentified Analyst

Okay. And you touched on this just a little bit during your prepared remarks, but what is current interest in share buybacks at this level?

Jerry Peters

Well, we like at eight, and we like it at 10 and you know what we always look at it for our shareholder to say what’s the best thing to do, I think what we did even though at this point it might not see as appealing to some, what we did is we bought back company very large portion of the company at an average of about $9 a share and so we like the stock.

We liked the ownership there. I think when you take a look at – looking at the pieces of what we do and you start with the agribusiness segment and you look at, a recent transaction in kind of a 8 to 10 multiple of EBITDA and you kind of equate that to our equity value with $30 million of term debt against that asset roughly, you can see that that’s not really represented fully in our price.

When you look at the $430 million of debt against 740 million gallons of production, you look at de-levering that has taken place, and you look at the equity value that’s left in those assets versus the current market which we’ve seen an asset trade is as high as the $1.29 a gallon, a very good ICMS at not a hundred, but even a smaller one trading that high $1.20 range. And if you look at the equity value of those assets and we think we have kinds of value there.

When you look at our cash balance, when you look at our even our BlendStar business, in a multiple of a terminal business, we think we have value there. So it should – but we have to make money and it comes on to that ethanol EBITDA and that’s still our driving force. But we think the overall base platform value is the reason why we look at buying our stock back at an average of about $9 a share. Because we felt for our shareholders after we generated over $350 million of EBITDA over the last three years, we felt that we had cash available to do that and really get that shareholding consolidated among kind of the investors, our institutional sponsorship, and then our retail sponsorship.

Unidentified Analyst

Thank you.

Operator

At this we will hear from Craig Irwin with Wedbush Securities.

Craig Irwin – Wedbush Securities

Good morning, everybody. Thank you for taking my question. There has been quite a lot of press coverage out there and a number of different people saying that we’re most likely can have a challenging time meeting the mandate levels for the year. And they are just two mandates, could potentially see short fall. How do you see this playing out for the industry? Do you think that this is something where it could create more significant demand in 2013 as far as compliance and the potentials for E15 to play or do you think that there are other alternatives that will make this less of an issue for the obligated parties?

Jerry Peters

Well, I think this year when you look at the mandate of 13/2, again what’s kind of attracting that 130 billion – 233 gallon gas demand range, and with the production level that’s went up to through mid-14s meeting the mandates will not be a problem in 2012.

And in fact we’ve taken our production down actually in 8.60 rate, so that production run rate, I think it’s about a 13/1 production run rate anyway. So from a production run rate, we’re actually producing below mandate levels, but you’ve got enough inventory to make up the difference over the monthly demand, but then as exports kick in you won’t have enough and you or the E15 kicks in, you won’t have enough, you’ll have to either kick production up or just potentially earn better margins.

So I don’t think this year it will be the problem, next year with – we produced a 133 – when demand is 133 billion again, and the industry the demand is 13/8 then that will be more interesting time and that’s what we’ve talked about earlier where E15 may kick in and alleviate that problem as well. But in general we shouldn’t have any trouble of meeting the mandate, it’s a function of how do we get more ethanol in the market using the E15 as the component.

Craig Irwin – Wedbush Securities

Great. So my next question is you mentioned in previous comments that you’re seeing assets trade a buck 20 a gallon. Obviously you’re buying your own plants, but what are the industry participants that are taking out assets out of buck 20 a gallon seeing that’s it’s not visible to the equity investors that are obviously valuing Green Plains with a significant discount to that?

Jerry Peters

That is the hundreds of millions of dollars question. I think, it’s a great question and that’s what we’ve been trying to figure out, because when we bought our shares back in $9 a share. We’d like these kind of the value in that mid $0.70 to $0.80 a gallon range – per gallon. That’s what in kind of incented us to do that when it takes us – it really truly does take us to $1.20 a gallon to buy a good ICM plant in the middle of Iowa, minimum. You might have to be able to buy it there actually, because there is plants that have been a bid higher than that that haven’t treated.

