Green Plains Inc. (NASDAQ:GPRE) Q4 2016 Earnings Conference Call February 9, 2017 11:00 AM ET
Jim Stark - IR
Todd Becker - President and CEO
Jerry Peters - CFO
Steve Bleyl - EVP of Ethanol Marketing
Ken Simril - President and CEO, Fleischmann's Vinegar Company
Adam Samuelson - Goldman Sachs
Ed Westlake - Credit Suisse
Farha Aslam - Stephens
Brett Wong - Piper Jaffrey
Dan Rizzo - Jefferies
Heather Jones - Vertical Group
Craig Irwin - ROTH Capital Partners
Pavel Molchanov - Raymond James
Patrick Wang - Baird
Ethan Bellamy - Baird
Selman Akyol - Stifel
Good day, everyone and welcome to the Green Plains Inc and Green Plains Partners Fourth Quarter 2016 Results Conference Call. Today's event is being recorded.
I’ll turn the conference over to Jim Stark. Please go ahead, sir.
Thank you. Welcome to the Green Plains Inc and Green Plains Partners' fourth quarter and year 2016 earnings call. Participants on today’s call are Todd Becker, President and Chief Executive Officer; Jerry Peters, our Chief Financial Officer; Jeff Briggs, Chief Operating Officer; Steve Bleyl, Executive Vice President of Ethanol Marketing and Ken Simril, President and Chief Executive Officer of Fleischmann's Vinegar Company.
There is a slide presentation for you to follow along. You can find this presentation on the investor page under the Events and Presentations link on both corporate websites.
During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in yesterday's earnings press releases and the comments made during this conference call and in the risk factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission.
You may also refer to page 2 of the website presentations for information about factors that could cause different outcomes. We do not undertake any duty to update any forward-looking statements.
Now, I would like to turn the call over to Todd Becker.
Thanks, Jim and good morning, everyone and thank you for joining our call today. We reported net income of $18.7 million or $0.47 a share for the fourth quarter. EBITDA was $83.5 million for the quarter and for 2016, we reported 174.4 million of EBITDA, the second best year in the last eight years of profitable performance.
Our results for the fourth quarter were driven across the board by solid performances in all the segments. As you can see, small moves in the consolidated crush margin can yield big results for the bottom line. This is due to the Law of Large Numbers which we have discussed in the past, as we start to achieve scale throughout the supply chain. The consolidated crush margin, which is operating income before depreciation and amortization from the ethanol production segment, including corn oil plus intercompany fees such as Green Plains Partners’ storage and transportation fees was $81.6 million or $0.24 a gallon for the quarter. Interestingly, both acquisitions we added in the fourth quarter were immediately accretive and helped with the strong results we reported. As you can see, we moved around reporting segments to better reflect our long term strategic objectives and for ease of reporting consistency. Jerry will cover more specifically how this is structured and the results per segment.
We produced a company record 334.2 million gallons of ethanol and to put this in perspective, that is more than the yearly production capability on October 16, 2008, the first day post-merger after forming the new modern day Green Plains. We also produced 894,000 tons of distillers grains and 77.4 million pounds of corn oil, while processing over 3.3 million tons of corn. Our yield was 2.86 gallons of ethanol per bushel of corn for the quarter. All 17 of our plants ran as expected in the quarter, including Madison, Mount Vernon and York plants added in the last week of September.
Green Plains Partners reported its best quarterly performance since the IPO, as we maintain a strong coverage ratio of 1.27 times for the quarter and 1.16 times for all of 2016. Jerry again will cover more in depth the financial results of this business later in the call. For Green Plains, ethanol exports accounted for 11% of the company ethanol production for the fourth quarter. We also exported 18% of our distillers grains and 68% of our corn oil that we sold globally. For the year, exports of ethanol accounted for 13% of our total production gallons with 96% of those gallons going to India, Brazil, Europe, Canada and the Philippines. We continue to see strength in these same export markets in the current quarter and for the rest of 2017.
To give you some perspective on this strength, we exported 15% of our production in January, the month just completed and plan on exporting 25% of our production of ethanol in February. This is an all in relation to the fact that we produced slightly less than 10% of total US production of ethanol. The ethanol margin environment was much improved for the fourth quarter compared to the previous quarter. Gasoline and ethanol demand both finished this year strong. Ethanol exports were also strong in the fourth quarter, as the industry exported 352 million gallons, bringing net exports for the US over just -- just over 1 billion gallons last year. The exports combined with solid blending kept the inventories down as we finished 2016.
The market expected stocks have built more than they did last quarter, which sets up 2017 as an interesting year, once we work through some of the winter driving doldrums. What everyone forgets is we have to build stocks during the winter to overcompensate for very strong demand weeks once the driving season starts. So while our margins initially reacted negatively to the build, we are starting to see some recovery off of recent lows. Another factor is while absolute stocks of ethanol are higher than shown or higher as shown in recent EIA data, we are down to 21 days of stocks versus total demand as compared to 26 days last year at this time. I cannot reiterate this point enough.
Ethanol exports continue to be firm for the first quarter of 2017 as we believe the industry will export between 300 million and 350 million gallons for the quarter, putting us on a path for exports to exceed 1.1 billion gallons a share, as we have China taking and we have China taking zero gallons in our analysis as well. Production rates remain seasonally high, running what we believe to be at a level that will be hard to achieve for 365 days. We believe that once March maintenance shutdowns take place and outdoor temperatures rise, production rates will come back down a bit. We believe the industry will produce somewhere between 15.3 billion and 15.6 billion gallons in 2017.
