Executives
Don Endres – Chairman, Chief Executive Officer
Danny C. Herron – Senior Vice President, Chief Financial Officer
Bryan Meier – Vice President of Finance, Chief Accounting Officer
Patty Dickerson – Director of Investor Relations
Analysts
JinMing Liu – Ardour Capital Investments
Heather L. Jones – BB&T Capital Markets
Ron Oster – Broadpoint Capital
Cornell Bernet – Citigroup
Eitan Bernstein – Friedman, Billings, Ramsey & Company
Paul Cheng – Lehman Brothers
Tom Nowak – Merrill Lynch
Joseph A. Gomes, Jr., CFA – Oppenheimer
Pavel Molchanov – Raymond James
Ian Horowitz – Soleil Securities Corp.
Scott Reynolds – Thomas Weisel Partners
Mansi Sengal – Lehman Brothers
Gregg Brody – J. P. Morgan
Melinda Newman – Post Advisory Group
Lewis Algin – ING Capital Markets
Kevin Malone – RBC Greenwich Capital
VeraSun Energy Corporation (VSE) Q1 2008 Earnings Call May 13, 2008 10:00 AM ET
Operator
(Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Patty Dickerson, Director of Investor Relations. You may proceed.
Patty Dickerson
Thank you, Serena. Good morning, everyone, and welcome to VeraSun’s first quarter 2008 earnings conference call. Before we begin I would like to remind you we are webcasting our call and you can access it at our website, www.versun.com, on the investor page. If you would like to follow along with today’s presentation click the webcast link. The replay will also be available at that same address later today.
Don Endres, our chief executive officer, Danny Herron, President and Chief Financial Officer, and Bryan Meier, Vice President Finance and Chief Accounting Officer, will lead the call this morning.
For those of you following the presentation please turn to slide number two, the company’s forward looking statement which says that some of our statements in this release and other written or oral statements made by or on behalf of us are forward-looking statements within the meaning of the federal securities laws. These statements are based on assumptions and assessments made by our management in light of their experience and the perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.
Any forward-looking statements are not guarantees of our future performance and are subject to risk and uncertainty that could cause actual results, developments, and business decisions to differ materially from those contemplated by any forward-looking statements. Any changes in such assumptions or factors could produce significantly different results.
Following our prepared remarks we’ll open up the lines for a question and answer period for analysts only. Press inquiry should be referred to Mike Lockrem and you can obtain his information on our website. Please be mindful of others so that everyone may have an opportunity to ask their questions.
As you will see on the overview slide, slide number three, today’s call will consist of remarks regarding our financial and operational performance for the three months ended March 31, 2008, an update on the merger integration, and an industry overview.
At this time I’ll turn the call over to our chief executive officer, Don Endres, to provide the quarter’s financial overview and highlights. Don?
Don Endres
Thank you, Patty. Good morning, everyone. Welcome. We appreciate your attendance and participation today. We’re pleased to report another solid quarter underscored with significant growth which has resulted in increased revenues and earnings compared to year-ago levels.
On slide 4 you can see that we ended our first quarter with revenues of $517 million, up 257% from last year’s quarter, EBIDTA of $32.3 million compared to $3.8 million Q1-07 – a nearly ten-fold increase – and net income increased to $7.6 million or $0.08 per diluted share compared to a net loss of $300,000 last year. We ended the quarter with cash and cash equivalents of nearly $74 million.
Our team again delivered strong inspirational performance. We maintained a solid safety and compliance record. As a result of our focus on safety I’m pleased to report that our team recently received rail car safety awards from the UP, the BNSF, and the CSX railroads.
VeraSun delivered record production of 142 million gallons, which was 101% (inaudible) capacity. Ethanol sales grew to $192 million, a 224% increase over last year’s quarter. We also started out our Bloomingberg, Ohio, facility in late March and we gained shareholder approval to merge with US BioEnergy on March 31st.
At this time I’d like to turn the call over to Bryan Meier, our vice president of finance and chief accounting officer, to discuss the details of our financial results. Bryan?
Bryan Meier
Thank you, Don. Good morning, everyone. I’m Bryan Meier. I’ve met some of you during our recent road show and I look forward to working with all of you in the future.
Before I start I would like to remind everyone that we did not complete the merger with US Bio until April 1st and therefore the quarterly numbers presented to do not include the results of US Bio. As I go through the presentation I will make reference to some of US Bio’s first quarter operating metrics in slide 8.
Now let’s go over VeraSun’s quarterly results. As you can see on slide 6, we had another strong quarter of gallons sold. Volumes increased 224% to 192 million gallons this quarter compared to 59 million gallons in 2007. During the first quarter, due to customer demand outpacing our production, we purchased gallons on the open market and resold them to our customers. For the quarter we purchased and resold approximately 50 million gallons.
On slide 7 you can see we continue to sequentially grow the top line on a year-over-year basis, and on a year-over-year basis sales improved 257% to $517 million compared to $145 million in 2007.
On slide 8 you will see our operating metrics for Q1 2008 as compared to 2007. Ethanol gallons produced increased 139% to 142 million gallons. Ethanol prices improved an average of $0.20 per gallon. Distiller grain prices increased $47 per tonne to $137 per tonne. Average corn costs increased $0.68 per bushel over last year’s prices. And natural gas increased 3.7% to an average price of $8.51 per MMBTU.
At this point I would like to mention US Bio’s operating metrics for the quarter. Production was approximately 84 million gallons. Ethanol prices averaged $2.21 per gallon. Distiller grain prices were $104 per tonne. Average corn costs were $4.26 per bushel. And natural gas prices were $8.47 per MMBTU. In addition, on March 31st US Bio had a working capital of $110 million, which includes cash of $53 million. Both of which will come over as part of the merge on April 1st.
Slide 9 presents the information from a slightly different perspective. This chart shows the key drivers on a cost-per-gallon basis. The key take-away from this slide is that even as corn prices increase selling prices exceeded the pace at which corn increased, generating an additional $0.04 per gallon across the margin.
Let’s move to slide 10, financial performance for the quarter. (Inaudible) increased $372 million to $517 million, up 257% in 2007. On a run-rate basis, that’s more than $2 billion annually.
Income was $7.6 million or 1.5% of sales, an improvement of $7.9 million over the loss of last year.
EBIDTA came in at $32.3 million or 6.3% of revenue; nearly a ten-fold improvement over the prior year or a $29 million improvement. Of the $29 million improvement about two-thirds of the improvement came from leveraging our SG&A costs from $0.18 per gallon in 2007 to $0.06 per gallon in the first quarter of 2008. This demonstrates the scalability of our SG&A infrastructure. The remaining improvement came from additional volume and increased crush margin.
Moving over to the column on the right side of the page we will see totals for the last 12 months. Our sales were over $1.2 billion with net income of approximately $35 million and EBIDTA of $119 million. This last 12-month look should give you comfort that our EBIDTA was sufficient to cover our current annual debt service requirement of approximately $100 million. The $100 million is made up of approximately $83 million of interest and $17 million of debt amortization payments related to the construction project financing.
