VeraSun Energy Corporation Q2 2008 Earnings Call Transcript

| About: VeraSun Energy (VSUNQ)

VeraSun Energy Corporation (VSE) Q2 2008 Earnings Call Transcript August 12, 2008 10:00 AM ET

Executives

Patty Dickerson – Director, IR

Don Endres – Chairman and CEO

Bryan Meier – VP, Finance and Chief Accounting Officer

Danny Herron – SVP and CFO

Analysts

Sean Hazlett – Morgan Stanley

Joe Gomes – Oppenheimer & Co.

Nancy Siegel – Lehman Brothers

Ron Oster – Broadpoint Capital

Patrick Forkin – Tejas Securities

Brian Millberg – Piper Jaffray

Cornell Burnette – Citi Investment

Gary Stromberg – Lehman Brothers

JinMing Liu – Ardour Capital Investments

Joe Cariello – Soleil Securities

Pavel Molchanov – Raymond James

Melinda Norman [ph] – Holt Advisory Group

Eric Villania [ph] – William Blair & Co.

Operator

Good morning. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the VeraSun Energy Corporation Second Fiscal Year 2008 Earnings Conference Call.

We will have Q&A for analysts only. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

I would now like to turn the call over to Patty Dickerson, Director of Investor Relations. Ms. Dickerson, you may begin your conference.

Patty Dickerson

Thank you, Erica. Good morning, everyone, and welcome to VeraSun's Second Quarter 2008 Earnings Conference Call.

Before we begin, I would like to remind you we are webcasting our call and you can access it at VeraSun's Web site, www.verasun.com on the investor page. If you would like to follow along with today's presentation, click the webcast link. The replay will also be available at that same address later today.

Don Endres, our Chief Executive Officer, Danny Herron, President and Chief Financial Officer, and Bryan Meier, Vice President, Finance and Chief Accounting Officer will lead the call this morning.

For those of you following the presentation, please turn to slide #2, the company's forward-looking statements which says that some of our statements in this release and other written or oral statements made by or on behalf of us are forward-looking statements within the meaning of the Federal Securities Laws.

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by any forward-looking statements. Any changes in such assumptions or factors could produce significantly different results.

Following our prepared remarks, we will open up the lines for a question-and-answer period for analysts. Please be mindful of others so that everyone may have an opportunity to ask their questions.

As you see on the overview slide, slide #3, today's call will consist of remarks regarding our financial and operational performance for the three months ended June 30, 2008, an operations update and an industry overview.

At this time, I'd like to turn the call over to our Chief Executive Officer, Don Endres to provide the quarter's financial overview and highlights. Don?

Don Endres

Thank you, Patty, and good morning and welcome, everyone. We appreciate your attendance and participation today. We are pleased to report another solid quarter with record revenues and significant earnings in a quarter that was one of the most challenging quarters in the history of the ethanol industry. You'll see from our presentation today that the scale of our business is clearly contributing to our financial results.

On slide #4, you can see we ended our second quarter with revenues over $1 billion, up nearly 500% from last year's quarter. Distillers Grain sales increased to $120 million, up from $23 million Q2 '07. Net income increased to $24 million or $0.15 per diluted share compared to $15 million from last year's quarter.

We generated $73 million of EBITDA compared to $33 million for Q2 '07. SG&A decreased from $0.13 to $0.05 per gallon sold quarter-over-quarter which is a 62% reduction. And we increased our revolving credit facilities to $125 million in the quarter.

Turning to slide #5, our team again delivered strong operational performance delivering record production of 257 million gallons, an increase of 215%, compared to last year's quarter as a result of adding eight production facilities. Ethanol sales grew to 330 million gallons, a 421% increase over last year's quarter and included 83 million gallons purchased for resale to customers.

To summarize, our scale was clearly important in the quarter as our EBITDA margin per gallon was less than half of last year's quarter and yet we were able to more than double our total EBITDA generated.

At this time, I'd like to turn the call over to Bryan Meier, our Vice President of Finance and Chief Accounting Officer to discuss the details of our financial results. Bryan.

Bryan Meier

Thank you, Don and good morning, everyone. Let's review our second quarter results. Please go to slide #7. As you can see, we had another strong quarter. VeraSun increased -- volume increased 421% to 330 million gallons for the quarter. This includes 83 million gallons purchase/resale. Last quarter, we told you that we thought we would sell between 300 and 325 million gallons in the second quarter so we were slightly above that guidance.

On slide #8, revenue increased 499% over $1 billion compared to $170 million in the second quarter of 2007.

On slide 9, you will see our operating metrics for the quarter of '08, compared to the second quarter of '07. Ethanol production increased 215% to 257 million gallons in the quarter. Ethanol prices improved by $0.38 per gallon over 2007 prices. Distiller Grain prices increased more than 50% or $48 up to $144.07 per ton. Our average corn cost increased $1.75 per bushel over last year prices. And natural gas prices increased 42.4% to an average price of $10.81 per MMBtu.

Slide #10 presents the information in a slightly different perspective. This chart shows the key drivers on a cost per gallon basis. The key take away from this slide is that even as our crush margins decreased year-over-year by $0.20 per gallon due to our increased size and scale our EBITDA more than doubled.