And so, what the – somebody who wants to own a plant as seeing versus somebody who wants to own equity as seeing is something that we have been trying to figure out. And so, if I wanted to go and buy – if I wanted to go and buy, I want my ICM plant today, a similar plant in the State of Iowa, number one, I don’t know if I could actually find one for sale and number two, I don’t know that I actually could buy it for less than $1.30 a gallon right now, if you’re farmer on plant with very little debt.

And so – and Steve, we’ve seen that several times, we’ve seen actually framer implants turned down bids and is it the big oil guys stepping in again or the big refinery? No, actually, it’s just trading among participants that have cash that say, at this price, we’ve seen good enough returns over the last several years that we can justify that over the long-term. So there is definitely a disconnect, but we try to – the reason we brought our stock back at $9 a share is because of that disconnect. And again, that will reconcile itself at some point. It’s just – I’ll probably just take time to do that.

Craig Irwin – Wedbush Securities

Great. And then last question if I may. In the past you’ve been very opportunistic about acquisitions obviously, recently buying your own stock. Would you consider further acquisitions to increase your overall participant – participation in the ethanol market or are you more likely to deploy capital in alternative investments?

Todd Becker

Well, I mean, at this point, we don’t have anything that we can buy in ethanol, let’s say we’re not going to look at anything and there is nothing very appealing out there. So I would never say never about ethanol, I mean, at this point, I think we – we’re in it and so if there was a plan that came up and it was interesting and there was a good value, we have to look at it, we believe in the long-term story.

We believe in E15, we believe in some – we believe this as a good motor fuel. It’s not the end albeit, but it is a good motor fuel. It’s the biggest replacement for gasoline ever in the history of motor fuel. So I think you have to respect that and I think that over the long term if you believe the margin be there, I think then you have to look at those opportunities.

But we also look at growing our Agribusiness segment, growing our terminal business, looking at other opportunities, deploying capital and ultimately we’ll have to determine, we don’t have any other places to do that. There are few ways to work on that. You either continue to pay down debt or give it back to your shareholder, and so we have to examine that but we are not at that point right now.

Craig Irwin – Wedbush Securities

Could you share with us how you would prioritize those different investments please.

Todd Becker

Really it just depends on what comes forward, if it’s Agribusiness asset, it’s appealing. They are all, all they all something we are looking at. So I wouldn’t today say that I would choose any over the other except that we are looking at the ends more than we look at the middle. We are looking at the handling and the beginning and the handling at the end of the chain. More than we look at the middle of the chain because the middle of the chain doesn’t have any opportunity today plus the buying thing it at an reasonable price.

Craig Irwin – Wedbush Securities

Great.

Todd Becker

Again disconnect between public activity and private purchases.

Craig Irwin – Wedbush Securities

Understood. Thank you for taking my questions.

Todd Becker

Thank you.

Operator

At this time we will go to Brent, Brent Rystrom with Feltl & Co.

Brent Rystrom – Feltl & Company

Hi. Good morning. Just couple of quick questions, could you give us a little more insight on the fertilizers, the change was down, does this have any implications for this season or is it just timing as far as say later in the inventory now and running it through more the system closer to the application time.

Todd Becker

Well fertilizer in the first quarter is typically down anyways. We saw some early applications in Iowa, but we’re really a second quarter fertilizer company.

Brent Rystrom – Feltl & Company

But what I was – Thank you, Todd. You’re at 2,357 million tons sold this year versus 3,108 million last year. So, I am assuming you’re just shallower on inventory and you’re going to ship more times, more at the application time, you’re not applying to seem down 20%, I guess what I am saying.

Todd Becker

Not at all, it’s a very low three month period overall for us and we do 60,000 tons of fertilizer or so maybe 70,000 tons something like that. And so the first quarter is not an indication of anything. We had a good strong second quarter. We have clean, good investment in from the farmer and making sure that corn crop gets up well and so overall we don’t see that as anything that you should view as a pattern.