Now I would like to give you guidance for the second quarter which is based on our current view of the market. Please keep in mind that this guidance includes the combined operations of US Bio and VeraSun.
We expect to ship between 300 million and 325 million gallons. Included in those numbers are 40 million to 50 million gallons of purchased resale gallons, a selling price of $2.45 to $2.55, and with the corn cost of between $5.60 and $5.75 per bushel.
On slide 11 we compare VeraSun to other companies that we consider to be peers both inside and outside of our industry. We arranged all companies on an LTM basis, looking at growth, EBIDTA as a percent of sales, and income as a percent of sales. These numbers represent LTM performance and are calculated from publicly available information.
As you can see, VeraSun is the clear leader in the ethanol space. With regard to top line sales growth we are number one against our peers, and with regard to EBIDTA percentage we are number two. Looking at income percent, we outperformed two of the three big refining companies.
At this point I would like to turn the call over to our president and chief financial officer, Danny Herron, to discuss our merger integration progress.
Danny C. Herron
Thank you, Bryan. As Bryan shared with you, we continue to focus on execution. Our size and scale has allowed us to reduce our SG&A expense significantly on a per gallon basis. On the next several slides I will share with you how we are doing on our integration efforts after the merger with US Bio that occurred on April 1st, as well as share with you how VeraSun will look at the end of 2008.
Let’s move to slide number 13. This is a map showing the VeraSun bio-refinery locations at the end of 2008. What I want you to note is the close proximity of several of the locations. The shaded circles around the facilities represent 50-mile radiuses. This close proximity allows us to reduce costs in several different ways.
For instance, we’re going to have one plant accountant for every three plants, yet the locations are close enough that the plant accountant can spend time in each of the locations they are responsible for. We can share spare part inventories between locations, thus reducing our working capital needs. And because all of our facilities use the same technology we can share training programs among all of them. And last, I would also hope that over time we can do a better job of synergistically procuring our corn and marketing our distillers’ grains in these geographic areas.
Please go to slide 14. As the slide shows, at the end of Q2 we will have 1.42 billion gallons of capacity. As the blue bars show, we have three start ups in Q2 followed by one start up in Q3 and Q4. Normally that many start ups in a short time would be a concern, but I’d like to remind all of you that since last April the combined operating teams have started up Charles City, Ford, Linden, Albion, Marion, and Bloomingberg. That is a total of six start ups in the last 12 months. So we’re very confident we’ll complete the next five as well. By the end of 2008, with what we know today, we will have 1.64 billion gallons of capacity.
Let’s move to slide number 15. The integration continues. We are on track with all major integration steps. Several major steps are behind us, as shown by the check marks. And we are focused on system conversions to be completed during the second and third quarters.
We expect to be in our new headquarters location by the end of August. And we’ll transition ethanol marketing from Provista to VeraSun by the end of the third quarter.
You will note that I’ve also listed the five plant start ups on this slide. All of these projects are on schedule. While they are not part of the formal integration activities, they are a major project that we will execute against during the remainder of 2008.
Now I’d like for you to go to slide 16 and I will conclude my part of the prepared remarks by discussing potential synergies and profitability improvements.
Most of you have seen this slide before as it shows the potential $80 million to $160 million of potential profitability improvement over the next 18 months, primarily as a result of the merger with US Bio. Our team has been working hard to identify the road map to achieve these improvements. Let’s review a couple of these areas.
On the first line, we will self-market the former US Bio gallons and save between $10 million and $15 million in commission that were being paid to Provista.
In distillers grains we have identified an opportunity to shift more of our production to drive distillers’ grains and improved profitability over $1 million per month.
Oil extraction will be operational in Aurora, South Dakota, by the end of 2008. Remember, that’s a $12 million to $15 million per year EBIDTA improvement at the Aurora facility.
In the plant operations we’ve identified several improvement opportunities across the fleet. In yield we currently have a range of 0.15 gallons per bushel across our plants. If we can implement best practices across the fleet and improve yield by 0.05 gallons per bushel we could save over 11 million bushels of corn or about $55 million at $5 corn. Just to put this in perspective for you: 1% improvement at a 110 million gallon plant is worth over $2 million annually at today’s corn prices.
In terms of gallons produced, we believe we have an opportunity to improve overall fleet performance by about 5%, which would increase gallons by about 80 million gallons and add a $0.25 EBIDTA margin that represents about $20 million.
We also expect to remove between $10 million and $20 million of SG&A expense beginning in the fourth quarter of 2008 after we consolidate our headquarters in the (inaudible).
Before I turn the call back over to Don I’d just like to reiterate VeraSun’s large-scale, low-cost strategy is working. We are becoming very relevant to our customers as we continue to grow our scale. Our unit train capability ensures deliveries that our customers depend on to avoid any disruption in their gas line distribution. We are lowering our cost per gallon as our scale grows. And we are continuing to open new markets for ethanol sales.
I’ll now turn the call back over to Don for some final comments before we open up the lines for questioning.
Don Endres
Thank you, Danny. You can see from our business results that we continue to execute on our plan to grow the size and scale of our business which was resulting in both increased revenues and earnings.
I want to take a few moments to again review the industry and the basic drivers of our business model. Some of these slides you may recognize from the last quarter with data updated to reflect current market development progress.
First I’d like to start off with ethanol supply on slide 18. As you can see, ethanol supply has been growing significantly from about 4.6 billion gallons at the end of Q1 2006 to the current capacity of about 8.5 billion gallons. Maybe even more important is the slide growth will level off in the next three quarters as no significant new construction starts are taking place. I also want to point out that the third quarter growth, as well as the fourth quarter growth, is already being committed in the market place. Ethanol producers for plants coming on line in those quarters have committed ethanol contracts in anticipation of start up.
On slide 19 I’d again like to provide colour on current demand and future demand potential. The yellow and the orange bars together represent current demand. The blue bars represent the total potential demand opportunity considering the ethanol is blended at a 10% rate. As you might imagine, the largest new opportunity is the East Coast had one, most of which is developing in the South East, followed by the Midwest where our current demand could nearly double.
There have been a number of tangible activities by majors regarding new ethanol blending throughout the country. For example, one refiner announced the conversion of 16 Midwest terminals beginning May 1. Another major communicated a conversion of 28 terminals to E10 over the summer, beginning with Atlanta on May 1.
Many have made the decision to use CBOB, a sub-octane gasoline blend stock in the Southeast and the Midwest. This is a significant move that helps ethanol demand in two ways: first, refiners are taking advantage of ethanol’s higher octane and therefore they realize better blend economics, which increases the point in which ethanol would trip out of the blend at higher prices. Second, in markets where CBOB is used fuel on the market will require ethanol because CBOB requires ethanol to make finished grade gasolines.
