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Gevo, Inc. (NASDAQ:GEVO)

Q22012 Earnings Call

August 7, 2012 5:00 pm ET

Executives

Mark Smith - Chief Financial Officer

Pat Gruber - Chief Executive Officer

Brett Lund- EVP & General Counsel

Analysts

Ben Kallo - Robert W. Baird

Jim Miller - Canaccord

Brian Gamble - Simmons & Company

Noah Kaye - ThinkEquity

James Medvedeff - Cowen & Company

Michael Klein - Sidoti & Company

Michael Ritzenthaler - Piper Jaffray

Gregg Goodnight - UBS

Ben Kallo - Robert W. Baird

Operator

Good day, ladies and gentlemen and welcome to the Q2 2012 Gevo, Inc. earnings conference call. My name is Julianne and I will be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. Now, I would to turn the call over to Mr. Mark Smith. Please proceed.

Mark Smith

Thank you. Good afternoon and thank you for joining Gevo's second quarter 2012 conference call. I am Mark Smith, Gevo's CFO and with me today are Pat Gruber, our Chief Executive Officer, Brant DeMuth, our EVP of Strategy and Corporate Development, Brett Lund, EVP & General Counsel.

Slides for today's presentation can be downloaded from the webcast and presentation section of our website at www.gevo.com. Earlier this afternoon, we issued a press release which outlines the topics that we plan to discuss today. A copy of this release is available at our website at www.gevo.com.

I would like to remind our listeners that this conference call is open to media and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on our website later today.

We want to advise you that this discussion will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that could be deemed forward looking statements. These forward looking statements are made on the basis of current beliefs, expectations and assumptions of the management of Gevo and are subject to significant risks and uncertainty. Investors are cautioned to not place undue reliance on any such forward looking statements.

All such forward looking statements speak only as of August 07, 2012 and we undertake no obligation to update or revise these statements whether as a result of new information, future events or otherwise. For a discussion of risks and uncertainties that could actual results to differ from those expressed in these forward looking statements, as well as risk relating to the business of Gevo in general, see the risks disclosures in the Annual Report on Form 10-K of Gevo to the year ended December 31, 2011 as amended and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by Gevo.

The conference call will also include a discussion on non-GAAP financial measures as that term is defined in Reg G including EBITDA adjusted for non-cash compensation. The company believes this information is useful to investors because it provides a basis for measuring the operating performance of the company's business and the company's cash flow.

The company's management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our operating performance and cash flow. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP and non-GAAP financial measures presented by the company may not be comparable to similarly titled amounts reported by other companies.

As appropriate the most directly comparable GAAP financial measures in information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release which is posted on our website.

In today's call, Pat Gruber, our CEO will being with a review of our recent accomplishments and provide an update of our startup operations at Luverne, Following Pat's presentation, I will review our financial results for the second quarter of 2012. Following the presentation, we will open the call up for questions. Brant and Brett will be available for questions and answer section of today's call.

I would now send the call over to Pat Gruber, Gevo's CEO.

Pat Gruber

Thanks, Mark, appreciate that. Thanks for joining us everybody. Mark has gone over the agenda. I will give the overview, talk about Luverne, that is the most important thing, then I will talk about the intellectual property bit, financial highlights and we will summarize it and then go to Q&A. Look forward to your questions.

Now, this is a big quarter for us. We actually started up our plant. We are at the midst of startup and I have got to tell you, we are in a startup learning curve. Startup is like a code word for steep, is what that means and our team has getting it done so far. We have actually been able to produce isobutanol and get it shipped in railcars and trucks and get it off on its way to customers for the chemical and non-automotive fuel market.

We are pretty excited about that. Now, (inaudible) is startups, you guys have heard me say this over to anyone who has met me in person, is sure to have heard it is that startups are really difficult. Lots to learn. We have mechanical issues to deal with. There is always the technology piece that comes with it and what's really important is operating discipline.

Now, what is operating discipline? Operating discipline is the actual knowhow to run this plant. It is not an ethanol plant, we are on isobutanol. We different procedures that have to be followed. The ethanol plants don’t run like a chemical plant, isobutanol run like chemical plants. We are stirring that operating discipline of how to exactly do we follow each and every procedure.

What our goal has to be and is that we have to become a reliable supplier. The time to be learned how to deal with process upset, things that go wrong, contingencies is right now. You can't do it once we are engaged in supplying customers. You can't do it.

Why? Once you start supplying customers, you have got the supply chain full and if you short a customer, you have lost that customer forever. You don’t do that. That's bad business. This is where companies blow it on the market introduction. We don’t plan to blow in the market introduction. We are going to master it running this plant. We have a lot of work to do still but we are making good progress along the way and our team has done an outstanding job and I am glad that they have the experience they have in the past.

So we are in good shape on that front. You will see the summary here on page four. There is a picture of our plant at Luverne, Minnesota. By the way, those big bits on the back are corn bins.

Now, the next page, page five, is a summary of our overall first relation strategy. We are looking several vertical segments. You have heard me talk about these before. The ones we are focused on in the early days here are specialty chemicals with customers such as Sasol, (inaudible) a proposition of all about a drop in chemical substituting for petrochemical isobutanol.

Gasoline blendstocks for boats, small engines, (inaudible) focus and then using some of our volume to see these other markets and other applications. So, for instance, we will talk more about this in just a minute but we need to get on with doing some of the work to make renewable (inaudible) get it on the full scale development. And we are working with Purina getting our animal feed of the market place

Cleaner, greener, cheaper and one of the things that you will see with us is that we pay attention to partnering all across the supply chain. We try not to get held hostage. We haven’t been held hostage so far by any one (inaudible) us. This is the mistake that, not a mistake, that’s a wrong word. It is the problem that’s inherent in the ethanol industry. They are held hostage by regional blenders. We are out to do customer partnerships and be a reliable supplier.

