Thank you everyone for joining us. Next we have Gevo, Inc., ticker GEVO. With us we have Dr. Eric Frey. Eric is VP of Finance and Strategy at Gevo. Welcome, Eric.
Hey. Good to be here.
For those that don't know me, Shawn Severson, Founding Partner and CEO of Water Tower Research. Known Gevo for a very long time, through research and working with the company. Very excited to have you here today. We'll just jump into some questions if you're ready, Eric.
Yeah. Good to be here, Shawn.
Great. First of all, let's start with the company overview. I think it's an area that's certainly getting a lot more attention in SAF and low carbon ethanol, but I'll let you tell the story and frame it up for investors about Gevo.
Yeah, sure. Effectively, Gevo is a platform for low carbon fuels and chemicals that are the same fuels and chemicals that exist in infrastructure today, but are derived from non-fossil resources. The process that makes the fuels and chemicals is lower carbon. It scales like a commodity because the product is the same. If I had a jar of jet fuel and a jar of our jet fuel that's made from Alcohol-to-Jet, you wouldn't be able to tell the difference. Because of where ours came from, it scales like a commodity.
It goes in the normal jet engines and tanks and so on, but it has the margin and the differentiation of a specialty product. That's why we think it's a good business, because there's demand for that on the compliance markets and on the voluntary markets for that specialty product. We have a couple different assets that are operating. We have an ethanol plant, corn comes in the door and ethanol goes out the door and it's blended with gasoline in your car.
That's a mature industry today, what's special about what we do is the bubbles of carbon dioxide that come off the fermenter. If you've ever made beer in your garage or if you like beer, the bubbles in beer are carbon dioxide. That comes from fermentation. That's a good carbon capture target, and we capture that carbon dioxide. We're one of three ethanol plants in the world that has operating Class VI, fully permitted carbon capture and sequestration, and that's a really good target. That's a low carbon ethanol, that does two things.
It's profitable by itself, also that's then the feedstock to do Alcohol-to-Jet, to make Sustainable Aviation Fuel from that low carbon resource, because you can convert ethanol and alcohols into jet fuel. That's a lot of what we do. We also have a renewable natural gas asset where we take dairy cow manure and convert it into renewable natural gas as well. The ethanol to jet is the main driver for us then expanding that is the main source of growth for us.
It's important to consider, too, the low carbon ethanol that as we're going to get to talking about SAF next in the market there, but the process begins all the way at the field, right? What we call low carbon. Maybe just a couple quick comments on what that means as you get from the field to the wing kind of a strategy.
Yeah. Just super high level, if you're starting with biomass, plants, cereal crops, that kind of thing, they grow by taking carbon dioxide out of the atmosphere, right? Versus fossil fuels, if you start with that, it's carbon that's been underground for millions of years. If you take that out of the ground and you burn it, you're releasing greenhouse gases. If you start with biomass, you're in principle capturing greenhouse gases and then burning it again. If you process that stuff efficiently, you can reduce your greenhouse gas footprint for the jet fuel or the ethanol that you're using by 80% or even 100%.
It all depends on starting at the field level, how much fertilizer did the farmer use? If they're more efficient, then it's lower carbon. What are their yields? If they produce more yield per acre, if they use less land, then it's lower carbon footprint. The cool thing is, usually we think of, well, we're going to have energy that's either going to be clean or cheap. Unfortunately, that's the choice. It's either going to be clean or cheap. When you start with biomass, when you make it cheaper, you are also making it cleaner.
If farmers are more efficient, they're by definition getting a lower greenhouse gas footprint. If our process converting that biomass to the fuel is more energy efficient, sustainability and reduced carbon intensity is a proxy for just doing good things that you'd want to do anyway. It's just the incentive to reduce carbon intensity kind of accelerates that process that you'd want to do, that you want to do regardless. That's how this can be lower carbon.
There's other tools that you have, like when you're converting biomass to an alcohol, that fermentation just gives you a really high purity carbon dioxide stream. Not every industrial process gives you that. That could be expensive because carbon dioxide is an inert dilute gas. This process gives you a concentrated version of that gas. There's other things, too. When you convert alcohol to a jet fuel, the fermenter, because it has a living microorganism in it runs hot. It generates heat. The next part of the process, when you condense ethanol into a jet fuel, you're effectively making it a more energy dense fuel.
I know this is getting really technical, but I'm just letting you know that there's heat integration you can do to make the whole process lower carbon, and you can electrify components, do all that kind of stuff. We are engineering a mousetrap that's more efficient and therefore also lower carbon.