If you assume normal downtimes of 10 to 15 days a year and a little over 1 million barrels a day production coming off it, you can back into this number easily. In all, we had a strong finish to 2016 with one of the best quarters we've had since 2014. Overall, we are not particularly happy with the full year results, impacted mainly by the loss in the first quarter, we believe the platform is set up well for future margin expansions.
I'll come back in the call later to discuss more details on our segments and how things are shaping up for Green Plains in 2017. So now, let’s turn the call over to Jerry to review both Green Plains Inc and Green Plains Partners financial performance.
Thanks, Todd and good morning, everyone. For Green Planes Inc, consolidated revenues were 932 million in the fourth quarter, which was up 192 million or about 26% from a year ago. This was driven by the acquisitions of the three ethanol plants as well as Fleischmann's Vinegar Company. Volumes of ethanol sold for the quarter were up over 30% to 379 million gallons, while higher average realized price per gallon contributed to the revenue increases as well. Our utilization rate for ethanol production assets was approximate 90% for the fourth quarter of 2016, which brought the average utilization for the year up to about 89%.
Our consolidated operating income for the quarter was 56.1 million versus 12.7 million a year ago. This $43 million improvement is primarily due to a strong ethanol crush, increased ethanol production volumes from our acquisitions and the addition of Fleischmann's Vinegar. EBITDA or earnings before interest, income taxes, depreciation and amortization, was up significantly over last year's fourth quarter at 83.5 million for the 2016 quarter compared to 32.5 million for 2015. With the act acquisition of Fleischmann's Vinegar in the fourth quarter, we reevaluated our segment reporting to provide additional clarity on our overall strategy and simplify how we report our results. The partnership segment remains unchanged, which reflects the results for Green Plains Partners.
Partnership segment reported a record $17.9 million of operating income. The ethanol production segment now includes the third party costs of grain consumed and third party revenues from product sales reported directly within this segment. In the past, we reflected this as the intercompany activity, with the agribusiness and marketing segments. So, our ethanol production segment now seamlessly reflects the full supply chain without large intercompany eliminations. Brand origination fees, product sales commissions and throughput fees through Green Plains Partners are reflected as intersegment activity, making this element and making this element of our reporting much more understandable.
Operating income for the ethanol production segment was $35.9 million for the fourth quarter. The agribusiness and energy services segment, which includes grain handling and storage commodity marketing and merchant trading, produced $13.3 million of operating income.
Our new segment of food and food ingredients, which includes our cattle feed lot operations and Fleischmann's Vinegar reported $6.8 million of operating income. Both cattle and Fleischmann's Vinegar performed very well during the quarter.
Shifting to our balance sheet, our total debt today stands at $1.1 billion at the end of the fourth quarter and that balance includes $291 million on our commodity revolvers, which are secured by significant working capital, including readily marketable inventory of just over $350 million at December 31. As we discussed on our last conference call, we utilize a pro forma leverage ratio to manage our balance sheet. This is intended to reflect the full year impact of our acquisitions and the performance of our platform through the full cycle, which based on our actual experience over the last five years is just over $0.20 per gallon.
Using this approach, our term debt leverage ratio is 2.9 times on our quarter end debt balance, which was slightly higher due to our 2017 acquisitions. Our liquidity remains strong with $356 million in cash on the balance sheet along with $121 million available on our revolver.
For Green Plains Partners, we reported adjusted EBITDA of 19 million, an increase of 33% from the fourth quarter of 2015. The primary driver being 34% higher throughput volumes on our ethanol storage assets. Green Plains Partners had 334.2 million gallons of throughput from all of the throughput from our 17 plants, which was -- that total was approximately 85.4 million gallons higher than the fourth quarter of last year. Distributable cash flow was $17.8 million or $3.8 million higher than what we reported a year ago. Maintenance CapEx was minimal at about $13,000 for the quarter, for the fourth quarter of 2016.
Partnership's distribution is now at $0.43 per unit and that results in a coverage ratio for the quarter of 1.27 times and for the full year of 2016. 1.16 times. We're getting a lot of questions from investors on our view on potential corporate tax reform in the US. Obviously, it's still very early in the process, but if there is a meaningful change in the corporate rate, Green Plains could certainly benefit to a lower rate. As you are aware, we are a full rate US taxpayer and as an exporter of products, we certainly could benefit from the border adjustment tax, depending on how it is structured. We will continue to track the details of both of these topics, along with the move -- any movement in the [indiscernible]
With that, I'll turn the call back over to Todd.
Thanks, Jerry and just to continue on that theme, I’ll just touch briefly on the new administration and the overdone speculation surrounding it. Our belief is that President Trump remains highly supportive of our industry. We have heard that from a number of sources, including our elected officials and from administrative appointees. The freeze that was issued on upcoming regulations that were to go into effect tomorrow February 10 in our view was a routine move that each administration has done, when there is a new one in place. Unfortunately, the 2017 RVO is caught up in the freeze, but we believe that will go into effect March 21st or sooner under the leadership of the new EPA. Administrator.
While there are select few pushing for a change in the point of obligation for the renewable fuel standard, I find it hard to believe that that is top priority for the administration and then all of the other obligated parties would agree with the change. In fact, the coalition to keep it unchanged is a cross-section of players that we have never seen together before from retailers to integrated energy companies and refiners to railroads and truckers, the API and the ethanol industry. So even a small trucker who buys above the rack would be an obligated party, which would just be an absolute nightmare. Finally, hundreds of millions of dollars are being spent on building out E15 infrastructure and we cannot stall the momentum we are getting from expanded brands in the marketplace.