Brent Rystrom – Feltl & Company

We can see nitrogen is doing well by what’s going with prices you have in last two days, Mosaic come out and say they see a strong demand and then Potash yesterday come on say they see weak demand for potash, any thoughts on what you are seeing? The potash fertilizer itself.

Todd Becker

Our demand is pretty similar last, I mean where we sell there is not a lot of change in rotation. So, I mean we are probably finding a little more corn, but in general there is not a lot in rotation. So from our standpoint everything is pretty steady. So nationally I haven’t seen – I mean nitrogen is obviously showing it’s colors right because of the price but in general the farmer is investing in this crop this year for sure and is planting a lot of corn and it’s going early and it’s going in well.

Jerry Peters

(Inaudible) this morning just on their call, I feel that should be (inaudible) harvest and they tightened the amount towards the low end of the range. They have been talking up towards 21 million metric tons, now there is 16 million to 17 million.

Unica just said the other day they only see sugarcane harvest in Center south (inaudible) of 3% to 4%. I would actual think that this would suggest that exports to the U.S. from Brazil are pretty much unlikely until mid-part of next year. They post even a risk. I think you said earlier today that you might see some later this year. But if sugarcane production as just up 3% to 4% in the center south I don’t see statistically how it could even export off this year’s crop?

Todd Becker

Except that they have this window where it all comes in and may make all their ethanol. And so during that window there is excess that has to move. And so it just depends on what the government does. If the government allows it and they let it go it will come here, if they don’t allow it and they say, no, you are not exporting to the U.S it won’t come here. So, I think it’s a window and it doesn’t matter necessarily what the sugar crop is in that window and then after that window closes we probably won’t see them after that until next sugarcane harvest. Steve, you got any comment on that?

Steve Bleyl

Well, I think the rule in the California department would be more valuable so you are starting to see something by that.

Todd Becker

Yeah, so that is something that’s why it’s coming in and then the Florida as well. You see some of there, but it’s is really just isolated to that time period and then just to take advantage it may be a D5 range arbitration other than that it’s good news if one (inaudible).

Steve Bleyl

It is and I don’t think you’ll see any more allocated, I think it will just flow the barrels over to California as all of it.

Brent Rystrom – Feltl & Company

Great, I’ve got just a couple three quick more questions and let’s get done here. Railcar leases, my actuation would be having grown up in the Bakken. All the pipelines growing and there is a window of about two years before those pipelines really start to hit. Is that kind of what you guys are looking at from the railcar leasing perspective?

Todd Becker

Steve has some take on that and then I’ll finish up on that as well.

Steve Bleyl

And I think Jeff could add to it. I don’t think you’ll see – we want the capacity increase on the rail are on the pipelines. We still that the excess capacity, it still has to be made by rail. You’re still seeing infrastructure investments being made but being in other railroads up there, because the rail are the pipeline capacity will not be able to handle all the increased production.

Todd Becker

Jeff.

Jeffrey Briggs

Yes. And some of it depends politically what happens with Keystone and follow on pipelines there. So I think there is some political risks surrounding that for me administration and it all depends on what the projections and the output are at the Bakken. We’ve heard numbers up to a 1 million a day fairly quickly but there are some people that are projection 1.5 million a day within the next two years. And so, if the estimates continue to be conservative versus the actual, our growth rate has been significantly beyond what was projected a year ago if you look at year forward. That’s going to mean that there is a continued haul of pipeline takeaway capacity from that area.

Todd Becker

So we have to study the chart Brent, because it will definitely affect the marginal barrel of ethanol. And so that’s why when we’re answering these questions, you see that we’ve spend a lot of time thinking about the tank cars and the impacts that will have on the industry by taking that excess capacity or even some of the needed capacity by industry of tank cars and the impact that it could have over the – next couple of years in U.S. ethanol market.