Let's move to slide #11, financial performance for the quarter. Revenues increased by $845 million to over $1 billion, up 499% over Q2 of '07. Net income was $24 million or 2.4% of sales, an improvement of $9 million, up 58% over 2007. EBITDA was $73 million or 7% of revenue, up 124% over 2007.

Moving over to the column on the right side of the page, you will see totals for the last 12 months. Our sales were over $2 billion with net income of approximately $43 million and EBITDA of $158 million.

These last 12 months book should give you comfort that our EBITDA was sufficient to cover our next 12 months projected annual debt services requirements of approximately $155 million. The $155 million is made up of approximately $115 million of interest and $40 million of debt amortization payments related to the construction project financing.

Now I would like to give you guidance for the third quarter which is based on our current view of the market. We expect to ship between 350 million gallons and 375 million gallons. Included in those numbers are 50 million gallons to 60 million gallons of purchase/resale gallons.

Selling price will be between $2.40 per gallon and $2.65 per gallon, and with the corn cost of between $5.90 and $6.15 per bushel. Given the current market for corn, this seems high, but during the second quarter, we recorded a mark-to-market gain of $25.6 million which will reverse in the third quarter.

I would also like to remind you that as our plants that were under construction are completed. Interest that was previously capitalized as part of the construction project will now be included in interest expense on the income statement.

Moving onto slide #12, we compare VeraSun to other companies that we consider to be peers both inside and outside our industry. We range all companies on an LTM basis.

Looking at growth, EBITDA as a percent of sales and income as a percent of sales, these numbers represent LTM performance and are calculated from publicly available information. As you can see, VeraSun is the clear leader in the ethanol space.

With regard to top line sales growth, we are number one against our peers and with regard to EBITDA percentage we are number two. And looking at income percent, we have outperformed all three of the three big refining companies.

At this time, I would like to turn the call over to our President and Chief Financial Officer, Danny Herron to give you an operations update.

Danny Herron

Thank you, Bryan. I'd like to reiterate what Don said about it being a strong quarter for VeraSun. Our team executed well across all areas.

We had record sales in shipments for the quarter. Not only did we exceed $1 billion in sales, we also achieved strong per gallon value versus our industry. Our average ethanol selling price for the quarter was $2.59 per gallon.

Our distillers revenues were $120 million for the quarter, and we continue to be a customer solution provider as we supplied some of our customer requirements through the purchase and resale of ethanol gallons. Our corn procurement team did a good job this quarter as their actual corn cost was $5.37 per bushel. That's $0.93 per bushel less than the average fee bought corn price of $6.30 for the quarter.

On the plant operations front, I'm very pleased with the progress the team is making on identifying best practices across the fleet and implementing them in a standardized process. We are beginning to see good improvements across the fleet in the old performance, and we are also implementing a corporate purchasing program that will allow us to leverage our size as wheat procures supplies and services.

We also completed most of the corporate SG&A integration activities during the quarter. Most importantly, we are able to show some tangible results for integration efforts.

Before the merger, the two companies reached about $40 million apiece on SG&A or about $80 million on a combined basis. If you annualize our second quarter SG&A expenses, we are now running at less than $70 million annually and there are still some additional opportunities.

And the last area I want to comment on is the fact that VeraSun made some tough decisions during the quarter, as we chose not to start up three new facilities as a result of extremely unfavorable market conditions.

Let's go to the next slide, slide #14, and I think you will better understand our rationale for that decision. This slide shows ethanol prices per gallon and corn prices expressed as a per gallon number by using 2.8 gallons per bushel.

As you can see, in mid-June, the spread between the two gallons narrow as $0.08 per gallon. In essence at that time the overall industry margins were about a negative $0.50 per gallon.

Now that low point occurred just a few days before we were scheduled to grind corn at the Welcome plant. Based on the industry condition at the time and the extreme volatility, I think we saw a $2 -- over a $2 rise in corn prices in about 60 days.

Based on that volatility and the market conditions, we chose to delay the Welcome, Hartley and Hankinson startup. Now since then based on improved market conditions, we have chosen to startup our Hankinson plant and we are currently commissioning our Hartley plant for startup.

We'll continue to monitor market conditions and volatility to determine the right time to start up Dyersville and Welcome. But at this time, we think that the overall conditions will be such that it will allow us to start up Dyersville and Welcome by the end of Q3.

Now let's move to slide #15 and talk about integration. We continue to be on track with our merger integration. As you can see, we've made good progress and have not missed any deadlines or key milestones.

The next big items are the conversion from Provista marketing to VeraSun at the end of August. And that's as you recall, worth about $10 million and the move to our new office in Sioux Falls by mid-September. Now, at this time we are on track and we really don't foresee any issues.

On slide #16, just a quick reminder of our accelerated growth. Even though we had some delays, we are still on track to have 1.64 billion gallons of capacity by the end of 2008.

Now just go to slide #17. Most of you have seen this slide before as it shows the potential $80 million to $160 million of potential profitability improvement over the next 18 months. And that's primarily as a result of the merger with US Bio that occurred on April 1st.

We continue to work hard on these synergies and we'll update you with actual numbers on the Q3 earnings call. But as I mentioned at the beginning of my prepared remarks, we are seeing good progress across many areas. We performed well in marketing our ethanol with excellent price realizations during the quarter.