We have got some, this last quarter was good, in that we had some new partnerships and collaborations. One of these is important from a couple of points of view. The first one, Beta Renewables. Beta Renewables is Chemtex with TPG. Those guys, as Beta Renewables have and are very, it looks to my technical team who are very much expert in this field of sale of the feedstock.

Looks like Beta Renewables have some very well developed cellulosic technology to produce low cost sugar. I like low cost sugars a lot and we have got a JDA with these guys to develop with them, isobutanol production process based on the sugars that come out of their cellulosic process and these guys are building up. They have a plant that starts up in August, September time frame in Italy using wheat stalks or feed stock and very soon you will see the progress that they made. But one thing we can tell, they look like the real deal.

Now it plays to the next item which is we have done a deal. We have announced collaboration with the Malaysian government. That includes the East Coast Economic Region Development Council, Malaysian Biotechnology Corp, State Government of Terengganu. This is about putting together the business system to convert biomass in one of the most biomass rich regions of the world, getting a business built at a site making industrial chemical complex and the Chemtex technology is a part of that potential. All these are things are further off in the future but nonetheless they are important in the long run as that is where the future lies.

The next one is Toray Industries. Toray is Japanese company. They are a leader in the technology of polyesters and they are interested in renewable paraxylene, the PET. They have already been a partner of us. They recently made an upfront capital investment to help on the pilot plant to go ahead and make this and they have also agreed to purchase the initial volumes of our paraxylene. We like the commitment of Toray. We appreciate that they are our partners. They are one of the best of the business.

One of the things that we did this year, this last quarter that was pretty exiting, I think, was flying a jet. The Air Force has a program to do what is called the ATJ. ATJ is Alcohol-to-Jet. That is what it stands for. Here we made a jet fuel at our Silsbee, Texas demonstration plant. It is jet fuel but kerosene JP-8 and blended 50/50 and a successful flight. No big surprise of its successful flight. It was good jet fuel. It was fun to do it though. It proved the point.

On the next page, page eight, you see marketing brochure that Sasol has used to introduce isobutanol ECO IBA and on the front side is a picture with the name and the backside is the specification. You can get a sense of how they are thinking about (inaudible).

Now, one of the questions, this is changing topics a little bit away from the market, but one of the questions that always comes up, particularly in a high corn price environment is what's the impact to you, Gevo, when corn is at a higher price. Now, remember that we have our contracts or index corn. So we have some protection but I want to take a moment and talk to you about how the corn industry works.

Now this is the way that people from (inaudible) will think about corn. We don’t actually ferment the corn, ferment the corn starch. We think of that as the carbohydrates and that carbohydrate we sell off, the protein. So on page nine here, is a slide that I hope you guys all have. It has got quite a lot of data on it but basically it is showing how to figure out what things cost.

So starting at the top of the page, there is a table called Net Carbohydrate Cost Sensitivity. Two columns there. One is where the animal feed product, we are saying at 75% of the original value of the corn and the column next to it is 110% of the value of the corn. There you see various corn prices per bushel. The group partially grayed out, the place where it says $6 corn, the next line down it says, $0.11, that’s taking the corn, dividing by the 56 pounds in a bushel to put corn on a pound base. Okay?

Then the DDG, there is the animal feed credit, right, because actually that’s how we treat it. We think of these things as a credit. So we take the bushel price and then give it a credit for the animal feed. Okay? Then it gives you a net carbohydrate cost per bushel, in this case, $6 corn nets us out and gives us net carbohydrate cost of $4.63. Okay?

There is 36 pounds of carbohydrate in a bushel. So that will be a $0.13 a pound carbohydrate cost. All right? Now that was a using the protein value at 75% of the value of the corn in the first place.

If you go over to, look at the next column where it is, this is the 110% value of corn. Look at the $7. Step through this and we get an animal feed credit of $2.34. That nets us out $4.66 a bushel for a $0.13 cent net carbohydrate cost per pound.

The point of this is that the animal feed product is incredibly important to cashing value. It mitigates the rise of corn price. In fact, even though if the corn original at $7, in this case, because of the value of the protein was higher, the net cost of carbohydrate is the same in each case, $0.15.

Okay, that you may not believe me, so here is a real case. There is a real life example as of August 6. So the Chicago board trade price of corn was $8.10. So this is the example on the lower right. It was $8.10. The local basis, remember you have to look at this. This is important, the local basis, you can't just buy corn off the board. You have got to think about the local basis because some places they are short corn and some are long corn.

In this case, where our plants are, it’s a discount to the Chicago board. So the local corn price is about $7.79, okay? We add the DDG, the animal feed co-product is trading at 102%, 103% of the value of corn right now, okay. What that means, is that that for each one of those bushels, we get $2.43 credit. So if you take the $7.79 for the local corn and credit back $2.43 that gives us a net carbohydrate of $5.36 otherwise known as $0.15 per pound.

With that $0.15 a pound in perspective that’s the same as the cost of goods sold out of Brazil's largest sugar producer. The actual cost, cash cost of production. This is the process, the delivered price, $0.15 for us from corn starch is our real raw material cost price. There is a cash cost and of course, well, sugar is at $0.23.

So this is why an Agrium or Cargill, a lot of the big corn miller types do well is because they are actually paying attention to this game of corn price versus animal feed price in local basis and the rest, okay.