Today refiners in gasoline markets that are blending ethanol are achieving $0.85 to $1 of margin per ethanol gallon. This is a large margin opportunity that continues to drive the build up of blending infrastructure.
On slide 20 I again wanted to update you on the ethanol corn spread for the industry. The yellow line on the bottom represents corn cost converted to a per gallon basis; the blue line represents ethanol price; and the red line is gasoline per gallon. I believe the best measure of how blending infrastructure is handling this large new supply is to look at ethanol price trends. You can see that ethanol continues to maintain its value and spread remains positive and much improved from the lowest spread back in October of last year. I also want to point out that ethanol is selling at a discount to rack gasoline and therefore, as supply levels off, it has good outside potential to realize its full value.
In the past, we’ve now taken time to discuss market development of distillers’ grains. Distillers’ grain is a high-quality protein supplement that is used as a valuable ingredient for livestock feed. On slide 21 you can see distillers grain export market is growing nicely. You can see from the chart significant year-over-year growth with the largest export demand coming from Mexico and Canada. We expect continued growth of distillers’ exports in 2008.
On slide 22 I’d like to spend a few moments on industry public relations work. There are a number of stakeholders that are working together to communicate the many benefits of ethanol. This includes ethanol producers, ag equipment, seed, fertilizer, and auto industries, as well as trade groups like the RFA, Epic, Ace, and the Corn Growers Association.
There are a number of activities that are under way, including the promotion of studies from third parties that clearly support ethanol’s value to consumers. For example, this slide shows one of the advertisements that ran just last week in a major Washington paper to get the message out that ethanol is saving consumers fuel costs at the pumps. Many editorial desk side briefings are communicating the research report from Texas A&M, Iowa State, and Informed Economics, which show ethanol is not materially increasing consumer food costs.
There’s a great deal of work to be done, but I wanted to share with you that our industry and stakeholder partners are engaged in working and getting the facts out. We’re already seeing projects that are starting to moderate their view and I’m confident that our industry will continue to make progress over time.
On slide 23 I’d just like to summarize our industry dynamics. A forward view of the ethanol market continues to improve with high growth levelling off and positive blend economics continuing to drive market development and new demand. With oil over $120 per barrel the market opportunities for ethanol continues to grow with every market up take.
I want to underscore that ethanol will be an important part of the US fuel production going forward. As refiners move to heavier, more sour crude, octane becomes more expensive to produce. With ethanol’s high octane it becomes a more strategic fund component over time.
The industry continues to produce a large amount of high-quality, low-cost distillers' grain and successfully develops new seed markets domestically and internationally.
Clearly, with retail gasoline approaching $4 per gallon, the need for additional refined product is obvious. Ethanol is here and now today, and is providing our country with an important new fuel supply. We believe VeraSun is well positioned to take advantage of this new and very large market opportunity.
That concludes our formal remarks. Operator, we’re now ready to enter the Q&A portion of our call.
Question-and-Answer Session
Operator
(Operator Instructions). Please stand by for your first question. And your first question comes from the line of Mansi Sengal (sp) of Lehman Brothers. You may proceed.
Mansi Sengal – Lehman Brothers
Hi. Good morning, guys. This is Mansi Sengal from Lehman. I wanted to ask a question on your production. It seemed it was a little bit light in the quarter given you should have had one month extra from the Albion facility compared to the fourth quarter. Was that the reason why you needed to purchase these volumes for resale and should we expect these volumes to go down to zero towards the end of the year when you have all your plants up and running?
Don Endres
Mansi, all our plants were running as expected. We didn’t bring Bloomingberg up until the very end of the quarter. Obviously our customer demand was higher than our ability to produce and we were able to buy product on the open market and supply that customer demand.
We would expect going forward that it may remain in similar levels. I think Bryan suggested a 40 million to 50 million gallon number for the second quarter also as our customers continue to grow and put in infrastructure.
Mansi Sengal – Lehman Brothers
I mean, you made a small loss on those volumes, so is that just to maintain customer relationships?
Don Endres
Actually, there is not a small loss. I know what you’re referring to as the cost for the purchase. But we sold more than that many gallons at a higher price than we purchased those gallons at. So there really wasn’t a loss on the gallons.
Mansi Sengal – Lehman Brothers
Okay. A couple questions on your capex. You’re talking about $100 million to $175 million of capex for the rest of the year. Can you quantify how much of that is discretionary or how much of that you absolutely have to spend on your facilities and how much you can basically decide not to spend? Just more like terminal expenditures, etcetera.
Danny C. Herron
Yeah, I’ll take that. Basically because our plans are so new the maintenance capex is minimal and probably around $1 million a quarter would be maintenance capex and the remainder is going to be for capacity build.
Don Endres
The one capacity item that could be discretionary in nature, Mansi, would be the oil extraction of both the Charles City and the Fort Dodge plants. We do have capital allocated for that in 2008, but I wouldn’t expect that we would delay the Aurora, South Dakota, facility since it’ll be up and running in the next seven to eight months. It’s scheduled to be up by the end of the year.
Mansi Sengal – Lehman Brothers
Okay. So if you would do, finish that facility then your capex would be more closer to $175 million than $100 million. Is that what you mean?
Don Endres
Yeah, there’s probably $30 million in there that would be going towards Charles City and Fort Dodge that you could consider discretionary capital at this point.
Mansi Sengal – Lehman Brothers
Okay. And how much is the remaining US BioEnergy capex?
Danny C. Herron
It’s about $100 million is what we’ve got.
Mansi Sengal – Lehman Brothers
And that’s all project level debt, right?
Bryan Meier
Yeah. With minimal maintenance.
Mansi Sengal – Lehman Brothers
Okay. Just a couple of modelling questions and then I’ll get back in the cue. Your tax rate in the quarter was slightly on the higher side. Should we be modelling your usual 35% going forward or do you expect a higher rate?
Bryan Meier
Well, the 35% is the federal rate and probably 2% to 3% is the state rate. What’s happening is our, what we had was interest income that was tax deferred and we don’t have as much investment there, so that’s why the tax rate went up.
Mansi Sengal – Lehman Brothers
So we should expect it to come down going forward.
Bryan Meier
It’ll be between 35% and 38%.
Mansi Sengal – Lehman Brothers
Okay. And your SG&A, could you tell me some kind of a guidance for the second quarter? Because you’re going to have three plants start up, so what kind of start up expense is there going to be?
Don Endres
Mansi, our start up expense will be comparable to the first quarter for Q2. Our combined SG&A expense between the two companies in the second quarter will run somewhere between $18 million and $20 million. That would not include the start up expense.
Mansi Sengal – Lehman Brothers
And then the additional $2 million.
Don Endres
Yeah. You will see the SG&A reduce itself beginning in the fourth quarter after we’ve relocated everyone down to (inaudible).
Mansi Sengal – Lehman Brothers
Okay. Thank you so much.
Operator
Your next question comes from the line of Ron Oster with Broadpoint Capital. You may proceed.