Our DDG sales price realization improved as we converted more to a dry basis. Our plants are seeing improved deals and other operational improvements as we implement best practices across the fleet.

We lowered our corn cost versus the overall market. And we began implementing purchasing programs to leverage our size and scale. And you can already see SG&A reductions in excess of $10 million annually versus the run rates of the pre-merger companies.

VeraSun's large scale, low cost strategy deal is working. We're becoming more relevant to our customers. Our unit trained capability and strategy is working. We are lowering our cost per gallon as our scale grows and we are continuing to open new markets for ethanol sales.

I'll now turn the call back over to Don for some final comments before we open up the lines for questions.

Don Endres

Thank you, Danny. You can see from our business results, we continue to execute on our plan to grow the size and scale of our business which is resulting in both increased revenue and earnings.

I want to take a few minutes to again review the industry and the basic drivers of our business model. Some of these slides you may again recognize from last quarter with the data updated to reflect current market development progress.

First I'd like to start with the ethanol supply on slide #19. As you can see, ethanol supply has been growing from 4.6 billion gallons at the end of Q1 2006 to the current capacity of about 9.4 billion gallons as reported by the RFA.

Maybe even more important is that supply growth looks to level off in the future quarters as no significant new construction starts are taking place.

I also want to point out that fourth quarter new production is already starting to be committed in the marketplace. The ethanol producers of plants coming online in the fourth quarter have committed to ethanol contracts in anticipation of startup.

We also believe that imports will slow as Brazil's own market as well as other export markets are trading at higher values than the US market. We believe at these price levels, we will see very little imported gallons from Brazil outside of the gallons imported through CBI for the remainder of the year.

On slide #20, I would like to again provide an updated view on current demand and future demand potential by area of the country. The yellow bars represent current level of RFG blending and the orange bars represent ethanol blending levels for the conventional market, and together, they represent the total amount of ethanol currently blended in the pad. The blue bars represent the total potential demand opportunity, considering ethanol is blended at 10% rate.

Again, the largest new opportunity continues to be the Eastern US, most of which is developing the Southeast followed by the Midwest. The May EIA report shows nearly 1 billion gallons of new demand has developed over the three month period from March to May of this year. The U.S. has nearly 5 billion gallons of additional untapped demand potential in the 10% blend market.

VeraSun is actively working with customers at a number of new locations. We see progress in nearly every major market throughout the U.S. And I want to recognize our customers and logistics partners' effort for a large amount of financial and human resource which they are deploying to blend ethanol.

I also want to comment on the ED5 market development. With ethanol (inaudible) in most major markets, we are starting to see gasoline marketers become more interested to offer ED5 at their stations. Today, a gasoline marketer is able to achieve over $0.25 of margin per gallon and in most cases sell more ED5 than non-ethanol gasoline products. These economics are now starting to incent gasoline retailers to consider repositioning one of their pumps to sell ED5.

Last week, we also received a positive decision by the EPA denying the Texas RFS waiver request. Although the industry was already oversupplying the baseline requirement, and we view the RFS as a safety net and the decision provides a consistent message to refiners, blenders and stakeholders that will support the continued build out of the US blending infrastructure.

On slide #21, it's duplicate really of Danny's slide on ethanol corn spread with an additional metric on ethanol's theoretical blend value for customers. This is the green line on the top of the slide and it's calculated by taking the wholesale gasoline value and adding $0.51 blenders tax credit. Many in the media continue to focus on corn costs as a primary driver of lower industry margins.

The point I want to illustrate is that tightening spreads are more about ethanol value than increased corn costs. If you look at ethanol's blend value compared to realized value at the highest corn price, there was an additional $1.20 of spread available. Today, our industry is in the process of incenting customers to increase blending. We believe the market will work to rebalance plan demands.

Just a quick update on industry public relations work. Last quarter, I shared with you that our trade groups as well as the number of other stakeholder group were working on PR.

Attached on slides #22 to #25 are few examples of our efforts to educate the public on the positive facts, regarding our product and the many benefits ethanol is providing our country. We recognize we have a great deal of work in this front, but the industry is committed to the effort and we continue to make progress.

On slide #26, I want to put into perspective the size of the U.S. ethanol industry, relative to individual OPEC producing countries. The blue bars on the chart indicate the amount of gasoline derived from imported crude and gasoline from OPEC countries. The background shows U.S. ethanol production capacities.

You can see that at the end of last year, our ethanol industry was producing more fuel than five of the eight OPEC countries including Iraq. The industry is currently producing at an annual rate of about 9.4 billion gallons which makes it larger than Nigeria and Venezuela.

By the end of the year, the ethanol industry will be producing more fuel for the U.S. than imports from Saudi Arabia. U.S. ethanol industry is becoming very large and a very important supplier of clean, high octane, low carbon renewable fuel for our country and we're significantly reducing our dependence on foreign oil.

That concludes our formal remarks. Erica, we're now ready to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Sean Hazlett with Morgan Stanley.

Sean Hazlett – Morgan Stanley

Congratulations on your quarter. Over the past several months, many ethanol producers have deferred their corn purchasing decisions. However, over the past month or so, prices have declined significantly for corn over the past month. Now in your view, have you started seeing more of your competitors resume their corn purchasing decisions? And has -- what about VeraSun?