Now, I'll talk a little bit more about the business. So, current ethanol margins while not as good as they were in the fourth quarter of 2016 are better than the margins we experienced in the first quarter of 2015 and have trended up from the trough felt a few weeks ago. Obviously, that number we mentioned earlier of 21 days of stocks versus use still makes the market a bit tight, but we still have a ways to go, but the trend is in our favor at this point. We were able to walk away approximately 100 million gallons of Q1 production at an average of mid-teens on a cent per gallon basis of EBITDA late last year, which is certainly more than what we're seeing in the market today.
Over the last month, we have also been in the spot as margins are in the mid to high single digits at times across the consolidated crush across our platform, yet, I said are moving higher over the last couple of days. We believe this is driven by a few factors. The curve structure went to full carry, much like grain markets performed and as the industry has become more sophisticated, we can hold gallons off the market and earn a return on our space. So for example, Green Plains has ten days of ethanol storage at our ethanol plants and we are taking advantage of the curve structure. These are gallons that we would have shipped and we believe the industry is also taking advantage of this as well and physical markets have tightened up as a result.
So when you add that to the strong export program and the potential plant slowdowns we are hearing about broadly, the markets seem to tighten up quite a bit as of late, but we'll see if that holds in our favor. We're not changing our ethanol thesis for 2017. We expect gasoline demand in the range of 145 billion to 146 billion gallons this year, leading to about 14.6 billion gallons of ethanol at a 10% level. As I mentioned earlier in my comments, ethanol exports should be approximately 1.1 billion gallons and could be higher in 2017 and we continue to believe that E15 adds a couple of hundred million gallons of incremental ethanol demand in the US. That totals 15.8 billion gallons of ethanol demand and if the industry produces on average somewhere around 15.5 billion gallons this year, we will still come up short to meeting demand.
Ethanol returning to a discount to wholesale gasoline we believe also helps to drive blending from an economic incentive standpoint, both domestically and globally. Farmers produced the largest corn crop ever the past season and as a result, Midwestern basis levels remain on the weaker end of the spectrum. Distillers values have leveled out between 75% and 80% of price of corn and should remain that way for a bit until we see some additional demand from either export markets or more importantly from domestic markets as distillers remain to be some of the cheapest per unit of protein on the market today. We have some evidence of expanded use with the value proposition that this product gives feeders of all sorts.
Finally, we became at Green Plains a leader in distillers, container shipments around the world and was the largest exporter of distiller corn oil out of the US. In addition to that, almost 20% of our corn oil production, which was exported was converted into food grade corn oil internationally. That is an interesting ongoing opportunity for the company in the global veg oil markets. We are certainly pleased with the financial performance of the Fleischmann's Vinegar Company. They had another successful year in completing customer and supplier contracts and we are essentially done with the high priority areas of our integration plan.
Ken and his management team are making excellent progress on the various growth initiatives we have outlined in the past, including vine grain and other agricultural applications as well as expanding internal capabilities for customer driven demand, for anti-microbial products and of course our varietal business as well. We're also looking opportunistically at acquisition within the food and food ingredients industry that can support our expansion into more stable and predictable cash flows, reducing volatility of the platform overall. Our cattle feeding business which is now in the food and feed ingredients segment had a strong year in 2016 as well. We believe that trend will continue in 2017. By applying sound risk and margin management programs, you actually experience much less volatility than the ethanol crush and more stable and predictable cash flows that most do not give this business credit for.
Our CRM program continues to achieve success for us. We now have 88 farmer customers, 8800 farmer customers in our database, which is 38% more than we had at the start of 2016. We achieved just under 57% of corn origination from farmers directly in 2016 and our goal to achieve 65% from farmers directly in 2017. The five points of capital allocation have not changed. Growth is still top of our list and it can come from any of the current businesses we are in or other adjacencies that take advantage of our supply chain capabilities.
Two years ago, Green Plains had a little bit over 1 billion gallons of ethanol production when we told the market we wanted to be a 2 billion gallons plus ethanol production company. We said it may take up to three to five years to achieve this goal, but we've explained that in order to have scale in this industry, we need to have that kind of capacity. Today, we are a 1.5 billion gallons of production capacity with one to three years left to reach our goal, but I would say that we are approaching scale with our current platform. Having almost 10% of the ethanol industry’s volume gives us a strong presence in the market on all commodities that are part of our supply chain.
We have a number of growth projects in 2017, which includes an import export terminal at Beaumont, Texas which is on track for ethanol. And as we normally do, we'll manage these projects based on internal competition for focused -- for capital focused on long term project returns. In 2016, we returned capital to shareholders in the form of dividends and stock buybacks, but also invested heavily in the future of the company. We remain very focused on balance sheet management and believe a strong liquidity position keeps us ready to maneuver anything that the market throws at us. Natural debt pay down happens when margins expand, as we are preparing to pay down almost $30 million in term debt to required suites because the fourth quarter was so strong that we just reported.
Finally, we spent $550 million in the fourth quarter on both the historical core ethanol business with the purchase of three more ethanol plants and on the future with the purchase of the Fleischmann's Vinegar Company. Our organic growth initiatives are also beginning to contribute to the overall profitability of the company. So for the last eight years, Green Plains has earned $1.3 billion of EBITDA, while producing 6.1 billion gallons of ethanol. We hope that that makes the power of our platform a little more apparent.
In closing, we appreciate the confidence and longer term view that our shareholders take in valuing our company, as we continue to build a significant business in the agricultural and energy space. I want to thank everybody for joining the call today and I'll ask the operator to start the question-and-answer session.
[Operator Instructions] We’ll go first to Adam Samuelson of Goldman Sachs.
Yes. Thanks. Good morning, everyone and congratulations on a strong end to the year. Todd, maybe first on the first quarter as it's tracked and the production rates in the industry and you alluded to the shutdowns or maintenance slowdowns in March, but has the pace of industry production year to date surprise you. Has there been better operating capabilities at some of the smaller facilities than you might have expected and/or capacity creep of up 7%, 8% year-over-year through the first four, five weeks, it’s a big year-on-year increase.