That’s how that works and so we are not nearly as volatile as one with big budgets being just responding it is like, oh my god, what happened, well, yeah okay. Animal feed product prices go up as corn goes up. That’s what happens.

With that, I am going to turn it over to Brett and Brett can talk about a couple of the intellectual property areas.

Brett Lund

Thanks, Pat. So as many of you are aware, we had a big win in the second quarter in our litigation. We were very successful in the preliminary injunction proceeding, the judge found in our favor, denying Butamax's request for a preliminary injunction.

There is a couple of reason why this is important. Judge Robinson is not only the judge for this case but for all of our cases in Delaware and this decision gives a lot of insight into how she feels about the Butamax technology and the Gevo technology and it is not only applicable for this case but to any other case involving the Donaldson patent.

So as I have mentioned before, you need to find two things in order to find patent infringement. You have to find that the holder has a valid patent and that the other party is infringing. All Judge Robinson had to do was find one of these and in her opinion she has stated that Butamax, the defendant, or the claimant does not hold a valid patent, nor would the defendant Gevo infringe it if it did. So she went above and beyond just finding in favor of us on one and found us in favor on both.

Going forward, now that we have this preliminary injunction decision behind us, now it is time for Gevo to move to the offensive side. So what we have done is we have filed a preliminary injunction against Butamax for infringement of our 715 patent. So this is what we call a TAM29 patent. This is a patent that is the deletion of a pathway that hijacks carbohydrate.

We believe that this technology is strictly needed in order to produce any kind of commercially relevant yield of isobutanol. If you don’t utilize this, you end up producing a number of other products which are not valuable and we now have great authority for this lawsuit because we have seen Butamax's use of this technology in their own patent.

In addition to that, we filed a number of other lawsuits for infringement of our patents, including our 089 patent which is our DHAD patent and we expect to have a number of new patents issued in the next few months.

Now, turning to the next page, I want to highlight three patents in particular. The first one is our 402 patent. This is what we call our Renewable Compositions patent. So this is chemistry patent that covers the conversion of isobutanol into hydrocarbon and not only is it isobutanol but it is any C2 to C6 alcohol. So ethanol, pentanol, propanol, butanol, hexanol and then converting any of those alcohols into hydrocarbon products like renewable gasoline, jet fuel, diesel, aviation gasoline, any of those products from a biomass source.

The next patent is our 089 patent. This is our DHAD patent. So this DHAD is the third enzyme in our pathway. So this is one that was just recently issued and we filed suit against Butamax for infringement and then last, our 404 patents and 415 patent. Again, these cover the pathways that come off the main pathway that are involved in carbohydrate hijacking and we believe you need to absolutely delete these pathways in order to get through relevant commercial yield.

With that I will turn it over to Patrick.

Pat Gruber

And you know what? We are ready to get down to the financial overview now. So now this is back to Mark.

Mark Smith

Thank you, Brett, and thank you, Pat. As planned in May we suspended ethanol operations and commenced startup operations for isobutanol production at Luverne. With the transition to start up operations during the second quarter, we reported $7 million in revenue compared to $14.5 million in Q2 2011.

The lower ethanol revenue in the quarter combined with startup operations, resulted in a negative gross margin of $1.5 million. The prior quarter comparison of a positive gross margin of $0.9 million reflected a full quarter of ethanol production and sale. As we flow revenue following suspension of ethanol operations, as we transition to isobutanol production, this result was expected and planned for.

The second quarter results did benefit from grants in research and development related revenue of $1.4 million including revenue from the sale of jet fuel to the U.S. Air Force and revenue under our agreement with Coca-Cola. Research and development expense decreased to $4.7 million in the second quarter of 2012 compared to $5.3 million in the same period of 2011.

The decrease is primarily the result of operating a demonstration plant in St. Joseph Missouri in the second quarter of 2011 as we prepared to begin retrofit activities on site at Luverne. In the second quarter of 2012, the focus of our development activities is wholly being directed to the startup of Luverne.

SG&A expense of the second quarter of 2012 increased to $9.5 million compared to $7.2 million in the same period of 2011. Included in this increase is a one time charge of severance for a former EVP totaling approximately $1 million. This one time severance amount includes the cash payment of $0.5 million plus a related non-cash expense of $0.5 million resulting from accelerated investing of stock options previously granted to the executive. Also included in SG&A for Q2 2012 were legal expenses related to our ongoing litigation with Butamax.

As we have previously described litigation expense is driven by activities in the courts in anticipation of hearings and by the various U.S. PTO actions. During this quarter, the litigation related expense was about 20% lower than Q1 when activities included the preliminary injunction hearing.

Within our operating expenses for the second quarter of 2012 was a total of $1.3 million to non-cash stock based compensation including the amount accrued as part of the one time severance item noted above. After accounting for interest expense of $0.4 million, we reported a net loss of $16.2 million for the second quarter of 2012. We finished the quarter with $38.6 million of cash on hand.

Our public offerings closed in July and the net proceeds are obviously not included in the quarter end cash balance. The offerings raised net proceeds of $98.8 million after accounting for underwriter discount and expenses. This amount includes exercise of the underwriters over allotment option of $5 million related to the convertible debt bringing the gross convertible debt amount raised to $45 million.

Given recent trading conditions, the underwriters did not purchase additional shares as part of the equity offering. Hence we issued an aggregate of $12.5 million new common shares as previously disclosed in our prospectus.

From these net proceeds we paid down secured long term debt of $5.4 million which was a condition of closing the convertible debt. During July, we also paid approximately $8 million for Luverne retrofit related CapEx payables.