Don Endres

We really don't have a view on what others are doing, so I can't really comment on that. Clearly, the industry is becoming more satisfied that corn is going to be available. We're going to end this year with -- in the range of 1.4 billion bushels. Next year, end of the crop year, looks like -- this morning, the USA Today just announced they're projecting about a 1.13 billion bushel carryout. So I have to think that overall people are becoming more satisfied, and they may very well be standing on the sidelines with as much new corn available.

Sean Hazlett – Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Joe Gomes with Oppenheimer.

Don Endres

Hi, Joe, good morning.

Joe Gomes – Oppenheimer & Co.

On the working capital side, you've been consumed some cash in the first six months and you guys are comfortable that you have enough liquidity to continue to open the plants and finance your existing operations?

Danny Herron

Yes. Joe, this is Danny Herron. That would be our current view given market conditions. I mean, obviously, this is an extremely volatile market. As I mentioned in my remarks, the beginning of June, we had corn at sub $6 or around $6, by the end of June, we had it at almost $8.

Joe Gomes – Oppenheimer & Co.

Right.

Danny Herron

We had ethanol on June 16 was $2.35 a gallon, and I want to say, July 4th it was $3.25 a gallon. So all over the board on the volatility, but based on our current view and what we know, yes, we think we'll be just fine.

Joe Gomes – Oppenheimer & Co.

And on the core product sales, it seemed a little bit light in terms of the amount of volume sold, given our estimates for your guys yield. Is -- was anything else going on there?

Danny Herron

Joe, have you backed out the purchase/resale gallons? Because on a percent of corn cost, we've actually exceeded 25% so we thought of it as a pretty good quarter. But I think maybe your volume, you need to back out the $80 plus million of purchase/resale and you'll be okay.

Joe Gomes – Oppenheimer & Co.

And one last one. I don't know if you might be able to give us a little more update on the corn oil extraction, how that's going. And if you could just remind me what you thought the incremental EBITDA per plant potential was there?

Don Endres

Yes. Joe, back in June when we did see corn prices spike and margins narrow, we put on hold all CapEx, just as a prudent measure, although we didn't put the oil extraction on hold. We slowed its development. So we're still moving forward with it, but we just slowed it down, again, until we're comfortable that margins return to more normal levels. But in terms of the EBITDA impact, Danny, in the range of I want to say $0.15 of--?

Danny Herron

It was $12 million to $15 million a year, was the EBITDA impact at 1 -- 110 million gallon plan. And that really didn't assume any uptick in the distillers grain revenue which we think is a substantial upside, because of the low oil nature of that product. It feeds very similar to soybean mill so we think there's a big upside there that we really haven't quantified until we get it in the marketplace and get it tried out.

Joe Gomes – Oppenheimer & Co.

Great. Thanks, guys.

Don Endres

You're welcome, Joe.

Operator

Your next question comes from the line of Nancy Siegel with Lehman Brothers.

Don Endres

Hi, Nancy. Good morning.

Nancy SiegelLehman Brothers

Good morning. Don, your slide 20 is quite interesting, was showing the potential demand of ethanol. Could you talk to that a little bit about the infrastructure in the industry and kind of southeast that obviously the blending has gone seamlessly over the summer, but by then, do you expect infrastructure to be in place for the whole of the country to move to E10?

Don Endres

Well, gosh, there won't be enough ethanol for the whole country to go to E10, because it's 143 billion gallons of gasoline by that 14.3. And today, the RFA would show that we have kind of a maximum potential of 13.6 if everything is built out. But we still see some softness in those numbers. But clearly, with $1.20 of blend value out there, we see activities in nearly all major markets. And it's -- we think there will be a nice step up in the fourth quarter, because of the easing of RBC requirements. And so we think we're in very good position to see blending infrastructure continue to take product.

Nancy SiegelLehman Brothers

I have a couple of modeling questions as well. I guess, firstly, did you include in your volume guidance that you've given in the third quarter? Is there anything included from Hartley in there? And even Welcome and Dyersville which are more I guess towards the tail end of the quarter?

Bryan Meier

From a Hartley perspective, I believe we -- I included one month's worth of production for Hartley. And for Dyersville, I think that's coming up towards the end of the quarter and Welcome is probably the same time period.

Nancy SiegelLehman Brothers

And for your tax rate, should we be modeling in 31% going forward now? Because you mentioned that you'll be utilizing your state tax credits or--?

Bryan Meier

From a conservative standpoint, I would use 35%.

Nancy SiegelLehman Brothers

And finally, could you talk a little bit about your ethanol yields from corn. What was it in the second quarter and how should we expect it to increase as you integrate the US Bio Energy plans going forward?

Danny Herron

Yes. Nancy, this is Danny. We don't provide what the yield number is. I think you can probably back into it or pretty close. What I will say is as we put these plants together and as the operations team is really focused on yield, we saw very good improvements in June. We see other improvements in July. So I think we'll continue to see improvements here, but we really don't provide what that calculation is. I will tell you that we are so focused on it that -- put this in perspective, two years ago, a gallon of ethanol was worth five times what a tenth of a yield point improvement was. And it's turned just the opposite today with the current prices of corn and the current industry EBITDA margins, we put five times the focus on yield as we do getting throughput out of the plant. So you will see that improve over time.