Ron Oster – Broadpoint Capital
Good morning. A couple of quick questions. I’m just wondering, you obviously have some pretty aggressive growth coming in the next year or so. I’m just wondering, at what point do you think you’ve maximized the benefits of economies of scale? And then secondly, Dan, you kind of commented or quantified the impact of yield improvements; I’m just wondering if you could give us some specific examples with regards to the types of innovations that you may be able to cut costs with with regard to yield improvements and any other cost-cutting initiatives you have in place.
Danny C. Herron
The yield improvements will come as a result of implementing best practices and also targeting producers that we buy corn from. There’s some really nice testing procedures out there that tell us about the commendability of corn that allows us to target our suppliers. It also allows us to adjust the operation to get the most efficient use of that corn. And as I mentioned on the call, we have a range between, say, our best performing plan and our one that has some opportunities. It’s like 0.15 gallons per bushel. So a lot of it is operational training. Remember, probably one of our better plants would be our older facilities. Each plant sort of has a personality of its own, but it does come through repeatability that we’ve learned in the older plants, how to get better yields out, and it’s transferring that knowledge across the fleet to the newer plants.
Don Endres
And then in terms of economies of scale, as we continue to add new gallons or spreading out those fixed costs SG&A just (inaudible) so you continue to improve that as you increase gallons. We also are able to, as you increase the size of your fleet again, gain a broader set of operating practices with a larger team. So I don’t know if they necessarily max out. Clearly there is a point where you have a big game – we think we have that today – but we would see incremental of the small synergies with the larger size.
Ron Oster – Broadpoint Capital
Okay. And then with what’s going on in the legislative front and lot more legislative support going the way of (inaudible), just wondering if you can refresh us on the investments you’ve made in that space to date and if we might see more capital heading that way should some of the proposals in the farm bill get passed.
Don Endres
Well, our philosophy, we’ve been very consistent with that, we would utilize technology from third parties and incorporate that into our plants when ROI sort of those opportunities matches and feeds our other ROI opportunities. To date we’ve made one very small investment in a company called Sun Ethanol and a very promising bug that can consume (inaudible) and produce ethanol all in one set. There’s a lot of development that needs to go on, but we think in the next three years we’ll see some commercial technology out there and then it will just be a function of how do these compare with other projects and opportunities that we have. We think there will be an opportunity for that technology to be bolted right on to our existing facilities. We’re out in the middle of corn country and agricultural areas, so we think that when technology is developed we’ll be in good condition to utilize our capital and to bring it to market.
Ron Oster – Broadpoint Capital
So I guess, is it fair to summarize that you’ll be more focused on maximizing the yield on your corn-based production as opposed to using other biomass feedstocks?
Don Endres Well, again, it will just be function of what’s the ROI. So we’ve looked at some models that look very promising that we compete with incremental improvements in our plants and other opportunities. But until the pilot plants are up and running and (inaudible) our yields and energy conversion efficiency, we won’t know it until these models are proven. Once they have been we would just look at it like any other investment and move forward as a result.
Ron Oster – Broadpoint Capital
Okay. And last one for me. With regard to the Reynolds plant that was suspended, any update with regard to resuming construction there? Can you just give us an update there?
Don Endres
I think it would assume to stay on hold until we are comfortable we have significant cash to kind of restart and complete the package. That would be kind of our (inaudible) no plans at this time to restart it, but again we’ll continue the monitoring and we’ll move forward when the time is right.
Ron Oster – Broadpoint Capital
Great. Thank you.
Operator
And your next question comes from the line of Pavel Molchanov of Raymond James. You may proceed.
Pavel Molchanov – Raymond James
Good morning, guys. As a follow up to the recent question about the policy backdrop, what are your thoughts about the perception out there that biofuels have a significant impact on food prices and the possibility of some policy shifts in Washington based on those perceptions.
Don Endres
Well, first of all, Pavel, there’s been a number of studies out there that have clearly shown that corn ethanol has had a very minor impact on food costs. Keep in mind that corn ethanol today, last year over this year, we’ve only increased corn demand by about 4.5% in the US. That’s netted out for the sellers. Worldwide we’re only at about a 2% increase. So really the new demand from corn ethanol worldwide, and we’re clearly in a worldwide commodities market, is very small. It’s about 600, the net of it, well, 900 million bushels before you count for distillers. It’s about 600 million and about a third of it goes to distillers’ grain. About 600 million bushels of new demand year over year. Worldwide we produce about 31 million bushels. So it’s a very small new demand.
But in addition, as you look at that corn cost as it relates to food products, it’s only, there’s just pennies of food cost in these products. So again, the studies show that the facts just aren’t there. There’s a number out there we need to continue to communicate those facts. We think, as it relates to your question around policy, that the policy will stand in place. At the present, even after some of this negative news was hitting the press, Bush came out and made the comment that he’s reviewed the data and doesn’t see that it is having any material impact on food price. Based on that comment, based on it’s his administration, we don’t see (inaudible) the RFS would be waived in any way.
In effect, the hurdle is pretty high. The waiver provision requires that severe economic harm be created by the provision. So we think it stays in place.
Pavel Molchanov – Raymond James
That’s helpful. And on the issue of repealing or suspending the import tariff, do you foresee that potentially materializing or do you think that will still remain in place?
Don Endres
Actually, within the farm bill we understand that there’s a provision now that would extend that to put it in line with V-Tech, the tax credit. So it looks like that could be in line, would be adjusted and extended out to the end of 2010.
Pavel Molchanov – Raymond James
Okay. Perfect. Thanks very much.
Operator
Your next question comes from the line of David Driscoll of Citi Invest Research. You may proceed.
Cornell Bernet – Citigroup
Good morning. This is actually Cornell Bernet (sp) calling in for David Driscoll. Okay. Thanks. I just wanted to know that given that currently spot ethanol prices are around $2.80, bit surprise to see your expectations for a $2.55 price in the second quarter given that you typically attract spot markets very well. So I just wanted to know what was the source of that discrepancy in Q2.
Don Endres
Cornell, it may be just the source of our different data points. Our current spot market that we’re showing, and we tend to look at the New York Harbour and the California market running somewhere between $2.62 and $2.66 while our expectation is based on that and based on where we were at the beginning of the quarter. I hope your $2.80 is right. We just haven’t seen those kind of numbers.
Cornell Bernet – Citigroup
Okay. I gotcha.
Danny C. Herron
And realize, Cornell, that the contracting is taking place, have already taken place back a quarter to 90 days ago. So there’s a lag. That may be part of the difference.
Cornell Bernet – Citigroup
Okay. And then so assuming that price has just held here and then given that you’re saying that there is somewhat of a lag, we would kind of expect prices to strengthen sequentially as the year progresses therefore.
Danny C. Herron
Well, based on what the market shows going forward, we think that’s possible
Cornell Bernet – Citigroup
Okay. And what’s your calculation currently just, like, if you look at on a flat basis ethanol and corn prices, etcetera, for current cash margins in the industry?