From an operations perspective, 2012 is all about the transitions to producing consistent volumes of renewable isobutanol at our Luverne facility. As Pat has described we have produced isobutanol at our Luverne facility and our first shipments were made in July. This is a huge step to Gevo and the bio-industrial group.

From a financial projection perspective, startup operations are difficult to project as we scale out new production processes, make changes leading to improved operations and move through the initial revenue recognition process. This is all typical of startup operations.

Based on projected operations at the Luverne facility, we anticipate using $10 million in 2012 to support plant startup and working capital needs. This is consistent with the expectations communicated on our last quarter call.

At the last call we projected EBITDA loss for the full year encompassing the Luverne startup and corporate activities of approximately $50 million. With six months behind, we maintain our projection within a range of 10%. As with any development stage company, there will be ebbs and flows in our quarter-to-quarter expense rate. Through the end of Q2 we have reported an aggregate EBITDA loss of approximately $27 million including accounting for initial startup activities at Luverne and significant litigation related activity.

I will now turn the call back to Pat Gruber.

Pat Gruber

Thank you, Mark. So, the summary is this. Overall we have had a pretty good quarter. Getting this plant turned up is a big deal. To put this in perspective, these fermenters are 250,000 fermenters. They are absolutely immense.

10 years ago, that would have been near the size of the world's largest fermenters, right. So it's quite something that we are able to get isobutanol through that plant and remember it’s a non-sterile plant. That means that you can't do all farmer tricks and all the other little things that people do. You got to actually tough it out, have your organism win against the tough competitors.

Now, the fact that we have got isobutanol shipped is outstanding. It was, we did ship a couple of railcars, took us a few weeks longer than we anticipated and we did ship some other stuff that we haven’t been too specific about as to where it goes or what we are doing with it but it is real, it is nice isobutanol.

What's coming down the pipe for us? We have to learn how to run this plant. This is about getting operational reliability up. Before we can be considered to be a good supplier, we have to show customers that in fact, we can deliver and be reliable. They depend on us at that point. That’s our focus.

So this game, for us, is completely about getting that plant reliably operating. To that end, w have a goal, my guys, the milestone actually, the actual milestone is million gallon per month demonstrated run rate buy the end of the year. The range that we need to be in fact is between about 500,000 gallons to 1.2 million, the actual range to where I would expect us to be something like that. That’s where I want to be but their bonus is set up at a million gallon.

Why the 500,000 gallon threshold? That’s about where we need to be able to run the systems having to have starting stock. That’s why the amount is put forth.

Now, the rest, everything else is somewhat secondary to (inaudible) the plan in how to run. There will be things we need progress on Malaysian collaboration. We will do, there will be other deals I would expect but our whole focus in life, now priority number one, two and three, is get that plant working. Get to become a reliable supplier. Earn our stripes.

I am looking around the room at my guys do want me to hit any other.

Mark Smith

No, I think that covers it. Operator, why don’t we open this up for Q&A, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ben Kallo, Robert W. Baird. Please proceed.

Ben Kallo - Robert W. Baird

Hi, guys, thanks for the update. As it relates to corn prices, thanks for the info on the IDGs, now when do you actually anticipate you will sell them and how should we think about the sale of the IDGs as it relates to ramp up? I will start there and then maybe you can loop in the Sasol off take agreement and how that provides a buffer on the corn price?

Brett Lund

All right, so the first part is, in the animal feed product is that the one who gets the consistency level right and so we know what it is on a consistent basis. It’s the same thing and we have an off-taker in Land O'Lakes Purina. So we are in good shape there and if it becomes important once we are operating in normalness mode, not during startup mode, so there will be opportunities for us to sell animal feed here in this year, I would expect but it is not going to be something that I am going to hand my head on. I don’t count until we are running a consistent normal mode.

Does that answer your question on that part, Ben?

Ben Kallo - Robert W. Baird

Sure.

Brett Lund

Okay, the next part was related to Sasol agreement, without going into detail. With Sasol, it is a contract that does take into account the corn price, does take into account operating cost et cetera and so it's not quite as sensitive as one would expect. We are not in ethanol business by any way, shape or form. This is not ethanol. It's not a spot market. This is a multi year contract, just the corn kind of pricing. So we are shielded on that front as well.

Ben Kallo - Robert W. Baird

Then so, maybe Mark can jump in here, on the gross margin front, as we look out for the next couple of quarters as you are starting up, how should we think about gross margins?

Brett Lund

No, you think about what cash burn is how you should be thinking about this.

Mark Smith

I tried to address that directly and with the thing about using $10 million in 2012 to run Luverne and that’s really, it's really about perfecting operations as Pat described. It's not about revenue projections or gross margins but we do expect an EBITDA burn of around $10 million from our operations at Luverne in 2012. We have been very consistent about that through the year.

Ben Kallo - Robert W. Baird

Great, and then, Pat, when do you expect that you can start delivering some news on how product is tested by your customers there are receiving it right now.

Pat Gruber

Probably. Well, some of it is already good. I already know that. So I would think that we will be able to see some definitive, I hear some background though. We will see some definitive here in the next few months.

What, here is one of the things we have to manage very carefully. Everybody is super sensitive to who gets isobutanol first, renewable isobutanol first. So if I say it is company X, company Y, then it gets all bent out of shape because they didn’t get it first. It is going to appear to you that we are being coy. We aren’t. We are sensitive to not upsetting the market development and our downstream customers.

So there will be places that we place product and we will do it very, very quietly and not tell anybody until we get enough experience under our belt that they want to announce it and have their thunder as they announce their products.