Nancy SiegelLehman Brothers

Thank you, guys.

Don Endres

Welcome, Nancy.

Operator

Your next question comes from the line of Ron Oster with Broadpoint Capital.

Ron OsterBroadpoint Capital

Good morning, guys. I had a quick question with regards to the corn line item in the revenue section. If that's going to be an ongoing revenue component or if it was more of a one time event this quarter associated with the plant delays?

Danny Herron

Yes, Ron. It was primarily just a one time deal associated with the plant delays instead of holding corn around at current values to go ahead and sell that corn. That's all that was.

Ron OsterBroadpoint Capital

And then, Danny, you touched on the yields and how you can back into them. I am coming up with a yield of close to 2.7 gallons per bushel, which is down from what you guys have done historically. Is that -- was there some (inaudible) in the quarter or is that -- am I miss calculating here?

Danny Herron

This is the first time the two companies have been put together, so I'd have to go back and look at that. We – actually, June was a better month than May, so I would have felt that the combined number would be up a little bit. The only other thing is, historically, if you're going back to your model, historically, we were blending, year ago at a 5% denature. And today, you blend at a 2% denature, so you have to consider that in your math.

Ron OsterBroadpoint Capital

Got you. And then with regards to depreciation if I look at it that on a per gallon basis, it jumped up with US Bio Energy being added to over $0.09 a gallon. Is that a sustainable level going forward for depreciation?

Bryan Meier

Yes, it is. One of the things the purchase accounting is you have to write up all the assets at fair market value, so we ended up writing them and therefore, depreciating over the lives. You're going to have increased depreciation.

Ron OsterBroadpoint Capital

Got you. Thanks. And one last one, transportation expense at $0.25 per gallon. Have those stabilized? They were a modest improvement from first quarter levels. Have those stabilized at these levels or what do you anticipate going forward for the transportation line item?

Danny Herron

Actually, Ron, because of the delay in startup of several of the plants, transportation should start to slowly decline, because we'll be leveraging those railcars. Railcars have been delivered, but they weren't being utilized at this point in time. Actual freight rates have remained about constant in the second quarter to the first in terms of fuel surcharges. But the real reason a little bit of an uptick is just the additional railcars that weren't being used.

Ron OsterBroadpoint Capital

Got you. Good. Thank you.

Danny Herron

You're welcome.

Don Endres

Thanks, Ron.

Operator

Your next question comes from the line of Patrick Forkin with Tejas Securities.

Patrick ForkinTejas Securities

Good morning. Congratulations on really solid execution here, guys. Don, you indicated that marketers might be able to get a $0.25 per gallon margin per E85. What would that compare to for non-ethanol products, maybe $0.10 or $0.12 a gallon?

Don Endres

Yes, not even that. I think in the range of about $0.05, $0.06. There's a fair amount of volatility with gasoline value so that changes a lot. But it's I think it's sub $0.10 would be in the range.

Patrick ForkinTejas Securities

And then what kind of indicators are you seeing that there's a little bit more interest by the marketers for a conversion to E85 pumps?

Don Endres

Just number of inquiries out there by marketers at an industry level. We're just hearing more about E85 projects that are underway including some blender pumps that are -- they're selling E30 and E85 to Flex-Fuel vehicles. We just see increased activity. Again, the margins are additives to the ethanol value. And so we see producers and gasoline marketers there are a number of groups all now trying to work out their 85 strategies.

Patrick ForkinTejas Securities

And then Danny, on the guidelines for Q3, the corn cost, $5.90 to $6.15 that includes this clip on the mark-to-marketing Q2. Can you give us any indication on what you think your cash corn costs for the quarter might be?

Danny Herron

The flip alone is probably worth $0.30 a bushel, because we basically use about 100 million bushels for the quarter. It was about a $25 million gain in Q2 that will go away in Q3. Actually, the market is actually a dollar less than where started Q2 at, so it's probably $0.30 a bushel, Pat.

Patrick ForkinTejas Securities

Very good. Thank you, guys.

Danny Herron

Welcome.

Operator

Your next question comes from the line of Brian Millberg with Piper Jaffrey.

Brian MillbergPiper Jaffray

Thanks. Hi.

Don Endres

Hi, Brian.

Brian MillbergPiper Jaffray

Just a couple quick questions. You mentioned that the timeline for the oil extraction has been pushed out. Originally, you were talking the end of Q4. Do you think it's not going to happen in Q4?

Don Endres

That's right. We think it's pushed out beyond that. We don't have an updated project completion date at this time, but we'll update you when we have it.

Brian MillbergPiper Jaffray

And just one other question. On the corn oil, is this going to be refined or are you just going to have the lower grade of corn oil?

Don Endres

It will be crude corn oil that's sold primarily in the biodiesel market. There may be some that will go into the feed market, some of the chicken or egg layers also use it for feed for energy. But most of it will go in the biodiesel market.

Brian MillbergPiper Jaffray

And then I saw that you produced about 10 million gallons more than you sold out of your own production and yet, you still went outside and bought ethanol. Can you explain how that works little more? What -- how your decision is made on when to go out and--?

Danny Herron

It was simply just -- Brian, it simply just be a timing issue of when product is produced and when it's due in the marketplace. That's all it would be.