Yeah. It is. I mean I think we're a little surprised when we saw numbers like 1060 a few weeks ago. We're starting to see those temper back down. I think the industry has hit the peak and is just starting to slow back down a little bit based on the fact that we’re just producing a little bit too much versus the overall demand at this part of the year. So I think that while we said last year we will produce over 1 million barrels a day and I think we should be prepared for that, that didn't surprise me. We're a little bit surprised that we can get up to 1.06 million [ph] a day, but I also don't think that’s sustainable for 365 days a year as I said.
We're in the peak of the ability to push as hard as we can, because of the cold weather and, but I think also when you look at the number, I still go back to that 21 days of demand versus last year at 26 days of demand and margins were much worse last year, while we have much higher run rates this year than last year. So I think the market is taking it. I think export demand is strong. I think we need, we need some of these gallons. We're building out as fast as we were and we're going to come out into the driving season I think in a little bit tighter situation than we were last year, which I think bodes well. So overall, yeah, a bit surprised that we can get up that high so fast. But I think we're starting to see that tempered a bit as producers are realizing that that's probably not the best way to be at this point.
That's helpful. And then maybe going back to the export commentary where you talk to over 1 billion -- another year of over 1 billion gallons for 2017, growth with China presumably out of the market both in terms of purposes, so kind of the non-China piece of exports would be up, up to 300 million gallons year over year. Any color on the areas for growth or countries that might be taking a bigger part of that increment?
Yes. So, our view in 2017 is Canada and Brazil lead the way. And I think Brazil is showing that certainly in the last couple of months, but I do believe that it will continue on throughout the year. They're not incented to make sugar down there or to make ethanol down there, it’s fully incented to make sugar. That market continues to firm up as the core market continues to sit here. And so our view is that Canada leads the way with better volumes than they took last year. Maybe China takes a little bit of stuff just for industrial and then Brazil after that and then we get in to India, Philippines, et cetera. So our number right now on paper exceeds when we add all that up together exceeds 1.1 billion and we could see at a discount to gasoline even growth from there, I think that's a pretty good -- for Brazil is a key part of that. We have Brazil for in excess of 300 million gallons of imports this year. And I think that's a reasonable number based on everything that we're seeing and that number can actually go higher potentially.
We’ll go next to Ed Westlake of Credit Suisse.
Yes. Congrats Todd on everything you achieved last year. Just a quick question on DGGs, I mean obviously I think the stock got hit a little bit on that Chinese stories, but you seem to be more relaxed and maybe just a little bit extra color there.
Yeah. So once the story came out, the market had already been adjusted in price and I think that was the key. I think that was basically, the market was already basically came down in to that 80%, 85% range of price of corn after the Chinese, earlier in the year, long before the story came out, that started the slowdown anyways and so we are already making adjustments. What we're seeing is the -- in addition to that, we've got the double whammy of Vietnam and had to slow down as well because of immigration issues that they needed to work through. We're starting them to see them reengaged at least on a discussion standpoint in country.
On reengaging with the US, if we do that, we're hopeful that that will bring back some export demand out of the US. But overall we have settled down here in the 75% to 80% the price of corn. And once that's in the model, then that's a given and now you have to work around all of the other factors. And so we are starting to see better inclusion rates at some of our integrated feeders in the US that we do business with because of the value of the protein and the things that we've seen and so I mean around the world and just this insatiable demand for protein. So there is a point where distillers just stop going down and I think we've reached that point right now and I think that that's at least we know that that's a stable factor in our crush margin and really has more upside than downside from here.
And then you're a keen observer of the corn markets, we filled storage a lot because we had a bumper crop, we can’t predict what the growing season is going to look like, that's very much weather related, but if you think about a normal season or a week season or a bumper season, maybe just some observations as to what we would do with the corn if we again have another good year.
Yes. I think that's a great question, Ed and so I'll start real quick, as the market is expecting around 90 million acres this year. But if you take a look at the profitability of the farmer in the seven or eight best producing states in the US, it actually is profitable to produce corn again. And so our view is that that will be on the low end of the acreage, final acres that we see this year and we're starting to do internal surveys with those 8800 customers across our supply chain and what we're seeing is that, we don't believe that we’ll be as extreme as a nine -- at this point based on what we're seeing is that we don't believe that the drop will be as extreme as the market season acres. But even if it drops to those levels, it's in areas that corn is not always the best thing to plant, but in the strong core planting areas, you might have 90 million better acres than 93 million total acres in your production. If you go above trend, it could really be interesting.
So our view is that in a normal growing season, that's all we can bet on between 90 million and 93 million acres of planting at a trend yield carry outs get bigger again in the United States. And there won’t be a lot more ethanol demand for that and we will lose. I think the key point is that if you’ve seen the estimates come out of South America and South America crops with the corn crop getting bigger again in South America based on some estimates that came out even today, we would -- the last time that happened, we just lost all our export share on corn by the United States in the summer and then what are we going to do in that situation as well. So if we get to 90 million to 93 million acres at trend line yields and we should drop off in export corn demand, there is nothing else to take that corn at this point, which we believe is favorable over the long term for our business.
Well, after those two lead-ins, I have to ask what are you going to do with the dividend.
Yeah. Look, we're assessing that. I mean, you saw that we allocated a lot of capital in growth last year. We're always looking for opportunities, but I would say that if we can generate, if we see a strong margin year overall, we will evaluate all of the different things that we do to allocate capital and dividend is one of those and I think you see in the MLP, we're not afraid to raise a dividend and we will not be afraid to raise a dividend in Green Plains Inc as well if that's the best use for capital.