That’s the kind of game that we have to play. We are a basic ingredient supplier to others. So we have to be respectful of their market development wishes as well. Does that help?

Ben Kallo - Robert W. Baird

Yes, and my final one and I will jump back in queue. Redfield, where do we stand there? I am sorry if I missed it and then when do you guys expect to break ground there?

Pat Gruber

What I will do is, we think of this as, you have heard me say over and over that I am going to capture every bit of learning I can out our Luverne plant and I want to do that first. You wouldn’t believe at sometime, I want to write my book. I will be able to explain all the things that we have learned here and it will be interesting. That’s for sure.

It does impact the way we think about things at Redfield. Nothing fundamental or material or major. These are little details, but they are important to make sure that we have a full grasp of them and I am not going to build a damn thing at Redfield to have that done. Now what I expect is that we would, earliest that I say and I have said this before that we would deploy large capitals in the first quarter of next year.

Ben Kallo - Robert W. Baird

All right, thanks guys.

Pat Gruber

So that basically I have a change when I think on that front but I want to make sure that I am not going to build any mistakes into Redfield. I am not doing it.

Next, operator?

Operator

Thank you. Your next question comes from the line of John Quealy from Canaccord. Please proceed.

Jim Miller - Canaccord

Hi, thanks, it's Jim Miller for John. I was wondering maybe if you could give us a little more color on the steep learning curve at Luverne, just some of the visibility on the initial milestones, the puts and takes there and then, once you get comfortable, how do you see it ramping after that?

Pat Gruber

Whenever you startup a new technology like this, one, its hard to, unless you have been there, and (inaudible), we will arrange tours for people at the right time but it is a huge plant with a ton of piping. Like I am talking about unbelievable (inaudible).

Mark Smith

Hey, John, could you mute your phone?

Pat Gruber

There is 12 years of bugs, they are happy there. They are now indigenous bugs who sit there and they are very happy living there. So this is quite the trick to get those bugs out of that plant, getting our own colony established and so that’s part of game.

Now, the detail, at Luverne would be other things. Things like, when you do a startup, it's not smooth. You run the pumps full forward. You stop while you have to check some things, measure parameters, did anyone notice that there was a, have you seen a strange bacteria from this particular pipe. That shouldn’t have any bacteria.

You send the robot down there and what do you find? A pigeon nest. These are the kind of things that you run into. What's the consequence? Well, guess what, we have a little bacteria. Now this is not the first time we knew where to look. We have seen this problem before.

So these are the rally practical things that you run into or its how the pipes are put together or how a well is done and what you have to do is root out all the bugs, all the bio-crap. That is the game and get our bugs to work.

One of the key things to this that I mentioned earlier is the operating discipline. When you are switching over from an ethanol plant to the isobutanol plant, detail matters here. Making sure that we have cleaned the things that we need to clean, making sure that we have opened the valves in the right sequence, that we have drained the valves from, they are supposed to have a drain to the lake, for some of the bio=crap buildup, that’s the kind of stuff that we have to do.

It’s the attention to detail that’s not inherent in ethanol plants. Our team has done a great job of learning so far and gaining operating discipline and they are expected to continue to do so.

We also have mechanical things that we had to fix. There are, again these are things that will never publish because they are competitive advantage but they are outstanding achievements that our guys did when they saw a problem that you just cannot do (inaudible) solve it.

So it was regarded, took equipment to do it. They built it from scrap, designed and built them from scratch in just a couple of weeks' time. It's those kinds of things that we have done.

Going forward, it’s a combination of learning how to continue to prove the operating discipline, running the plant, getting the sequence of events properly. One of the issues that we have to still continue to learn about is how to integrate all the recycles properly, and make sure that we understand them because they have their holdups as well and that’s a common place because that changes the impurity profiles of what comes back into the plant and then we will always be on the mission of improving our organism. Always, always, always.

And so, those combination of events of having some mechanical works, good operating discipline, good bug behavior, that’s how you get to be successful.

Jim Miller - Canaccord

That’s helpful. I appreciate the color. Maybe if we look longer term as you have seen in some of these other markets, the Toray partnership, in terms of the bio plant, the expectations there, from those guys?

Pat Gruber

Well, that will be done as a part of our Coca-Cola deal to, I think they will wind up getting together all the collaboration from that outfit.

Jim Miller - Canaccord

Fair enough, thanks guys.

Operator

Thank you. Your next question comes from the line of Brian Gamble with Simmons & Company. Please proceed.

Brian Gamble - Simmons & Company

Patty, you were cracking up with the pigeon discussion. This was hilarious.

Pat Gruber

Right, man. Good, I would tell you story after story of stuff like this. Not from this plant but from other plants.

Brian Gamble - Simmons & Company

We always appreciate the color. It helps to break things up a little bit. If Luverne gets to that range that 500,000 to 1.2 million and maybe this is a tough question to answer but the cash burn for 2012 turns into a cash profit in 2013?

Pat Gruber

Mark, why don’t you take this.

Mark Smith

We have commented that once the Luverne plant is up and running above a million gallons per month range, then the plant level is EBITDA, but we need more volume than Luverne to generate a positive EBITDA for the whole company. We have projected as recently as the offering that if we have Luverne and Redfield up at full scale operations that we could project a company positive EBITDA from those two operations but that’s the scale it takes to EBITDA positive.

Pat Gruber

But I think the question was directed to the plant. Somewhere in that 750 million gallon range is where we expect the plant. By the way, our yields are good right now. So I feel good about yields. It's all about discipline around the throughput of the plant. That’s actually that matters.