Brian MillbergPiper Jaffray

And then for modeling then should we basically assume that once you reach your approximately 410 million gallons per quarter, that's what you're going to basically sell? Or is it possible you still could sell more?

Danny Herron

Yes. I think you should probably for modeling purposes, probably include 25 million to 50 million a quarter for purchase/resale. Once again our strategy is to become the only ethanol company on speed dial for a purchaser. We want them to call us first and if we don't have the gallons, we'll do our (inaudible) to find those gallons for them as a customer service response.

Brian MillbergPiper Jaffray

I'll get back in queue. Thank you.

Danny Herron

Thanks.

Don Endres

Thanks, Brian.

Operator

Your next question comes from the line of David Driscoll with Citi Investment.

Cornell Burnette - Citi Investment

Good morning, everyone. This is Cornell Burnette actually calling in with a few questions on behalf of David.

Don Endres

Hi Cornell. Good morning.

Cornell Burnette - Citi Investment

Congratulations on the quarter.

Don Endres

Thank you.

Cornell Burnette - Citi Investment

Alright. My first question was wanted to get a sense of how much, if any, of your corn do you have locked in for the remainder of the year?

Don Endres

Cornell, in our queue, we show about 23% locked in for the third quarter, very little in the fourth, if I recall correctly. There is a table in the queue, though.

Cornell Burnette - Citi Investment

Thank you. And also you had mentioned that when we saw the spread between ethanol and corn narrow to about $0.08 back in June, you were looking at industry margins which were a negative by $0.50 per gallon. Obviously, corn prices have come down over $2.50 per bushel since that point. So given that, where do you see kind of like current spot margins for the industry?

Don Endres

There is slightly positive at this point, but it changes everyday with the volatility. I mean two and half weeks ago, we had $3.25 ethanol and this week, it went to $2.25 in New York Harbor. So -- ask me tomorrow and I'll give you a different answer. Basically, it's the real answer. Because it is so volatile that we can't really predict that. But it is -- it seems like once the news of the flood sort of went away and you had that huge run up in corn prices which incidentally showed how bad ethanol was in demand because the market instantly improved $1 a gallon on ethanol. Once that perception of high corn prices went away, the market tended to come back down but it does show the demand for the product and the fact that we seem to be hovering around at fairly constant margins. It just has different ups and downs daily.

Cornell Burnette - Citi Investment

Got you. And then the last question was, do I have this correct, for the third quarter, you're looking at an average realized ethanol price of $2.40 per gallon to $2.65 per gallon?

Danny Herron

That's correct.

Cornell Burnette - Citi Investment

And then I guess the question surrounding that is it seems little bit wider than -- normally your guidance is pretty tight within $0.10. Is there any reason why there's a $0.25 also in the guidance this time?

Don Endres

Just given the market volatility what we've seen over the past three to four months, it's just hard to predict.

Cornell Burnette - Citi Investment

So then basically, you continue to sell from the bulk of your ethanol volumes are basically being sold on spot basis?

Don Endres

That is correct.

Cornell Burnette - Citi Investment

Thank you.

Don Endres

Okay, Cornell.

Operator

Your next question comes from the line of Gary Stromberg with Lehman Brothers.

Gary StrombergLehman Brothers

Thanks. Danny, a little bit more help on working capital. It was the use it looks like of about $90 million year-to-date. I assume you're going to require some more working capital with three plants coming on. Can you just help us in terms of uses?

Danny Herron

Yes. Actually, it' about -- it would be about flat from here, Gary. We had procured the corn for those plants. It was already in the Q2 numbers for the plants that are up. The ethanol pretty much will remain constant at the terminal locations. And then the other thing that will happen is as we bring over the Provista Marketing gallons -- from Provista, we believe that we will have a pickup in DSO. I want to say that in the right way. But we think our DSO will perform a little bit better on those gallons than it has been in the past, based on the way we've been paid.

Gary StrombergLehman Brothers

So even with the corn sales in the second quarter, you still think you're going to wind up being pretty much flat for the rest of the year?

Danny Herron

We think so at this point.

Gary StrombergLehman Brothers

And then a question on the availability. It looks like the queue says $89.3 million is available. I assume that excludes the revolver and that's all US BE facilities?

Danny Herron

Gary, I want to -- I need to check on that. The revolver balance for the $125 million was at $40 million at the end of the quarter. So that would have left about $80 million of revolver balance on the $125 million. And then we have additional seasonal revolvers for the US bioplants that was I believe about $27 million to $30 million. Maybe Bryan has a better answer.

Bryan Meier

I think the $89.5 million that you're referring to on the queue that is related to the construction financing that is yet to be drawn on the facilities that have not finished yet.

Gary StrombergLehman Brothers

So that is just the US BE construction financing facilities?

Bryan Meier

That is correct.

Gary StrombergLehman Brothers

And do you have an LC balance at the end of the quarter, we can back into how much is available on the revolver, the corporate revolver?

Bryan Meier

I think we disclosed it's about $13.5 million.

Gary StrombergLehman Brothers

$13.5 million. That's all I had. Thank you.

Don Endres

Thanks, Gary.

Bryan Meier

Sure.

Operator

Your next question comes from the line of JinMing Liu with Ardour Capital.

JinMing LiuArdour Capital

Good morning.

Don Endres

Hi, good morning.