Don Endres
Cornell, we haven’t published that, but it wouldn’t be very different than what your model would show either. I mean, I think just about everyone does it the same way. It’s got ethanol and it’s corn and some people put in natural gas and distillers and then others also put in transportation costs.
Cornell Bernet – Citigroup
Okay. Well then, currently we’re kind of $0.25 to $0.28 per gallon. Does that sound like we’re in the ballpark?
Don Endres
You know, I’m sure based on your assumptions that number would calculate out. If you’re using a $2.80 ethanol price it would be quite a bit higher than what we have.
Cornell Bernet – Citigroup
Okay. I understand. Thanks, guys.
Operator
And your next question comes from the line of Heather Jones of BB&T Capital Markets. You may proceed.
Heather L. Jones – BB&T Capital Markets
Good morning. I have a couple of questions. First on your DDGs, we track pricing for different regions of the country and one of the regions we track is Iowa. You alls number for the last couple of quarters has come in meaningfully below that. I’m just wondering, do you all sell forward a significant proportion of your DDG projection? I’m just trying to figure out the disconnect between those.
Don Endres
Heather, we do to some extent. When I say significant generally a quarter out is how you would sell distillers whereas your price in corn on a daily basis. So this tends to lag corn price run up in the first quarter versus the fourth. We sell corn run up over 30% quarter over quarter and yet distillers’ pricing only went up about 10% throughout about 10% of the Delta was clearly the fact that we had contracted some forward production in the first quarter. The other 10% was really just the normal lag that you’ll see between distillers and corn.
Heather L. Jones – BB&T Capital Markets
So right now in Iowa we’re seeing prices in the $1.70 to $1.80 a tonne range. Is it fair to expect that that’s the numbers you should see in Q2 or at least Q3?
Don Endres
That’s certainly the current market that you’re seeing. That would be reflective of current spot. I would not go so far as to say you’ll see that in Q3. That’s pretty far out and the market can change drastically between now and then. Currently those are the current spot prices that we see also.
Heather L. Jones – BB&T Capital Markets
But should be able to see in Q2, Don?
Don Endres
You’ll see increases in Q2 versus Q1.
Heather L. Jones – BB&T Capital Markets
And as far as your corn cost guidance, I understand you now have a wider geographical base as far as your plants go, but the $5.60 to $5.75 is not that significant of a discount to current spot prices in Chicago. I’m just wondering, because say a year or so ago your Iowa plants I thought were getting $0.40 to $0.50 spaces discount. It just seems like that discount is eroding pretty dramatically. I’m just wondering if you can comment on that.
Don Endres
Heather, we’re seeing CBOB north of $6. So we’re still roughly $0.40 to $0.45 under what we showed for CBOB. Obviously it moves every day and it’s highly volatile now with the new limits of $0.30 a bushel, but we’re still seeing second quarter corn north of $6.
Heather L. Jones – BB&T Capital Markets
Yeah, I was looking at cash Chicago. Cash only, I should say. So you all don’t get a significant discount to cash Illinois?
Don Endres
The CBOB delivered corn, the way our corn is priced is CBOB is the sub-coin and then you reduce it by the local basis. So when CBOB is trading at $6.05 or $6.10 and we’re coming down at about $5.60, in essence we’re $0.45 to $0.50 under the CBOB price.
Heather L. Jones – BB&T Capital Markets
And that’s based on the nearby contract?
Don Endres
Yeah. It would be the nearby.
Danny C. Herron
We’re seeing new crop bases significantly wider than that.
Heather L. Jones – BB&T Capital Markets
Wider than the $0.40 to $0.50?
Danny C. Herron
Yes.
Heather L. Jones – BB&T Capital Markets
Okay. And then my final question is on your S&L price. I was wondering if you could give us an idea, because we track the pricing on a regional basis, weren’t you on spot for the entire Q1?
Don Endres
We pretty much spot basis, Heather, it prices on different mechanisms and different indexes. But it generally prices, say, the week prior to delivery. Some of the contracts are the average monthly number, so it does fluctuate by customer. But generally speaking we are on spot and I believe our prices reflected that for the quarter. You had a run up in prices, so you’re obviously going to lag the end of the quarter stock market, but I think we tracked it pretty evenly throughout the quarter.
Heather L. Jones – BB&T Capital Markets
But is there a specific geography that you all are selling more to?
Don Endres
Yeah, we’re probably 45% New York Harbour, 45% California, and the rest is going to the Gulf Coast or to the Southeast at this point. Once again, we are definitely trying to leverage our unit train capability. Remember when the dedicated power comes into our plant, it pulls out the 110 cars, six days later it’s in a coastal market. So our cost to deliver is certainly a lot cheaper in those markets and they generally have a premium pricing structure, so we tend to focus on those two markets.
Heather L. Jones – BB&T Capital Markets
Okay. You said 45% New York Harbour, 45% West Coast, and the rest is Gulf Coast?
Don Endres
Yeah. That’s general numbers.
Heather L. Jones – BB&T Capital Markets
Okay. All right. Thank you very much.
Operator
And your next question comes from the line of Ian Horowitz of Soleil Securities. You may proceed.
Ian Horowitz – Soleil Securities Corp.
Hi, guys. Danny, did you say that you were moving more towards a dry distiller product?
Danny C. Herron
We are, Ian. When you look at the numbers on that and the cost to dry we’ve identified an opportunity that’s worth probably a million dollars a month to our fleet and even more towards distillers. It varies by plant. I understand in some plant locations you have a lot of feed lots within very close proximity. Those you might very well do a modified wet. But for the most part the math would show you that dry distillers is better.
Ian Horowitz – Soleil Securities Corp.
So then can I guess then that a higher percentage of dry going forward is meaning a longer distance overall being travelled for your distiller product?
Danny C. Herron
It would mean a longer distance probably being travelled, but the net back would be better.
Ian Horowitz – Soleil Securities Corp.
No, no. I understand. I’m just trying to get an understanding of the, not the price, but the physical penetration of the distiller market around your area. I know you guys have had some success moving product south into Mexico and I’m just, am I supposed to arrive at that continuing to occur?
Danny C. Herron
You’ll continue to see us penetrate markets if you reviewed Don’s slide that he showed on distillers’ penetration you’ll notice one of the fastest growing markets is North America, and that’s primarily Mexico and Canada. We’ll certainly continue to play in that marketplace going forward.
Ian Horowitz – Soleil Securities Corp.
Okay. And then one last question and I’ll get back into cue. Like Heather said, it seems that there is a little bit of a weakness in terms of the regional spot market on distillers, but your correlation on a per tonne basis versus your corn cost still remains, as well as for the entire industry, very high. Do you guys have any thoughts on how this correlation will continue? This kind of is an above-average trend right now for the industry. Do you expect this to continue or should we start seeing a reversion back to normal correlations on a per tonne basis?