All of that gets you to a low carbon Sustainable Aviation Fuel. Spend a moment talking about the market, because that's the end product. What's the market? In fact, we were just on a panel at the Louisiana Energy Conference addressing the energy security aspect of this, but there's the decarbonization and the energy security side of it. I think talk to both of those as far as the SAF markets.
Yeah. We know the markets really well because we've been one of the few companies to make Alcohol-to-Jet SAF. We produced SAF last quarter. Our goal is to produce much larger quantities. How does that market work? High level, first, you just have to worry about the jet fuel market. Don't worry about carbon for a second, just worry about jet fuel. The U.S. consumes 20 billion to 25 billion gallons a year of jet fuel, and that's going to grow by 10% over the next 10 years. That is different from most fossil fuels.
Most fossil fuels are not growing at that rate. They're kind of going sideways or declining because of urbanization, because of electrification, that kind of thing. The U.S. needs more jet fuel. Also, most refineries, they only produce about 9% jet fuel and 50% gasoline. There's a disconnect. People think, oh, the U.S. produces lots of crude oil. That's true. The processing facilities that produce the final fuel, that is a bottleneck. We haven't built a new refinery in, like, 50 years.
We need more jet fuel, and in terms of low carbon jet fuel, basically, it's very difficult to reduce the carbon footprint of aviation without a low carbon fuel. You need a lightweight fuel for aviation. As you can imagine, it's hard to put a battery on an airplane for lots of reasons, range and weight and all that kind of thing. They need Sustainable Aviation Fuel, and basically we're producing, compared to the scale of jet fuel, zero of it. Now, the U.S. produces 15 billion gallons of ethanol, and we produce enormous quantities of cereal crops like corn and sugar.
We probably eat too much sugar. You've got all this supply over here, all this unmet demand over here. Our goal is to connect the dots.
You mean when United recycles my Diet Coke can, that isn't changing the footprint of the flight?
Yeah. If you look on some of the airlines, I won't name names, but if you look at their napkins in their clubs, they'll say, we're using SAF. That's great. They are using some SAF. If you read the fine print, it's very tiny. It's small.
Yeah.
We, the producers, need to catch up to their demand.
Let's talk a little bit about the carbon capture leadership. Interesting angle. Not something I think a lot of people are familiar with, but it's a business.
Yeah. It's a good business, we're trying to do it the right way. Carbon capture can be expensive if you don't do it the right way. Like I said, there's carbon dioxide in this room. If we had fans that just try to capture it and make it dense, that'd be expensive. This process gives you that, our facility is strategically located because it sits about a mile above the right rock, a thick rock formation that's porous rock that's good for carbon capture. People, if you've heard a lot about CCS or carbon capture and sequestration, we're one of the few companies where that's actually at the core of what we do.
Not many companies are actually doing this. We are because we have a good source and a good sink. It's that porous rock, it's certified to last for over 1,000 years because essentially carbon dioxide mineralizes. We are using about 17% of our pore space. We think we can do about 1 million tons per year of carbon capture, but we only produce 170,000 tons per year of carbon capture. Depending on what markets you're looking at, the price of carbon that we can get is anywhere from $60 on the low end in places like California to $400 a ton in places like Canada last quarter.
It's a good business, we're trying to efficiently serve that market.
Let's talk about the revenue model. It's not just as simple as selling gallons of SAF, right? There's a lot to this, help investors understand where those revenue mechanisms are in the business.
Yeah. So there's kind of a multilayered take of revenue when you think about a gallon of a low carbon fuel like SAF. The first thing you get is any producer of biofuel in the U.S. gets what's called a RIN. A RIN is a thing that you get if you're a biofuel producer under what's called the Renewable Fuel Standard. That's been around a very long time under both political parties, because it supports domestic biofuel production. So you get a RIN. In fact, actually you get 1.5 D4 RINs if you want to know, but you get a RIN.
You also get credits in places like California, Oregon, Washington, British Columbia. Those are places that have a low carbon fuel cap and trade market. If you have a low carbon fuel, if you sell into those markets, you get a premium. Finally, there's a U.S. federal tax credit called the Clean Fuel Production Credit. It was extended by Biden under the Inflation Reduction Act and then extended again by Trump under the Big, Beautiful Bill. That also is tied to carbon intensity. If you have a low carbon fuel, you get a bigger credit.
When you add all those up, effectively, our very low carbon ethanol can get a margin of over $1 a gallon. Normally in this industry, commodity ethanol with no carbon capture, no premium on carbon, you're looking at $0.10-$0.20 a gallon. Why is that? Well, it's because we're not just selling gallons of ethanol, we're selling tons of carbon removal. If you are Microsoft or Google or Nasdaq, if your other end customers that are trying to reduce your carbon footprint, it is economic for them to pay somewhere in that ballpark, $50-$400 a ton.