JinMing LiuArdour Capital

I had a question. If you back out of the sales of corn during second quarter, what kind of EPS we should look at for our 3Q '08?

Danny Herron

The sales for corn in the second quarter, that's identified in the--

Bryan Meier

Yes. The margin on the sales was I think $8.5 million.

JinMing LiuArdour Capital

That's good.

Don Endres

We don't give guidance on end of '08 projections.

JinMing LiuArdour Capital

My next question is based on my calculation. Your ethanol production in the second quarter '08 was slightly lower. Have you slowed down your production in 2Q at all?

Don Endres

Yes. I think we had some maintenance -- plant maintenance that would have reduced the production number slightly. And then we simply were focusing on yield and some of that work involved adjusting production rates. But it would have been still in the range of near nameplates. In fact, one more item too, I think weather was somewhat impactful there as well, but not a big change.

Danny Herron

There was no intentional slowdown other than just good production practices and focusing on yield and as Don mentioned, some maintenance was planned during the quarter.

JinMing LiuArdour Capital

Thanks. That's all -- those are all my questions.

Don Endres

Thank you.

Operator

Your next question comes from the line of Joe Cariello with Soleil.

Joe CarielloSoleil Securities

I'm calling in for Ian this morning.

Don Endres

Good morning, Joe.

Danny Herron

Hi, Joe.

Joe CarielloSoleil Securities

Seems like your coproduct correlations have gone down quarter-over-quarter. Can you talk about why, what's going on and how it looks going forward?

Danny Herron

Actually, I think as a percent of our corn cost, coproduct sales actually went up. We were slightly above a 25% recovery rate. And if I recall Q1 was about 22.5%. I'll be glad to -- if you want to call me after the call, I'll go through the numbers with you that are in the queue but we see the recovery rate in Q3 -- or Q2 being slightly better than Q1.

Joe CarielloSoleil Securities

Any guidance on interest expense for the remainder of the year?

Bryan Meier

No, we don't give guidance. I think it's pretty descriptive as far as our debt when that goes. If you could probably calculate if off and put into your model yourself.

Joe CarielloSoleil Securities

And then you made difficult decision to end production due to the economic time in the third -- or in the second quarter. Are you concerned starting up these plants in the third quarter will oversupply the market again, the rest of the margins?

Don Endres

We're still, obviously, relatively -- those gallons will be relatively a small portion of new supply to the marketplace. But, our focus has really been on market development and we're -- we've been monitoring market conditions. But we see variable margins being positive and as long as they're positive, it makes sense to run the facility.

Joe CarielloSoleil Securities

And then your average ethanol price guidance for the third quarter is higher than the term pricing environment, because you sold a good amount of the ethanol forward or is this projection of pricing for the remainder of the quarter?

Danny Herron

No. We had a very good July, July prices were very robust. And our current view is that there's probably some upside in the market for the month of September.

Joe CarielloSoleil Securities

And then finally, do you have any CapEx guidance for the remainder of the year?

Bryan Meier

Yes. CapEx guidance, it's in the 10-Q, but its $50 million to $75 million in the third quarter and $25 million to $50 million in the fourth quarter.

Danny Herron

With $80 million of that being financed from the construction financing facilities for the three US bio -- for the US bioplants.

Joe CarielloSoleil Securities

And does this include all the construction in the corn oil?

Danny Herron

It does. Got everything that we anticipate.

Joe CarielloSoleil Securities

Thank you.

Danny Herron

You're welcome.

Bryan Meier

Thanks, Joe.

Operator

Your next question comes from the line of Pavel Molchanov with Raymond James.

Pavel MolchanovRaymond James

Guys, great quarter.

Danny Herron

Thank you.

Pavel MolchanovRaymond James

Quick question about corn prices. Can you talk about the recent spreads that you have observed between CBOT and your local pricing that you're currently getting?

Danny Herron

Sure. Obviously, the bases have widened out. I think again, we all are very comfortable with in the range of 1.4 billion bushels of (inaudible).

Operator

There is a participant and her name is Melinda Norman [ph] with Holt Advisory Group.

Melinda Norman -- Holt Advisory Group

I guess, I jumped the queue.

Don Endres

Melinda, you're next.

Melinda Norman -- Holt Advisory Group

I wanted to get more clarification on the 25.6 million mark-to-market on the hedges. So, was that a mark-to-market on an unrealized hedge? And can you what I'm really getting at is in the third quarter is there going to be a cash components of that or how much close to think about where your hedges are and what you got marked on your books versus what's going to be actual cash?

Danny Herron

It was a non-cash gain, if you will, in the second quarter as the market ran up from$6 to $8 and as the market runs back down, it's the split on it.

Melinda Norman -- Holt Advisory Group

But it will still be non-cash?

Danny Herron

Yes.

Melinda Norman -- Holt Advisory Group

So when you give your corn costs, $5.90 to $6.15, and you say $0.30 of that is related to the mark-to-market where are you trying to really get it what cash is going to be we should use $5.60 to $5.85, that sort of a cash corn cost? With whatever hedges you're going to realize in the quarter? Do you see come back to me on it?

Danny Herron

Yes. Let me I want to make sure I answer that correctly for you, but (inaudible) that one.