We’ll go next to Farha Aslam of Stephens.
Hi. Good morning. Todd, could you update us on the Jefferson terminal and should we make a decision whether you’re going to go with the part 2 and double the capacity at the Jefferson terminal?
Yeah. So we’d like to get done with part one first. So we’re going to -- we think the first tanks will come on in July ready for the last half strength in the export season. We are in open season right now with talking to no less than 20 to 25 potential customers of the terminal on long term throughput agreements. We got a lot of demand for that terminal and it's evident by the fact that even in the last couple of -- in the last 30 days, when the fog rolled into the Gulf, Beaumont where we would have our terminal never shutdown and would have no delays and while the Gulf has boat stacked up in the other export terminals for ethanol. So I think that was a good exercise for people to see as we're going through open season. We will evaluate, we want to get done with phase 1 first, but we are already evaluating phase 2, not just for ethanol, but for other agricultural products that we export like corn oil through that terminal as well as distillers grains through that terminal. So overall, we're still on track on all of our assumptions that we thought about when we did this project and at this point, we're not going to make a decision on phase 2 yet.
And could you remind us how much EBITDA that should add, that part 1 will add to GPRE roughly?
Go ahead, Jerry. I don’t know if we’ve put that specific number out, but I think it’s between $5 million and $10 million.
Yeah. I don’t think we published a specific number for EBITDA, but it's a $55 million terminal and the multiple, the EBITDA multiple on that is in the 5 to 6 range.
And then and just as a follow-up on the core ethanol business, can you share with us more color on E15, kind of how much you expect, how many gallons E15 to absorb and kind of where that market stands and what’s underlying strength with the uncertainty in the point of obligation.
So I'll let Steve comment on E15 and the whole program [indiscernible] because I think there's some interesting color on that about the expansion in the stations and the capital spend that’s being taken place. I’ll come back to point of obligation once he's done.
You are starting to see more stations switch over. We have another new one coming through in an RFG market. We anticipate this year to add right around 200 million gallon incremental due to E15 stations. Both conference right now I was listening to earlier they were talking about there's a little over 600 stations with E15. That's where it’s still going but there are more people continuing to come forward to Prime the Pump fund and see if there's still money available for switching over.
I think what Steve talks about one more switching he means one more chain with a lot of stores. So it is now one more gas station switching, so I think that's important. And overall we expect to have a thousand stations by the end of ’17, right. So I think we're starting to get penetration but what we’re far up is that even people that weren't - even companies that weren't in Prime the Pump it's having a competitive impact on it on them when somebody across the street has added E15. And now we're seeing changes that they would not do it coming to Prime the Pump as well as other programs to try to figure out how do we get E15 into our gas station as well. So it’s in our view, we’re starting to get - we spent the money to get the first phase done as an industry and as USDA. And the second phase we think will happen more naturally from a competitive standpoint. In terms of point of obligation, as I mentioned in our call there's a lot of - certainly a lot of consternation and arguments going on around that.
Our view is that we have put together a coalition of a party that have never been in a coalition before because they understand, we all understand together the importance of keeping the point of obligation right where its’ at and while there certainly are a couple of companies that are looking to move that that's not the majority and we believe that we will be able to maintain that point of obligation for now. Obviously it's going to be a point of negotiation continuing on because we don't believe that the few companies that are fighting hard to move it will give up and we’re just going to have to defend it and prove our point and make sure that the coalition we put together puts all the arguments forward and we believe that it will be heard and we will continue to fight to keep it where - right where it’s at.
We'll go nest to Brett Wong of Piper Jaffrey.
Todd you mentioned you're buying spot but with the improved margins recently and uncertainty that that's going to persist here in the near term. Are you marketing any more of these higher margins?
Well higher margins is relative, it's not high enough for us to say let's go and lock away a bunch of margins like it was in late December where we were pushing into the mid to high teens on the margin structure and we try to get as up quite frankly as much done as we could at the time. But then the market just moves so fast [indiscernible] reported that it went away from us. So at this point, no, I think Brett, the key is that we have 38 million gallons of storage at our platform and we're storing every gallon that we can and earning the return on our space which held 38 million gallons off the market if you multiply that by a lot more plants across the industry then you're going to - then there's a lot of gallons in our earnings that the market is incenting us not to shift that's being felt. The second thing that’s being felt is when you start exporting a 100 million gallons a month.
That's being felt and a tightness of that and so, our view is that we will continue to be aggressive on pricing export gallons to off shore as you see with our February program at 25%. And carry as much as we can when the market intensive and we're starting to see that that have an impact on the margin structure. I don't think the end user quite feels as comfortable as they have 30 days ago when we started to see stocks build as we come to the end of the storage season and into summer driving. And then the last thing is I just can't again, I'm going to reiterate this as much as I can. We have 21 days of stocks to total usage at this point versus last year at 26 days of stocks to total usage. We are tighter than we were at this time last year with higher stock numbers or as high of stock numbers in total. So it's a totally different market when demand grows, stocks need to grow along with demand but we are definitely in a tighter situation I think the market is starting to feel.
And then just on your comments that you made about continuing to build your capacity out of the ethanol business. Just wondering if you could talk about the potential assets out there that you see and your willingness to potentially pay up compared to what you've previously paid for acquisitions given some quality assets that you might see out there. So I know those are coming in few and far between of getting.