Brian Gamble - Simmons & Company

Okay, yes, and that was point to consider but I was just wondering, you mentioned that 500,000 range. That seemed a little low for plant possibility but that 750,000 to million ton sounds with more consistent with what you guys have said in the past.

Pat Gruber

Yes. If I wasn’t public I wouldn’t tell you guys any of this, right. I would just be concerned internally about getting to 500,000 gallons because that’s where I know I can run my plant without having to start and stop it. I just need to make sure that I sell it. So that’s actually the reality of life. Its actually the number I care about, personally.

Now, the fact that we have got to drive it as fast as we can, whether we did it within three months or six months got to the other, that will depend upon market conditions and all the rest.

Remember we have got to get our stuff into the supply chain, let people adapt it and all the rest too. So this is a learning curve across the board, but yes, to where we are at right now, we are doing pretty darn good.

Brian Gamble - Simmons & Company

You had (Inaudible) can you give comments on just the financing view to a little backward looking. I mean it's been done for a while, but why the size that it was. Why the discounts of the sub products went to closed? I mean, kind of just walk me through that and just me some clarity on what you were thinking at the time and why it ended up being the way it was?

Pat Gruber

You know what? That will be an area of great speculation and I think as of now, I don't want to speculate on this call. It's like on the hind sight thing, if we can second guess things all day long and we will find a lots of different reasons for it.

Brett, you want to comment?

Brett Lund

Yes, sure. Clearly, Brian, the objective on the size was to bridge the gap between now and when we feel we could be EBITDA positive at the corporate level. So rather than having to come back to the market in six to eight months or whatever the number would have been, we decided to try and then achieve raising enough capital to get us to that bridge to EBITDA positive.

Brian Gamble - Simmons & Company

Okay, that’s fine, appreciate it, guys. Have it going.

Operator

Thank you. Your next question comes from the line of Colin Rusch, ThinkEquity. Please proceed.

Noah Kaye - ThinkEquity

Hi, gentlemen. It's Noah, in for Colin. How are you? Just to ask about so far the back end. The part of production utilization GIFT. How is the productivity looking in that respect? Do you see the kind of the rate of the off take ticking up over time or is it pretty much steady state? In other words, are we really stalling here for the initial fermentation phase?

Pat Gruber

Well, we do phase face start-ups, but we've been working on the fermentation phase we have done. We haven't run the GIFT system pull out. We have actually have not done that. We have run to purify, so I kept the rail cars installed. I mean I was going to ship them right away. I got to hung on to them and I ran part of it back through the plant, and that's because we wanted to test out that part of the system. So we are making progress on the whole thing.

Part we have to wind, we have to get good fermentations. We are not there yet as I mentioned and then get the whole system steady state. Then I will be happy.

Noah Kaye - ThinkEquity

Okay. With corn prices being where they are creating some pressure obviously on ethanol plants. Can you give us your view on how the opportunity is looking for follow-on deals? Do you have a better sense of timing on when you think you will be able to announce the third facility?

Pat Gruber

I would say that the overall, whenever ethanol was in trouble, it wasn't being good for us from everybody and now as we focused to be motivated (Inaudible). So I would say that our ability remodel companies that we have engaged gone up dramatically, and there are some bigger players in that.

Again, to do a definitive deal, the conditions are these. I got to have a crystal clear view of the market volume requirement and pricing. If I do a deal too soon, then I am going to crash the pricing, and that's a mistake, a very common mistake that people make entering a market. What I want to do is make sure we are doing this in a balanced, disciplined approach. So you will see us do things kind of in combination. We have the right kind of customers in right place.

My most valuable gallons currently are the gallons that I have out of my Luverne plant and internal capacity I don't want to push through there and it will be Redfield. Right? That's how I make the most money as a company, but the deal after that, I would like it to be bigger and that's why we did our Biofuels International. With Biofuels International, those guys and there's others. So I can't give you specific guidance on the plant 3, because it's too early, but that's how we are thinking about it.

Noah Kaye - ThinkEquity

Okay. That's very helpful. Thanks so much, guys.

Operator

Thank you. Your next question comes from the line of James Medvedeff, Cowen & Company. Please proceed.

James Medvedeff - Cowen & Company

Just for clarity, was there any revenue at all from the DDGs in the quarter or was it all ethanol?

Mark Smith

It was ethanol and DDGs related to ethanol, but it was not sale of IDGs, which I think is where you might have been going with that question.

James Medvedeff - Cowen & Company

I'm sorry. I didn't quite catch that.

Mark Smith

Through May, we sold ethanol and DDGs from our ethanol production process and that's all the revenue from production that we reported in Q2.

James Medvedeff - Cowen & Company

Right, okay. Understood. Then the question is, why the front end of the plant is the same? Why are you unable to ship DDGs now on these initial runs as you get the plant up to speed and working out the bugs? The front end, where you actually product the DDGs is the same, right?

Pat Gruber

No. The front end of the plant is the same, but where the DDGs come out is out of the fermentation and then it goes through a process and it goes through a (Inaudible) and then with recycles and all the rest. So it isn't as simple as what you described.

James Medvedeff - Cowen & Company

Okay.

Pat Gruber

Further processing of them, and so where we sell them? Yeah. I got a pile of them. I might very well do that, but not yet I don't want to mix that (Inaudible).

James Medvedeff - Cowen & Company

Okay. Understood. Nobody has asked yet about LANXESS, did you have an update for us on that?

Pat Gruber

No, same thing. They are plant 3 type off taker. So it's a great relationship. Those of you who are wondering they are still an investor.

James Medvedeff - Cowen & Company

Good one, but in terms of their plans to build a conversion facility?