Melinda Norman -- Holt Advisory Group

Then second question on the CapEx. Just the split between the restricted and unrestricted or however -- VSE and side of things and the US BE side, do you – is there is the corn project and Welcome on the VeraSun side and then Dyersville and Jamesville. Can you give me any better sense of allocation of CapEx between all those various components?

Don Endres

The Dyersville and Jamesville will be probably closer to being 9.5, but we have the construction amounts available, and everything else pretty much would be a non-US file.

Melinda Norman -- Holt Advisory Group

And then the -- this is related to the mark-to-market question. Just some sense of where the 23% or whatever you're hedged at for corn in third quarter what your hedge price is. Because if don't back out that mark-to-market, it seems like it must be pretty high. If I do back it out, it seems more reasonable, but still it sounds like it's you put it on in the second quarter.

Don Endres

That's correct. It was put on in the second quarter.

Melinda Norman -- Holt Advisory Group

Great. That's it from me. Thanks, guys.

Don Endres

Thank you, Melinda.

Danny Herron

Thanks, Melinda.

Operator

Your next question comes from the line of Eric Villania [ph] with William Blair.

Eric Villania -- William Blair

Hey, gentlemen.

Don Endres

Hi, Eric.

Eric Villania -- William Blair

I apologize if I -- if this question was already asked before. We actually got cut off here for a brief period. If I use slide 10 how you defined your crush margin could you maybe just talk a little bit about how you -- at what level of the crush margin do you need before you start rethinking whether or not you open up a -- start up a plant that you finished building, but had not started yet?

Danny Herron

Eric, it's not just the math on that, it's our view of the future market and what's going on, and what other participants are doing. It's not just one item that gives us the confidence to go ahead and start up a facility or not. But certainly, we would not start up a facility that wasn't covering all its variable costs and contributing towards our fixed costs that we consider to be corporate costs and interest expense on our bonds in our debt service. Those are fixed costs we want to make sure that we're contributing something for. We're not going to run a plant, spend money to one of our customers in the form of a discount to our variable costs.

Eric Villania -- William Blair

Sure. I was -- where I was coming from with this -- that question was just trying to get a sense of like where are you thinking you may need to be in terms of crush margin where Reynolds could possibly be open next year. I know you haven't really talked about any timing for Reynolds yet in '09. Is that still at today's levels? I mean, is that outside of the realm of possibilities because it looks like corn and natural gas prices have come up pretty sharply recently. I'm just trying to get your thoughts on what may happen with Reynolds. Is that a possibility in early '09? Or is there still more stuff that needs to happen, more things need to swing your way before that happens.

Danny Herron

We need to see improved sustainable margins, back to Don's slide on the value proposition of ethanol, we need to start achieving some of that inherent value that's there between what we're currently realizing for value of the product and what is true economic value is to our customers we need to start realizing some of that before we go forward on Reynolds.

Eric Villania -- William Blair

And then when you say consistent margins, how long of a time period are we talking about here, weeks, months, and quarters?

Danny Herron

It's really a view of just a number of different things. I mean it is -- what we are hearing as we make sales calls every day, what we get from our crop consultants tell us what's really going on in the corn crop. I mean, today, we had some bearish news for corn with the carry out going up by 300 million bushels, but the market is still highly volatile and it's just getting a comfort level with that. What we don't want to do is start a plant up and then shut it down because the margins go extremely south on you. That's not good for our employees, it's not good for the plant and we're trying to make absolutely sure that doesn't occur.

Eric Villania -- William Blair

Sure, makes sense. Quickly on '09, is there any thinking right now in terms of what your CapEx could be? Is there a wide range that we should be thinking about or is this too early?

Danny Herron

At this point, it would be a very small CapEx number unless margins really get robust and we started on Reynolds. There would be some completion of oil extraction at a couple more plants, but it would be a fairly small number relative to what it's been in the past because basically, we're built out now.

Eric Villania -- William Blair

Sure, sure. And my final question just with the stock. The stock is up this morning, but still trading below your book value. Is there -- has there been any incremental discussion in terms of buying back stock? I know that there is a priority with finishing the plants. But if we're still at this price level for the stock six, nine months out from here, I would think that stock repurchase might be something that would be of interest to you guys, correct?

Danny Herron

It would all depend on the margins that accrue between now and then, and what capital markets did and what availability there was to buy that back. If margins don't improve and you don't generate tremendous excess cash, obviously, you wouldn't buy back at that point. But it -- obviously at this level, we think we're undervalued relative to the value of our company going forward.

Don Endres

We would also consider potentially paying debt down as well, so there's a number of opportunities that we consider as part of the overall mix.

Eric Villania -- William Blair

Sure, sure. Actually, I'm going to throw in one more. Just can you remind us what you're comfortable with for corporate debt to cap ratio, what's your target long-term?

Danny Herron

We've been in that 50% to 60% range. And probably given the volatility the market is showing us, we will probably back off that a little bit over time and reduce the amount of debt relative to where we have been in the past.

Eric Villania -- William Blair

Great. Thank you very much.

Danny Herron

You're welcome.

Operator

(Operator instructions)

Don Endres

Operator, we'll go ahead and close the call then. I'd like to again just say, I appreciate all of your participation in the conference call today. We apologize for the technical issue that occurred and we look forward to our next quarter's call. Thank you and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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