I think the market came off of a strong fourth quarter whenever that happens, acquisitions become a bit harder to make. But I also feel like that the industry is in - is in some of the best financial shape they've ever been in. So a lot of times when you call for the demise of ethanol in one down quarter, they're missing the fact that we had a pretty good 2016, an okay 2015 and a great 2014. So the industry is in great financial shape. I think exits coming from players that pay down debt and still can earn a return against your current values. And I believe that we'll still have the ability to continue to look at assets. I think our advantages are MLP with our ability to use their cheaper cost of capital to help us acquire these assets when needed. But at this point, I wouldn't say it's a robust pipeline of ethanol plants but there are definitely people still shopping around looking to potentially do deals with Green Plains and again. As I often said in the past this will probably be the last plant we buy for a while and then we end up buying two more, so I don't know what will happen in 2017. I would imagine that we will have opportunities. Again, we don't want to - there's a point where we just say that we’ll just wait be more patient, but at this point I don't have anything that - anything to report in terms of any active deals happening.
We’ll go next to Laurence Alexander of Jefferies.
Hi this is Dan Rizzo in for Laurence. Just in terms of the vinegar market, do you have a breakout what your market share is there?
No, and you probably won't see that, it's not a huge market globally. But we are big enough player in that market that it will be hard to get data out of us on volumes and total capacity mainly because that they're so sensitive relative to other competitors out there that you know we can give you broad guidance on where we are and what we're doing and some of the things that we're doing. And you'll see some of that guidance through the new segment that we have, but in general I don't think that you'll get very much other data out of us in the vinegar segment.
Could you tell me what's driving the strength in placement of vinegar market [indiscernible].
What’s driving - you said the placement of vinegar is showing signs of strength, I’m just wondering…
In feedlot, we were able lock margins away in the feedlot operations and our cattle feeding business well above hotel margins and that's what drove the business profitability and was nothing more every day we buy cattle and hedge cattle and earn margin, there is no real risk around doing that and a good thing for our business is that when it's not profitable to feed cattle we don't have to feed cattle. We don't have a factor on the other that we are obligated to. So, from our perspective, we manage that business very opportunistically and we've been able to do that very well. I’ll let Ken just speak to some of the broader opportunities in vinegar and where some of the growth came overall for him, but gain we’ll keep it at a high level as it's a highly competitive market. It's a competitive market from a standpoint of not very many players and we just can't give too much information on all of those things that you’re looking for.
As it relates to our vinegar business, we’ve seen continued growth in our [indiscernible] business and what's actually driving that growth within that group are specialty products group has done extremely well. We have antimicrobials that are in that space. And that market continues to grow I think up of the quarter we were up about 9%. Non-GMO was up about 18% and organic was up about 11%. And those are the products that are really kind of accelerating our growth outside of our normal 2% to 3% growth rates that we talked about in previous calls. And I think you know we're on trend if you will with all the health and wellness. Our products that are in the marketplace and in antimicrobials that's a market that's really growing our growth rates there are about 50%, ten-year CAGR of 50% and that's finding application in the meat and poultry segments for lunchmeats and ready-to-eat meats. And so that's what really kind of driving our business on an accelerated basis in terms of our traditional kind of growth rates again in the condiments, sauces and dressings.
We’ll go next to Heather Jones at Vertical Group.
You mentioned the ten days of storage, so should we anticipate that your gallon fold in Q1 will be meaningfully lower than it would have been otherwise. And how should we be thinking about that?
The carry kind is starting to come out of the market because the market is getting tight again. So we’ll just make the decision on what we ship versus what we store by the end of Q1. But at this point I wouldn't change any of your estimate as the market is starting to tell us that they need those gallons out. So we'll see what happens by the end of the quarter.
And then your supply outlook, it implies call it 2% to 3% year on year growth which clearly year to date we've been up well north of that. So, when you came up with that estimate, are you assuming that the industry will pull back some out of rationality or do you think that a lot of the increase we’re seeing now is the result of creep that came on maybe mid last year and so we will lap it and then along with down times. Just help us to frame your outlook guidance in light of what we've seen year-to-date.
So we’re not in any downtime at all really across the industry, we're running full out and that's given us about a 1.050 million a day. Our view at 15.7 billion gallons is about a million-twenty five million a day over the whole year and that takes into consideration 10 to 15 days of total downtime at 1 million and million-thirty a day. So you know overall when we look at that we just say what's reasonable, typically what we see the 2% to 3% drop during the second quarter from the first quarter of production levels is what we’ve seen in the past. So if you're at a million-fifty maybe you go down to million-twenty five and I want to see what the summer brings but you got also remember a very strong export program during the summer during the heat when we make less gallant anyways because of the gallons that we - the type of gallon we produce it - produced also has a bearing on how much you produce in the US as well. So our view is kind of up to 15.3 billion to 15.7 billion type number and that comes from about million-twenty five million a day roughly over the whole 365 days on average. And I don't know if we're capable of doing that either, we’ll have to wait and see.
And then on the demand front, so export demand is strong but year-to-date it’s not just domestically for ethanol but just gas demand has been weaker than definitely I had anticipated and just wondering if you could give us some thoughts on what do you think is driving the sluggish. And I'm not thinking about like in a seasonal downturn, I’m thinking year on year. So if you can give us some color on that.
I think is a view on a couple of different points there and I’ll let Steve expand on it but I mean exports also need to be taken into consider - or imports that need to take into consideration and exports as well in these numbers. And then when we look at it you know, yeah, we're definitely watching that very closely. We did see high inclusion rates last week in the last data numbers for ethanol which would imply gas demand is starting to creep back up and then we'll see where that – we’ll where end next week, we also saw tightness in EIA this week as well with gasoline stocks drawing. So Steve you want to talk a little bit more about that.
The only thing they’re really missed some of the exports going offshore the gasoline exports that was part of this, but we've seen it and we question whether it's some of it is West Coast weather is affecting it with some of the trouble they've had out there and so we definitely are looking at it but we still are sitting at about a 1, 1.1 growth rate for the year.