Danny C. Herron
Well, we see a very dynamic market for distillers. So I would say on the conservative side probably more of the average historical differential is probably safe. But we are seeing that our product is very well received in these international markets and we see a significant new demand coming at us. The industry has a number of locations now that are loading these containers and shipping product around the world with back hauls. So we think that it stays relatively strong. Again, from my own perspective we can take the conservative route and be safe.
Ian Horowitz – Soleil Securities Corp.
Okay. Great. Thanks, guys.
Operator
Your next question comes from the line of Paul Cheng of Lehman Brothers. You may proceed.
Paul Cheng – Lehman Brothers
Hey, guys. Don, with the construction now that you sensibly ordered new project is being shut, have you guys thought to seeing some cost deflation in the development cost? And also, if that means that the Brownfield (sp) expansion will become far more economic.
Don Endres
Yeah, we see the major portion of cost, obviously, is steel and manufacturing equipment. That’s remaining relatively high. Labour as well is tight, so that’s staying high. Some of the margins by builders has softened a bit. But we don’t see a significant change to the Brownfield growth. We just don’t see really any activity at this point and I think most would say that we can acquire an additional gallon lower cost than we can build it today.
Paul Cheng – Lehman Brothers
And from your standpoint, I mean, Don, when you’re looking at between a Brownfield expansion and acquisition, do you concur with that conventional wisdom that it is better for you to buy instead of for the Brownfield expansion at this point?
Don Endres
Well, if there’s some incremental expansion that you can get within your facility that’s a very low cost that would probably win the day in the beginning. And that’s the normal course of business for us. (Inaudible) might be increased, size of pumps and motors, things like that. So that’s first priority. Then as you look at incremental expansion outside of the existing facilities, still today acquisition would be a lower cost.
Paul Cheng – Lehman Brothers
And Don, when you’re talking about that minor (inaudible) what kind of opportunity are you talking about? It is 10, is it 110 million gallons in the site capacity? Are you talking about 10 million gallons, 20 million gallons, or somewhat less?
Don Endres
Well, you can see that we’re running Aurora at a 120 rate, so obviously we’re pretty confident that we can move the rest of these plants at that level given some time.
Paul Cheng – Lehman Brothers
Okay. So (inaudible) I would say 8% to 9% gain.
Don Endres
Yes.
Paul Cheng – Lehman Brothers
And can you give us an update on how the market penetration in Florida has been going on and any progress in Texas outside of Dallas and the number of areas that are currently RFG? Are we seeing any migration in Texas also?
Don Endres
We see market developments everywhere. There are a couple of areas in Texas, San Antonio is one, Austin is another, that have some regulatory issues that are yet to be worked out, but that’s about it. The rest of these markets of any size appear to be actively being developed.
Paul Cheng – Lehman Brothers
Okay. Your taxes, are they having any infrastructure user?
Don Endres
No. As you know, when the RFG market took (inaudible) some challengers, but those are all resolved now. There’s four new terminal facilities that are in construction.
Paul Cheng – Lehman Brothers
Don, can you give, do you have any sense that in Florida, how big is the market now? Has it been able to offer the ethanol brand gasoline now? Is it 30% in the state, 40% or 50%?
Don Endres
Well, let’s see. Let me try this a little different.
Danny C. Herron
Yeah, I think currently about 40% of the state is what our data would show that is penetration in the state currently. Also coming over from the Gulf Coast via barge, as you know, and the ethanol for the most part is being shipped via train.
Paul Cheng – Lehman Brothers
Okay. And how quickly do you think Florida will go into 100%?
Don Endres
For the country?
Paul Cheng – Lehman Brothers
No, Florida.
Don Endres
Oh, gosh.
Danny C. Herron
You know, I bet if Barry was here with us I bet Barry would probably tell us by the end of the year we’ll probably be there.
Paul Cheng – Lehman Brothers
M-hm. Final question for me. Corn oil. After the pilot projects start up by the end of this year, what is your game plan? How quickly do you want to expand that operation or that you want to say pause and wait and see for six months into the operation before you go. What kind of expectation we should be?
Don Endres
I think our view would be we want to get the facility up and running and (inaudible) and just understand how it all works so we can make whatever engineering adjustments we need to make to the facility. And then based upon cash availability we’d look to see (inaudible) investments (inaudible) as well as Charles City.
Paul Cheng – Lehman Brothers
So we should assume that even if you decide to go ahead we’re probably not going to see another corn oil facility up and running until at the earliest sometime in the mid-2010?
Don Endres
No, I don’t think we’d go that far out. I think we’re talking about, we’re working on permitting as we speak for both of those facilities. But again, the point which we’d push the button to launch this, I would say it’s probably into this year or early next year. Again, all of that would be continued upon cash to invest.
Paul Cheng – Lehman Brothers
Great. Thank you.
Operator
And your next question comes from the line of Eitan Bernstein of Friedman, Billings, Ramsey. You may proceed.
Eitan Bernstein – Friedman, Billings, Ramsey & Company
Morning, gentlemen. Most of my questions have been answered. I do want to double check one very basic modelling issue. Just, do you have guidance for commentary on second quarter shares outstanding? I want to make sure I’m doing the math right for the latest acquisitions.
Don Endres
Eitan, it’s around $160 million.
Eitan Bernstein – Friedman, Billings, Ramsey & Company
Okay. Perfect. Excellent. That’s all I’ve got. Thank you.
Operator
And your next question comes from the line of Tom Nowak of Merrill Lynch. You may proceed.
Tom Nowak – Merrill Lynch
Hi. Good morning. I’m wondering if you run calculations or monitor the economics of bringing in imports from Brazil. Do you show that as currently a negative or are we approaching break even at this point?
Don Endres
Yeah, we look at that every week, in fact. I’ll give you a little colour on it. February imports were about $2 million gallons. That’s both Brazil and CDI gallons. So that’s a run rate of about 215 million gallons. So I would say most of that is coming through CDI. Keep in mind, though, we also export, the country also exports about 220 million gallons primarily to Canada. So it really is offsetting that. So as we think about this, it’s kind of in the range of 30 and the lowest side would be maybe 150 million gallons on top. Not a significant portion. Obviously as prices move up the arbitrage opens and that could be adjusted. But keep in mind that Brazil only has about 10% to 15% capacity to export. Last year there was about 5 billion gallons, so maybe that’s 500 million to 750 million gallons on the (inaudible) top side. But they’re also developing markets in Europe and Asia, so again the other opportunities as well as the US.
Tom Nowak – Merrill Lynch
Okay. Thanks. And just in terms of expectations for industry capacity. The numbers thrown around are around roughly 13 billion gallons by the end of next year. Do you concur with that or do you think it’s going to come up significantly below that?