It could really change things because I don’t think that the railcar companies can roll them off that versus the needed takeaway capacity. So we have to really look at that and I don’t actually think that’s a negative risk for us. I think it’s actually potentially – we look it as a potential positive risk. It’s kind of like what we say. We hope, companies that – so I think I’ll step back, so when we look at that and we say, if we could change the way that you U.S. Ethanol potentially trades, then it has to be essentially positive for the margin and if you can earn more money with your assets doing something else, it’s potentially positive, potentially positive, just has to still play out.

So it’s kind the any in all of above strategy, but we have to be very cognizant that, somebody wants our rail cars, and there aren’t enough coming off and there is big demand that at $3,000 a car, if you think about an ethanol plant, and you put 30,000 gallons in a car, $0.10 a gallon right there, you got a paper car. At the low end of the range, we are leasing up for $250 a car three years ago.

So that’s a big change in ethanol economics that if you all sort of can’t move ethanol where you’re going to get it from, you’re going to have pay more for it. And you can see that, I mean the spread, there is more to say because the spread between gas and ethanol. So why they can pay more for ethanol, it’s just a function of this buy demand man equilibrium getting out of whack.

Brent Rystrom – Feltl & Company

Final question I have for you is, looking at some of the activity up in Canada, (inaudible) your neighbors are telling there in rumors about Mitsubishi possibly buying them, are you seeing larger entity interest in the, what I would call the, agriculture infrastructure that you’re kind of building across obviously ethanol, obviously your (inaudible) centers, the whole thing, are you seeing acquisition interest of you?

Jerry Peters

Well, we like those transactions because I think you can put at least a print to understand why we’ve done what we’ve done. So we generated – we doubled our EBITDA last year in that segment to in the range of $15 million EBITDA and we’ve seen multiples in transactions trades eight to 10 and that was a 11 multiple on the first when you talked about of the EBITDA and so we’d like to see those prints and that’s how we look at it.

And we’ve built it up and I’m not actively marketing our grain business at this point. It has a lot of value you can’t go buy, I cannot go repeat what I’ve done very quickly now. We’ve built 40 million bushels as a company of storage in terms of acquisitions and some organic growth and when you look at that business replacement cost alone to do that is significant opportunity and it takes a year, it will take you a couple of years to do that.

The value of the assets versus the multiple of being paid versus the crops coming in the world and the U.S. still being the residual supplier of the world, we’re very happy with what we’ve done in our Agribusiness segment and it’s not repeatable very quickly and to buy a 40 million bushel grain business in the U.S. today at any reasonable value is near impossible. So we’ve seen many transactions that we like, what we’ve seen eventually we believe it will get reflected in our value.

Brent Rystrom – Feltl & Company

Thanks, guys.

Todd Becker

Thanks. I appreciate it.

Operator

And that is all the time that we have a questions. At this time I’ll turn things back over to Todd, back for any additional or closing remarks.

Todd Becker

Well, I want to thank everybody for coming on today. Obviously, it’s not wasn’t a greatest quarter, we think we have a lot of positives coming out of the quarter albeit we still have a challenge out there ahead of us for a little while, but we are locking in margins for the second quarter and looking out on the curve.

We think what we’ve built up over the last several years after 11 profitable quarters, $300 million plus of EBITDA, positive net income on the bottom line for three years in a row, prepared us for this time. We have – we had a better situation from a balance sheet to withstand a cyclical downturn that we would have been three years ago, and that’s all just a function what we’ve been able to over a lots of couple of years.

We’re going to generate over $50 million of non-ethanol operating income from our three segments. Which we think is a, a very big advantage for us and we continue to be committed to what we do in our structure in our strategy that we’ve laid out to you over the last couple of year. And we appreciate, we appreciate your continued support Thank you very much.

Operator

Again, ladies and gentleman, this does conclude today’s conference call. Thank you all for your participation. You may now disconnect.

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