Pat Gruber

There are still previous close to do that yet. My knowledge.

James Medvedeff - Cowen & Company

Okay, all right. I'll get back in the queue and let somebody else take over. Thank you.

Operator

Thank you. Your next question comes from the line of Michael Klein, Sidoti & Company. Please proceed.

Michael Klein - Sidoti & Company

Targeting the transportation market, you are now talking with BioFuel Energy, even though that's not setting stone yet. Just the way you are thinking about it, are you targeting plants and then do you get the obligated party to partner with you after that? Is it a chicken and egg-type dynamic? What's the thinking behind moving forward on that end?

Pat Gruber

Well, the way to think of it is that we look at each one of these verticals almost the discretely. Now remember, we are lucky. We have a platform molecule. This platform molecule can serve any one of those seven vertical markets. The market development rates can occur at their own pace at each one of those seven. That's a tremendous advantage over most companies, right? It gives us confidence that we actually stand a chance.

In the automobile fuel market, right now, it hasn't been part of our near-term plan other than do some testing and things like that, and we'll hold on for a little while on that front. In the mean time, we will do marine engine testing and small engine testing, because those are so pretty interesting niche markets where we can get paid good money for our product. The automobile market, if we are going to actually sell to a refiner it requires us to have maybe 200 million gallons in that one refiner. That's a tough nut to crack. That comes later.

In the meantime, we place the product where we can show the benefit clearly of isobutanol compared to other renewable resource-based fuels and show that fact customers like it and its valuable. That's where our focus will be in the near-term.

Michael Klein - Sidoti & Company

Okay, thank you for that. As we look at your goal of 350 million gallons on line, I guess part of that expectation is further down the road having a licensing and royalty-based model. Can you just talk about the challenges, or maybe just the nuances of that type of business model and working with the different parties associated with that versus the retrofit model you are going after right now?

Pat Gruber

Sure. In licensing works, when you have a product of known value in a growing market and a technology that unequivocally works and you know its operating cost and capital cost. That's when one can strike a very good life in deal where everybody is happy and it works. Okay?

Now, I happen to differ than most of my colleague companies, and when I talk about licensing, because I actually believe you need those things to occur. Now remember, I was the guy who people brought when I was in the big company previously, I was the guy that people brought technology to, and I was not very nice sometimes. I would say, well, yeah but I got all these assets and what do you got? Nothing without me, and I would beat them down to dust. So I don't want to be in that situations, right?

We had to do this to prove our technology. The right way to prove your technology is to make sure you own the asset. You are going to hope for it. It's also with the way you make the most money. I think we do not need to own lots and lots of plants.

The second thing that we have to consider is that each segment to develop differently. It may very well be that we do slightly different ethanols for different market segments. These are very new and settled that we would do, but for jet fuel we might want a slightly different isobutanol than say for other stuff and we have to take that into consideration too. So all in all I would say it's too early. We do think about this in each vertical segment and each one is going to develop slightly differently. Right? That helps you?

Michael Klein - Sidoti & Company

It does. Thank you. Last question, I think someone may have touched upon this. With Redfield and construction starting and what not. I guess my question is, do you still expect it to come online in the back half of '13?

Pat Gruber

Yes.

Michael Klein - Sidoti & Company

That's still the expectation?

Pat Gruber

Yes.

Michael Klein - Sidoti & Company

Okay, great. Thanks a lot.

Operator

Thank you. Your next question comes from the line of Michael Ritzenthaler, Piper Jaffray.

Michael Ritzenthaler - Piper Jaffray

I guess my first question. Already a lot of good questions asked, but since you already have a partnership with M&G and the cellulosic sugar technology, has there been interest in other aspects of your technology like the PET or the PX.

Pat Gruber

Do mean are there people wanting to license and partner?

Michael Ritzenthaler - Piper Jaffray

No. I am talking about energy, in particular.

Pat Gruber

Good comment on that. I couldn't. Let me say that step back from them for a minute and more broadly, yeah, there seems to be quite a lot of interest in paraxylene and for making PET. For everybody on the phone, paraxylene is the chemical ingredient that's used to make the major building block of polyester plastic for bottles, film and for fibers, but yes there's quite a lot of interest.

Michael Ritzenthaler - Piper Jaffray

Okay. Then I guess if we just kind of take a step back I think this touches on earlier question, but from a little bit different angle. Given that you've done this type of thing so many times before, have you seen anything unusual either on the positive side or the negative side from starting up Luverne versus the half a dozen or so that you have done previously?

Pat Gruber

Yes. I was just telling someone earlier today that today I feel like Groundhog Day. It does, and so it has been here, done it before. It's the same kind of issues running where I have to have people. I am glad that we have a team that's experienced. Thank god. Because if they are facing these, here's what happens, you get crazy things pop up, right? Take the bacteria that come from pigeons, right?

We already knew about that one, so we knew where to look, right? It's a question of once we saw that particular bug, we knew what kind of things to look for. You know what I am saying? Then when could you, but we have been there and done it before. Imagine scratching your head if you have never new things?

So, it's very much along those lines. One of the thing that we did, and again I can't talk about the operational detail of what we did. Our guys came up with some extreme. We have got into a problem that something that we have never seen before (Inaudible) demo plan it, but we had to step without a plan, they came up with an outstanding creative solution implemented very fast and looked straight.

That's experiencing talking, and we'll face more of these too. The game really is to get to be good at running this plant day-in and day-out, and everybody it's a brand new technology for God's sake.