Don Endres
Yeah, the numbers we show you on S&L capacity we think are probably in the range of 600 million gallons high and maybe, we’ve had one analyst tell us he thinks it’s a million gallons too high. Sorry, a billion gallons too high. We would expect the run rate capacity end of 2008 to be in the 11.5 billion to 12 billion gallons, production to be in the range of 9 billion to 9.5 billion gallons. Gosh, it’s hard to say as we go to fully built up, but you take 600 to a billion off that and you’d probably be in pretty good shape.
Tom Nowak – Merrill Lynch
Okay. Thanks. And just regarding the blending credit and the import tariff, just remind me, is the blending credit going down by about $0.06? Would you also expect the import tariff to go down by a similar amount?
Don Endres
Well, it’s possible. The import tariff is a credit offset, so that’s possible. Although we really haven’t heard that. That’s talked about as it relates to the farm bill yet.
Tom Nowak – Merrill Lynch
Okay. Great. Thank you.
Operator
And your next question comes from the line of Jeff Osborne. You may proceed.
Scott Reynolds – Thomas Weisel Partners
Hi, guys. This is actually Scott Reynolds for Jeff Osborne. I was wondering about the purchase resale gallons. If this was something you plan to do going forward or as new capacity comes on you might phase that out. And could you walk through the economics of maybe a gallon of a purchase resale?
Don Endres
Well, we don’t give guidance on what that exactly is, but what we would say is this: We’re in the market day in and day out and we see opportunities to take advantage of purchase resale opportunities. We’re dealing with some of the largest customers in the country, so we also see stranded production at times. So we take advantage of the arbitrage that’s available. There’s times when the margin just varies based upon the opportunity. But we tend to do that kind of on current economics tend to not be anything that we hold on to for any period of time. They tend to be more paper transactions.
Scott Reynolds – Thomas Weisel Partners
Okay. And also on the corn, you’re still not significantly hedged heading into the second quarter.
Don Endres That’s right. Our view is then that because there’s not a forward opportunity to fix price ethanol that we’re keeping our books balanced and keeping corn on a soft basis as well.
Scott Reynolds – Thomas Weisel Partners
Okay. That’s all for me. Thanks.
Operator
And your next question comes from the line of Gregg Brody of J. P. Morgan. You may proceed.
Gregg Brody – J. P. Morgan
Hi, guys. Just a follow up questions relating to your revolver commitment. The $125 million that you have the commitment, is that fully authorized right now? Is the inventory receivables in place to access that $125 million or do you have to incur more inventory to get to that amount?
Don Endres
It is fully underwritten. We’ll close on it by the end of the month. It is supported by the assets that we currently have in place between receivables and inventory to fully support the $125 million.
Gregg Brody – J. P. Morgan
To the extent that your inventory grows, is it possible to increase that revolver?
Don Endres
You know, at this time (inaudible) in there, so that would just be a renegotiation of a new facility. Obviously it will probably be over realized depending on your view of what commodity prices do. But certainly with our files in scale we’ll always be able to support that $125 million number.
Gregg Brody – J. P. Morgan
Okay. And just jumping to transportation costs, the number there, I think you had $0.28 per gallon in your cue, could you just (inaudible) about the dynamics with the rail cars to give us a sense of how that’s trending?
Don Endres
Well, obviously we’re getting fuel surcharges from the railroads now and that was worth about $0.03 a gallon for the quarter versus what it would have been without the fuel surcharges. We would continue to see that trending the way it is, if not even going up, because of the price of crude. If crude continues to increase we’re going to continue to get bigger and bigger fuel surcharges.
Gregg Brody – J. P. Morgan
That’s helpful. Thank you.
Operator
And your next question comes from the line of Melinda Newman of Post Advisory Group. You may proceed.
Melinda Newman – Post Advisory Group
Hi. I just wanted to revisit the DDGS situation because it does, I know you commented previously on the discrepancy to market. Can you give us a little more detail on exactly what the market is that you’re selling into now? I think you commented that you’re doing more drying, what the time line is for drying, how many more markets that’s going to enable you to access, and exactly what we can expect in terms of getting closer to market, what the timeline is to get closer to market.
Don Endres
Well, Melinda, on the being closer to market, that’s really a function of how far forward you sell the product.
Melinda Newman – Post Advisory Group
So how far forward did you say you sold again for this quarter?
Don Endres
You’ll do a quarter forward going into the winter. And remember, each and every day, I mean, a 110 million gallon plant is producing a thousand tonnes a day of distillers. We’ve got 16,000 tonnes a day that are coming at us or about to coming at us. So we can’t be handing them out. We have to have the volume committed. Some of it will be committed at a spot price that occurs at that point. For the most part, distillers is contracted at a fixed price and you generally go from two to six months forward on the pricing.
Melinda Newman – Post Advisory Group
Okay. So headed into the first quarter you were sold a quarter forward?
Don Endres
At least, yes.
Melinda Newman – Post Advisory Group
Uh-huh. Okay. And how about the rest of the year?
Don Endres
We’re still probably at least a quarter forward sold. You look at our book and we would have the next three months worth of production sold. At various price levels, as the market moved up, you participate in that movement up in the market, and eventually when the market moves down you’ll lag the downward turn also.
Melinda Newman – Post Advisory Group
Right. Yeah. It’s just in this, with precipitously high corn costs if you were as exposed, you know, you would do a lot better. If you were getting $180 with corn going up as much as it’s going it drives a pretty significant lag in profitability. I mean, I think you guys had a decent quarter. So is there any anticipated change in policy or you would just continue to do business this way, you think?
Don Endres
You know, I think we’ll continue to do business in similar ways, but what we are focusing on is the economics of drying more distillers gives you a better net back. What really happens in a plant is you have a drier running. It doesn’t really cost you much more than natural gas to use that drier a hundred percent of the time and to keep it full. That’s what we’ve been focusing on and, as I mentioned, it’s about a million dollar per month opportunity across our current fleet of 11 plants to improve our percentage more towards dry.
Melinda Newman – Post Advisory Group
Right. Alrighty. I appreciate it. Thank you.
Danny C. Herron
Melinda, in terms of markets opportunity, we’re selling more tonnes into existing markets, as you’d expect. And we’ve seen some new market development, but that’s just a normal course of business.
Operator
And your next question comes from the line of JinMing Liu of Ardour Capital. You may proceed.
JinMing Liu – Ardour Capital Investments
Good morning. Most all my questions have been answered. I have only two left. The first one is that I noticed that you recently secured $125 million credit facility. Are you going to use that facility for a future acquisition?
Don Endres
You know, obviously the credit agreement will probably have some carve out with that ability, but the focus is, it’s just liquidity insurance. That’s how we think of it. We have a large investment in working capital and that investment will grow as we more than double our quarterly volumes through our various marketing themes. So it’s really a liquidity insurance policy, if you will. And there will be times that we will draw on it because you’ll have imbalance of inventories and receivables from time to time. Quite honestly, we’re going from shipping 195 million gallons in the first quarter to shipping 300 million to 325 million in the second. And the third quarter will probably be approaching 400 million gallons. So there’s a large increase in working capital requirements.