That's the price that they're willing to pay. They're paying it now. We are just so efficient at sequestering so many tons of carbon that on an ethanol basis, we get $1 a gallon where the industry gets $0.20 a gallon.
That brings me to one of my favorite topics, which is the economics of the business. I think for a long time, for those investors that aren't familiar with Gevo, it was all about building one big SAF plant, right? That's what the entire focus was. Investors were just micro-focused. It was really focused on that, laser-focused on it. What's happened is you built a business inside of this that is profitable and cash flowing. I think from an investor perspective, it's really interesting.
Let's talk a little bit about the business that's cash flowing and the profitability drive that you're pushing towards. Then, of course, there's the larger scale opportunity in SAF, which we discussed is a huge market. I think this is missed by a lot of investors, that there's an underlying fundamental, profitable business at Gevo with this tremendous optionality on huge SAF potential.
Yeah, I think that's right. I'll bounce through it quickly. If you look at our EBITDA by segment, what we call the Gevo North Dakota segment, that's the assets I've been talking about. Last quarter, if you look at that, excuse me, that's doing $70 million a year of EBITDA. Gevo as a company, last year, we had about $16 million of EBITDA. We think this year we'll have $30 million, and going into next year, we'll be at like $40 million per year. That's just by selling carbon the way it should be sold. Those are just operating assets.
There's no capital projects at all so far. We're also de-bottlenecking those assets, if you expand $70 million by 10% or 15% starting next year, we're just expanding volumes a little bit. That has an outsize effect on our bottom line. We're doing that, too. We're also planning to double the size of that plant in the next two years. Finally, that's everything before Sustainable Aviation Fuel. All the stuff I just talked about is just doing low carbon ethanol and carbon capture. As Shawn said, we've been a company that's about this, which is, okay, low carbon ethanol is a good feedstock to then do Sustainable Aviation Fuel.
That's a bigger project. That'll take two, three years construction time and cost $500 million+ . We're going out to the private credit market to get loans that will be tied to our existing assets to then build that facility. That'll take a while. If you think about it, right now, we have cash flowing assets that we can grow with modest amounts of capital. Then we have the longer term SAF project. The long, long-term vision is that project becomes like a showcase, so we can go to the other 180 ethanol plants in the U.S. and say, Hey, do you want to build one? Or, could we build another one?
Because we don't think the world just wants one. We think the world wants more than one. We've designed it to be repeatable.
I'd encourage investors, take a look at the deck on the website. You've done a great job of breaking out the underlying businesses. It's a valuable slide that they do have on there. It explains the business and the cash flow opportunity. I know we don't have it up here today, but definitely worth a look at for investors. Moving on to policy and energy security. We touched a bit on energy security, policy tailwinds, obviously a big issue.
The administration, America First, energy. I think there's a lot of confusion about what policies actually help Gevo today and what exists, and some of them are still very attractive.
Yeah. If you think about Gevo, you would think, well, gee, the current administration, maybe a company like Gevo is not so much in favor, because a lot of what we do is low carbon footprint. That's actually wrong if you just tick through the things that Oh, sorry. Am I running out of time?
No, you're fine.
Oh, okay. If you just tick through the things that matter to us, the administration in the U.S., what do they do that matters to us? Well, it's the Renewable Fuel Standard and it's the Clean Fuel Production Credit. Okay? Those are the two things that affect us. They extended the Clean Fuel Production Credit. They did not get rid of it, even though it was in the Inflation Reduction Act. They announced the largest Renewable Volume Obligation ever under the Renewable Fuel Standard.
In terms of what the administration does, they actually support biofuels. Now, what do they not do? There's other folks that do things that matter to us, California, Oregon, Washington, Canada. In Canada, their prices of their cap and trade for carbon hit $400 a ton last quarter. That's not going away. On the international stage, we're selling carbon offsets to companies like Nasdaq, to Bank of Montreal. These are global companies that want to buy carbon offsets regardless of who the U.S. administration is.
I think the optics of just the White House trading hands does not really match the fact pattern behind us. We sort of thread the needle of we tend to be in favor, actually, on a bipartisan basis, which may surprise people.
Let's move on to Verity. I want to get through a couple more and leave some time for some questions as well. Verity, super intriguing technology and business. Just a brief overview on that.
Yeah, sure. Verity is our in-house software tool. Like I said, if I had a bottle of Sustainable Aviation Fuel and a bottle of fossil-derived jet fuel, it would look the same. It would just look like clear liquid, and it would work the same. What makes it different is the label. You need a good label that says, well, this one came from a process that you can trust that was lower carbon. Verity is our software that we deployed in-house and we now made available to several other biofuel, think soybean oil processors, biodiesel processors, that kind of thing, for them, too.