Big plant. It takes work to how to run the thing, which button you push in which sequence and that's something that we have to get good and reliable ourselves at and when we're doing not to think of them as a sort of experiment, right? We are still in the mode of what happens when this goes bad, or what happens when that goes bad, but we will wait. It did go bad, now what do? Those are all things we have to learn right now before we are supplier. We have to do.

Mark Smith

Operator, we probably have time for maybe two more questions. Mike, are you done?

Michael Ritzenthaler - Piper Jaffray

Yes. Thanks guys.

Operator

Thank you. Your next question comes from the line of Gregg Goodnight, UBS.

Gregg Goodnight - UBS

Pat, you've given me some serious flashbacks to a former career that I had with the start-up. A couple of questions for you. I thought the LANXESS conversion was constrained by their timing on the NOVA Chemicals cracker conversion project, which is 2014. I am surprised not to see more progress on that front. What's going on here? I mean why is this dragging out.

Pat Gruber

Now, they had to do the engineering (Inaudible).

Gregg Goodnight - UBS

Okay, but to your knowledge 2014 cracker conversion on schedule or is it slipping?

Pat Gruber

You know what? I can't comment on that LANXESS business. So they had not anticipated taking product from us in 2014. So they had to make other arrangements I am sure.

Gregg Goodnight - UBS

Okay. Second question. You talked about trying to be reliable and consistent. One follow-up that came to my mind is, you are St. Joe plant experience were you able to use that to develop process documentation that's in place now and how applicable was that to your current experience at Luverne?

Pat Gruber

There is. There's process documentation from that facility, but also process documentation from Luverne facility. There are some related things. Where it differs is in the nuance of we built the feed train, right? How do you handle the feet train or the procedure and protocols? How do we do this particular fermenter in this circumstance? What happens when we see even X occur? What the immediate steps? Those are all the things that we had to do and they are slightly different.

Gregg Goodnight - UBS

Okay. Makes sense. Last question if I could. In terms of the temporary in junction against DuPont, what would that prevent them from doing?

Brett Lund

Sorry. This is Brett Lund. What that would do is, it would basically prevent them from utilizing our technology in their bug by any means. So if it is granted, it would limit all of their R&D work. Now, they don't actually have a plant in the U.S. up and running that we are aware of. So there is not plant to shutdown, but nothing that would shutdown all of their activities with our technology and our organism.

Gregg Goodnight - UBS

Okay, so at this point, primarily R&D and then maybe later that conversion or something like this more full scale production. Correct.

Operator

Your next question comes from the line of Ben Kallo, Robert W. Baird. Please proceed.

Ben Kallo - Robert W. Baird

Thanks for the follow-up. I just want to get your thoughts about how the Butamax cross lawsuit is affecting your business development on both, your partnerships with future ethanol plants, I guess your existing customers and future customers maybe are they less likely to take out long-term contracts? Then, basically just that.

Pat Gruber

Okay. One, all lawsuits are hustle. Make no mistake, and I don't like reading these press releases as much as you guys don't like reading these press releases and I don't like it at all, and especially when we are in the technology leadership position and we are able to find out two big goliaths like this.

So I don't care for it at all, and we are very sure that they are infringing our technology and we are very sure that we are not infringing theirs. Now of course they will have their same opinion vice versa. That's the reality of life.

In the meantime, we are the ones with the commercial plant, learning the technology and how to make it all real and develop the marketplace. So from a standpoint of had the lawsuit hindered us with customers? It is a hassle to deal with their customers. I can't even tell you the number of companies who have gone through this portfolio and had a good comfort before they signed and doing business with us.

So it's pretty much everybody. That's just the way it works. Brett, you want to add some?

Brett Lund

Yes. I just wanted to add that while it's a hustle, in my opinion, it hasn't foreclosed foreclosed on those opportunities and we think about it, we find a very important deal with Coca-Cola. They spent a lot of time going through it. We signed deals with LANXESS, with Total, we signed deals with tons of partners along the way. We just signed a deal recently with Toray. We obviously did the Redfield deal. All of those folks and our investors who invested tens of millions of dollars in the company each after going through expensive diligence. So everyone is going through, done tons of diligence and all have gotten comfortable with it. So its one of those things were everyone has gone through, done the work, have come to the same conclusion we have.

Pat Gruber

I see this. We are not doing an R&D project. We are doing, trying to make stuff commercially real and that’s where our focus has been and all along has been. It isn’t some hypothetical thing. So that’s where we are focused.

So this lawsuit, the lemonade part of this lawsuit and this is actually the real truth. Isobutanol is a viable molecule. More so, probably more viable than that molecules that anyone has talked in the marketplace today because of its versatility against the vertical market cutting across specialty chemicals, automobile fuels, hydrocarbons of all different types, plastics and materials. That’s why we are all having a little fight about this.

To making sure that we know who owns what in what property. So it's worthwhile recalling, for instance, how many times we sued them Brett?

Brett Lund

Sure, so we filed suit against them for infringing seven of our patents. They filed suit against us for infringing five of theirs and of those five, all three are related to the Donaldson technology.

Pat Gruber

Yes, and ours is the each one to stick the separate. So its one of these things where getting the stuff settled is going to be important. Getting it organized, sort it out as to what is important. So that will happen in time.

Mark Smith

Operator, I think that does it for time. Why don’t we go to closing comment? Pat, do you have any?

Pat Gruber

No, I think we covered it all. Thanks for all your questions. I appreciate it. Thanks for joining us today.

Mark Smith

We appreciate you guys joining us. I think with that we will conclude Gevo's second quarter call. Thanks, guys.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Gevo CEO Discusses Q2 2012 Results - Earnings Call Transcript
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