JinMing Liu – Ardour Capital Investments
Okay. Thanks. My last question is actually more than a question. On the balance sheet I noticed you have under accounts payable $112 million on March 31st, down $8 million from the end of 2007. But on the cash flow statement the change in accounts payable is $26 million. Can you help me understand that?
Don Endres
Yeah, the difference there is really the capital expenditures. The way that we’re required to do that is if our capital expenditures increase it’s not your normal, you take your beginning balance plus your capex minus your depreciation to roll your PP&E. If there’s a non-cash piece that gets hung up in accrued liabilities that gets netted in your cash flow statement.
JinMing Liu – Ardour Capital Investments
Oh, I see. Okay. Thanks.
Operator
And your next question comes from the line of Joe Gomes of Oppenheimer. You may proceed.
Joseph A. Gomes, Jr., CFA – Oppenheimer
Good morning. Both of my questions have been answered. Real quick. Just on the DE85, how many locations do you have now? What do you guys see that being by the end of the year?
Don Endres
Gosh, I think we’re in the range of about 150 sub-stations. I will say we see gallons growing very nicely there. I think last time we were out we recorded about 60% year over year increase in the number of gallons sold. We continue to work with different marketers to expand that sub-print and we see it sequentially growing as it has in the past.
Joseph A. Gomes, Jr., CFA – Oppenheimer
Thanks.
Operator
And your next question comes from the line of Lewis Algin (sp) from ING. You may proceed.
Lewis Algin – ING Capital Markets
Good morning. From your previous answer it seems like this new credit facility’s going to be used primarily for working and capital needs. Do you expect to use any of it for construction capital?
Don Endres
You know, not at this point. We think our construction capital’s probably provided. Of course, that always depends on your margin assumptions that you put in the models and where the market ends up going. Once again, it provides us with some liquidity flexibility to continue to run our business and grow our business.
Lewis Algin – ING Capital Markets
Okay. Thanks. One more question on this purchase of ethanol and the open market. Obviously it seems like it’s a very low margin business. Can you just comment a little more on that?
Don Endres
Well, yeah, absolutely. Again, we’re working with large customers and there’s opportunity, even though they’re relatively small on a per gallon basis, those are coupons we want to continue to clip. We think it makes sense.
Danny C. Herron
They required no incremental, we already have the SG&A footprint to be able to support that and it’s our way of providing superior customer service to our customers also. So we become a one-stop shop for them versus them going to a competitor to buy the product.
Lewis Algin – ING Capital Markets
Okay. Great. Thank you.
Operator
And your next question is a follow up from the line of Pavel Molchanov of Raymond James. You may proceed.
Pavel Molchanov – Raymond James
Thanks again for taking my question. With regard to cellulose (sic), if the industry heads in that direction have you given any thought to planning strategically for perhaps retrofitting your plants at some point in the future to run on cellulose (inaudible) or is that a little bit early for that?
Don Endres
No, it’s a good point, actually. We are looking at models that would take the fibre out so that, you know, within our facility we have fibre that’s just part of the corn kernel that today is moving over to the distiller’s grain. We take it out and it actually improves the value of the distiller’s grain and the model looks interesting. Again, no more transportation costs there. So we are looking at those models, looking at the return on investment to remove the germ and get at the fibre and then the next step of that is to determine with our ROIs, converting that fibre into (inaudible) ethanol.
Pavel Molchanov – Raymond James
And when’s your best guess on when that might be in commercial scale operations?
Don Endres
You know, there’s a number of companies out there that are working in pilot facilities today. So those are going to take call it 12 months to build. Probably going to take some six months to prove them out, and then the engineering would need to go on to produce a commercial scale facility. We’re real time on it. We have two people focused on this. One is a business development person, the other is a technologist. And they’re going through those models and working with these groups. At that point in time where it makes sense we’ll be there.
Pavel Molchanov – Raymond James
Okay. Thanks very much.
Operator
And your next question comes from the line of Kevin Malone of RBC Greenwich Capital. You may proceed.
Kevin Malone – RBC Greenwich Capital
Hey, good morning. I just had a question regarding USB. Do you guys plan on providing any more financial information for the first quarter for US BioEnergy?
Don Endres
Not for the first quarter. They will be included in our numbers for the second quarter.
Kevin Malone – RBC Greenwich Capital
Is there any way, I mean, do you know off hand sort of the debt on the balance sheet at close then? Of US BioEnergy?
Don Endres
Yeah, we can certainly get that for you. I don’t have it right at my fingertips, but if you want to call me back after the call I’ll be glad to go through.
Kevin Malone – RBC Greenwich Capital
I’ll do that. Just two more quick questions. Have you guys disclosed what the LIBOR margin is on the new liquidity facility?
Don Endres
No, we have not. We are still working through that.
Kevin Malone – RBC Greenwich Capital
Okay. And then lastly on the information you gave on US BioEnergy, did you say it was $104 per tonne on their distiller grains that they sold?
Danny C. Herron
That’s correct.
Kevin Malone – RBC Greenwich Capital
Is that the average cost or is that just for their dry distiller grains?
Danny C. Herron
That’s an average across the dry and the wet.
Don Endres
In some of their markets they’re very close to substantial feed lots, so they get a lot of modified wet.
Kevin Malone – RBC Greenwich Capital
That seems like a big tic up from last quarter. When I call back I’ll just go into that a little more. Okay. Thanks a lot.
Operator
(Operator Instructions). And your next question comes from the line of Lewis Algin of ING. You may proceed.
Lewis Algin – ING Capital Markets
Hey, guys. Just a follow up. I thought that was a great question on the cellulosic (sic) conversion eventually. How would something like that be funded?
Don Endres
It would be funded, well, we’d look at the market conditions and cash in the balance sheet and based upon cost of capital would make that decision.
Lewis Algin – ING Capital Markets
And unfortunately I didn’t listen to your answer too well on that question. Would that be something, I guess you guys are looking at the next couple years?
Don Endres
No. I think it’s really driven more by when the technology would be developed and what the ROI would be relative to other opportunities, like incremental gallons and kernel extractions. Gosh, I’d love to be able to give you a date. As you know, we’re very real time on it, I’ll say that. We’re fairly close to each of these leading technology companies. As soon as we think it’s viable we would be moving forward.
Danny C. Herron
And clearly our scale we build up complete here is large enough that a $0.10 improvement on margins throws off a lot of cash quarterly. So to Don’s point, we are constantly looking at ways to invest and grow our business, but not so it becomes a market condition.
Lewis Algin – ING Capital Markets
Okay. Thanks.
Operator
And at this time we have no further questions in the cue. I would now like to turn the call back over to Don Endres, the CFO, for closing remarks.
Don Endres
Thanks, Rita. As you’ve heard, we’re very optimistic about the future of this industry. The VeraSun team has great confidence in our strategy and our ability to execute on the opportunity. We very much appreciate your participation today in our conference call and we look forward to our call next quarter. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!