What it does is effectively tags crops of soybeans or corn as they move through grain elevators, as they move through processing plants, as it becomes a gallon of biofuel, as that gallon of biofuel goes to Canada or California. Why? Because it's a commodity industry and no one had done that before. Canada or California, that end customer, prior to recently, didn't care how much fertilizer was used at the farm that grew that crop. It didn't matter. All that matters is that the fuel meets spec. Now they care.
Now those biofuel producers, they need that track and trace, and Verity just makes it easy. It's a software system that helps you avoid spreadsheets.
When carbon has value, it needs to be verified and tracked and accountable, let's say.
Absolutely.
This is a very important part of the carbon chain because it does have value on the world markets and it's going to, going forward. Tracking and having an audit, let's say, of the carbon number is really what this provides, correct?
Yeah. Quick math. In the ethanol industry, a good margin on just normal ethanol is $0.20 a gallon. If the carbon value is $0.02 a gallon per carbon intensity point, okay, in this industry, you have these carbon intensity points. By tracking the field, those farming practices, if you don't track them, you may be missing ± 5 to ±10 points of carbon intensity. Well, you multiply that by $0.02 a gallon, and that actually could be a big deal. If you're an ethanol producer, let's say, you want to track that and say, Okay, I got it from Shawn's farm.
Shawn used less fertilizer and had higher yields. His corn actually had a lower carbon intensity than that person's corn. Therefore, my ethanol should get a bigger premium. That's the idea.
Just for investors looking at milestones, obviously something we all like to look at, how do we know Gevo's progressing, tracking? What would you say are the key signposts ahead the next 12-18 months, Eric?
Last year, we turned EBITDA positive, and we hit about -$13 million of operating cash flow. This year, we should get to $30 million of EBITDA plus and be neutral to positive on operating cash flow, and then growing from there. That's what you should see over the next couple quarters, including last quarter. Last quarter, we actually had $9 million of EBITDA, so we're pretty close to $40 million per year already. That's on the financial side. On the operating side, you should see us increase volume of carbon capture and ethanol by about 10%-15% starting next year.
We've already done the tie-ins for our debottlenecking. On the milestone side, we said last quarter, we announced for the first time that for that future SAF project, we had about half the volume under take-or-pay offtake contracts that have a fixed price or a floor price. That's a big milestone for us. We want to get more, but that's a really big achievement in our industry to get a fixed price or a fixed floor price, because as you can imagine, historically, this is a commodity industry, but now we're starting to get customers that are willing to sign contracts like that to make the product financeable.
The final thing is we completed our FEL2 engineering. If you're not familiar, that's basically two out of three. We've got to get FEL3 engineering done. That'll be the next milestone that we'll announce.
Great. Thanks. Jump to any questions. Got a couple of minutes left. Anybody have.
How you guys doing? Great question. I should have mentioned that. That'll generate about $150 million a year of EBITDA. I wouldn't call it $500 million- $1 billion. I would call it $500 million +, so you need contingency and reserve and that kind of thing. I hope it's a lot less than $1 billion. I think, and I can give you more detail, but high level, $150 million a year of EBITDA. We need to get to FID, because we're not going to start mobilization and construction until we have all financing in place. We're not a big enough company for that.
It's prudent to say, Okay, we're going to meter out our spend on the development cost for the big project until we have 100% of the financing. At FID, final investment decision, we'll mobilize the site, start construction, then we need two to three years construction time. That does put you into 2029. A plant like this, too, will have a startup period, too. There will be some period where you're ramping up to full volume. This is the first in the world ever large scale Alcohol-to-Jet plant.
We think, just like in the early 2000s, the U.S. built dozens of ethanol plants, we think that the stage is set to build dozens of Alcohol-to-Jet plants. It will take time, though.
The cost of capital should come down with each one, right?
Absolutely
Project financing.
We don't have to design it again. We don't have to design it again, once you have a fabrication yard making the modules, it's designed to be modular. Once that fab yard makes it, if they make a dozen, the number 12 shouldn't cost as much as number one.
Any other questions? All right. We'll wrap it up. I'd encourage everybody to take a look at the research on our website. There's a great body of work out there from our analyst, Peter Gastreich, at www.watertowerresearch.com, and we have all kinds of reports and fireside chats and podcasts with Gevo as well. Encourage you to take a look there. Thank you, Eric. Very informative today. Appreciate you coming.
Thanks, Shawn. Thank you all.
Thank you.
Appreciate it.