I was wondering whether to but I mean some areas have been you know unseasonably warm, so there's no reason for us to think, I mean this doesn't intuitively make a sense that demand would have just slowed down so dramatically over the course of one month. So you're not seeing anything that would make you think that?
No we're not.
We’ll go next to Craig Irwin of ROTH Capital Partners.
So Todd, this has been sort of touched, but I wanted to ask if we could maybe get a little bit more clarity here. So some of the ethanol market participants the other producers we talked to out there have said that they're hearing that Green Plains has slowed down production at a few different facilities within the last couple weeks. Is this just an overly sensitive market maybe picking up on Green Plains moving over to heavier mix of export spec ethanol sort of you know as we exit January coming into February or did you have any discretionary slowdowns during the quarter?
But we've heard that about all the guys you asked that they slowed down too. So anyways, so couple of things. I think one thing we did across our platform is took the corn basis down $0.10 across the whole United States and how people view that they can view that anyway they want, but we have no problem by and because of our farmer program we have no problem buying corn at our facilities at this point and have more than enough coming at us every single day than we need and all our stores is full. So I think when you do that people initially think that you take your production down. Have we reduce slightly, yeah, we definitely have looked at it where in certain areas that – of our bottom five - bottom tier plants.
It made sense to slow a little bit down and the market is assuming correctly that we've done a little bit of that nothing materially but enough to we believe that between slowdown and using our own stores to keep barrels off the market and exporting that Green Plains is part of the impact on some of the stock or some of the building in margins. We’ve also heard that across the board that others have done a lot of the same things. Didn’t see it in numbers this week as we only were down 10,000 barrels a day, so we’ll just have to wait and see if and when, it’s going to come soon number of others have done the same. We are not announcing any numbers for anything that we've gone but marginally have slowed some of our bottom tier plants.
My next question was about the hedging position for the first quarter. So you mentioned 100 million gallons mid teens position more or less on margins. Can you maybe share with us whether this was something more towards the front of the quarter or evenly distributed throughout the quarter so we can maybe parse what the spot exposure is to January and February.
It was heavily weighted towards the first month of the quarter as we saw out forward that was the best, the highest point on the curve out forward. We're not going to give you an exact percentage on that but you could assume it was heavily weighted towards January.
And then my last question on the food product M&A outlook. So you’d have bought Fleischmann unless you wanted to get bigger in high margin stable business. Can you share with us the resources that you're putting on identifying and evaluating targets maybe whether or not you have active conversations with potential targets at this time and what you think about the potential for acquisitions in this area over the course of 2017?
So we have an active M&A process across our all platform. I would say that one of the definite places where we want to allocate capital in the future is in the food and food ingredient segment under Ken’s leadership. And where we have tier-1 and tier – we kind of basically break it down in kind of tier-1 and tier-2 opportunities, we do have several tier-1 opportunities which are everything ranging from a small tuck-in acquisition to a larger platform acquisition and we look at everything between those. So I would say we are actively seeking to build off of the Fleischmann’s platform and actively seeking to expand into food ingredient businesses much like Fleischmann’s and that have similar characteristics other something that we produce or something we use or an adjacent to something that we can do or even completely something different if it's unique enough for us to say it makes sense to do that. But our focus is on things around adjacencies to what we do today and where we can leverage the capabilities of the Fleischmann platform as well in terms of distribution cut for management sales and research et cetera. So stay tuned, I mean I think that we at a multiple different stages with potential acquisitions at some. As we always say we don't know when one will hit but we are actively engaged in many opportunities.
[Operator Instructions] We’ll go next to Pavel Molchanov of Raymond James.
The fact that RIN pricing has obviously fallen off the cliff without any policy changes actually having been announced, do you think once there is clarity on kind of the EPAs intentions, there is a likelihood that we’ll see a bounce back in RINs or do you think there is more downside.
Our view was even faced on the market that we are in, that RINs at a dollar were too high just based on market fundamental’s and so I don’t think we are in falling from $1.50 can give you any view of what will happen if we go back I’ll get clarity on point of obligation and EPA and RVOs and those types of things. So you know our view is that at any of these price levels some of its fundamentally driven and some of its market driven in terms of different players coming in and coming out of different times and some of it is timing driven. So when you look at the RVO for ‘17 which we believe will hold at 15 billion gallons and a domestic market that should take 14.6 billion gallons, we're going to need to use some of the excess RINs this year which could provide volatility throughout the year. So I think what we've seen here is a pullback from a market that we felt fundamentally was too high in the first place. Steve do you any other comments on that?
No it’s perfect.
And then just a quick one about kind of your own M&A thinking and I appreciate that you're not guiding to any specific acquisitions. Abengoa last year was unique in that you were able to buy a package of assets rather than you know want one off plans. Given that ADM doesn't seem to be interested in selling their dry milk anymore. Do you think that package deals are going to be a realistic going forward or is it going to be going back to one-off.
I still think it's a combination of both, potentially down the road. I mean there are definitely players that own multiple plants and players that own single plants. We don't view one as better than the other. We can close a single plant as fast as we can close three plants and it doesn't you know we can move - we are well set up to do that and integrate very quickly. So, our view is we want to do the best thing we can for our shareholders and if that means buy three at a time or one of the time we're okay in heading in that direction. So that is we’re approaching scale but we still want to continue to expand mainly driven as well by the MLP advantage that we have and we think that it’s great for the MLP unit holders that we have this view and we’ve achieved our growth targets for the MLP and exceeded them both on growth and yield and so we think we've definitely been highly focused on growth for the MLP both in ethanol production and additional downstream assets that may not be within our value chain today as well. We are for highly focused on M&A in the MLP centric space as well, more and more terminal assets that could fit well with our distribution.
We’ll go next to Patrick Wang of Baird.
Todd, just going back to the hedging program really quick. In the past we've talked about the increasing complexity of hedging and associated value at risk as the company continues to grow. Can you just talk a little bit about do you have any sort of targeted hedge percentage that you'd like to hit entering the quarter or is the program just purely opportunistic in nature?
I wanted you think about that because when we would've hedge 100 million gallons eight years ago that was a third of our year and today it's a third of a month or months. And obviously it's changed a lot. The complexity has - actually the complexity is not any different, it's just as easy to hedge today as it was you know back then, it's different because you do have your hedging mainly in financial instruments than just hedging full off in physical sales. But overall we watch it very carefully. I mean we can't - we probably can't hedge a third of our production right now and feel very confidence that the balance sheet can handle it because any kind of blowout in margin structures and we start having $50 million days. While it’s right away risk for the rest of the year, you don't want to start making margin calls like that. So we're very - we put a lot of analysis behind it. 100 million gallons, we could do more than that but we would probably start to limit it at a quarter 250 million gallons or less somewhere in that range on a forward book, if we had to do it from a balance sheet perspective.
And then related to that can you help up size up generally how much you had hedged entering first quarter, I mean what would you completed in [indiscernible].
For the first – you mean coming into the first quarter that we're in right now?
So we had 100 million gallons hedged which is about - a little less than a third of our production for the quarter. So we basically were able to get that off. We wanted to continue on from there and the market just started to break away once we started to built stocks during January.
We’ll go next to Ethan Bellamy of Baird.
Hey Todd, what’s a reasonable modeling expectation for the timing and size of dropping the Jefferson Terminal into MLP?
So what we want to do is get through open season and get some contracts in place. Once we do that it’s our obligation through the agreements in place to offer that to the MLP. I think we would potentially if we can get enough contracts in place and have enough scale, which we believe is a high probability. We would offer it to the MLP shortly after start up or a little bit before start up. Don’t we Jerry?
Yeah absolutely. And I think in terms of…
So say fourth quarter.
Possibly as early as third quarter. Third to fourth quarter. And I think in terms of value I mean you can look at other terminal businesses and see EBITDA multiples in the market on those and kind of back into a drop a reasonable dropdown value.
We’ll go next to Selman Akyol of Stifel.
So a couple questions. So first of all in terms of just thinking about the terminal would you then as it gets dropped in with phase 2 be on the MLP to build out or would you still retain at a top and then drop it in as phase 2 got build out.
The terminal, the JV itself would be dropped down into the MLP so the future build out would be done by the MLP. It depends entirely on the status of the commercial arrangements, who’s supporting expanding that terminal for other products and what kind of contracts we’d have in place. I think parent company would certainly be helpful in that regard to make sure that we have the right level of commercial support to build up the terminal.
And then going back to, you made some comments about acquisitions terminals for the MLP. And I'm wondering would you be looking at freestanding terminals then not in conjunction with your production facilities or is there any more color you could shed.
Yeah we've always said you know it's a multi-strategy M&A plan for MLP as well, it starts with the base business of our ethanol production that goes through the tanks that the MLP owns which generators - is generating quite a bit of a stable income. From there we look at - we looked at the terminals at BlendStar owned which were basically well supported by Green Plains distribution. But beyond that we've also said that we will also look at freestanding terminals outside of our normal platform but things that we believe we can add value to. So if there's a terminal somewhere in the northeast that is interesting for us and we could ship gallons through there and move our you know when you've got a lot. we've got a 1.5 production here on the United States of gallons that we believe we can have significant impact to acquisitions that we would make downstream even though it could be a multi-product terminal and ethanol is only a piece of it. We believe we're going to enhance profitability even further by moving our own supply through there and we're paying others to handle it for us today. So yes that is absolutely part of our strategy and to go forward.
And then my last question. In terms of the 38 million gallons you referenced to your holding. How should I be thinking about that in terms of throughput for the MLP in terms of the first quarter?
As I said we haven't really made a decision on what will happen with those gallons yet, but really just depending on - and don't forget we're producing at maximal levels and we're not anywhere close to the NBCs and we're doing all good from that perspective. But we just have to wait and see what the market structure is. The market structure, it happened so fast when just even recently I went to a full carry structure where it was accepting us to hold it and now the front end is already gone into a flat and even inverted into cash market. So it happens very fact, I can’t anticipate what will hold at the end of the quarter. We always hold some gallons anyways, I mean our average hold at the end of every quarter is somewhere between 15 million and 20 million ethanol gallons anyways. So what we've done is we've just topped up at least in the short term but by the end of the quarter we might get back to our normal hold. It just depends on what the market is telling us. So you didn’t see a lot of gallons anyways.
Just from a very much from a conceptual standpoint, we don't recognize the revenue on that until we do actually deliver the product out of the terminal. So, if we did have something to get over the quarter, you might see a slight change in volume throughput but as Todd said, don't really expect that to bridge over the quarter end.
I’ll turn the conference back to Mr. Becker for any additional remarks.
Thanks for everybody coming on the call, obviously a strong finish for 2016, a bit of a choppy start in ’17, but we still believe overall ’17 is still shaping up much like we've talked about in the past. From a supply and demand perspective we got work to do in the first quarter as margins are chopping around but as we said still better than this time last year. So with that and strong demand and a stock situation that needs to be looked at from how tight it is in the market, we think there is great opportunities going forward for the company both from a growth distribution and across our platform perspective. So we appreciate everybody on the call and we'll talk to you next quarter. Thanks.
And that does conclude today's conference call. Thank you for your participation. You may now disconnect.
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