Good morning, and welcome to the Green Plains Inc. and Green Plains Partners Second Quarter Earnings Conference Call. Following the company's prepared remarks, instruction will be provided for Q&A. At this time, all participants are on a listen-only mode. I will now turn the conference over to your host, Phil Boggs, senior vice president, investor relations, and treasurer. Mr. Boggs, please go ahead.
Good morning, and welcome to Green Plains Inc. and Green Plains Partners' second quarter 2020 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer; Patrich Simpkins, Chief Financial Officer; and Walter Cronin, Chief Commercial Officer. There is a slide presentation available, and you can find the 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 press releases, in the comments made during this conference call, and in the risk factors section of our Form 10-K and Form 10-Q and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward-looking statement. Now I'd like to turn the call over to Todd Becker.
Thanks, Phil, and good morning, everyone, and thanks for joining our call today. For the quarter, we reported a net loss of $8.2 million, or $0.24 a diluted share. While we had a small loss, we were free cash flow positive for the quarter. We also reported $17.9 million in adjusted EBITDA for the quarter. Before I get more specific on our results, I would like to recognize how proud we are of our employees during the quarter as we continued our high-quality alcohol donation program and partnership with the University of Nebraska–Lincoln as students, staff, and professors made hand sanitizers. This product was provided for free to various organizations ranging from daycares to USDA offices to local school districts, which we believe positively impacted Nebraska health and wellness during this pandemic.
The market value of this production from the hand sanitizer program was significant, and the gratitude from those receiving this was simply something we could not have done without a facility like Green Plains, York, Nebraska. We never, ever said no to an organization in need. Our positive results were driven by several businesses within our portfolio. We had another record quarter in our investment in Green Plains Cattle Company, which will allow a dividend to be paid to all the partners. Our high-quality alcohol sales out of our York, Nebraska, facility helped deliver strong results, and we had some beginning contribution from our high-protein sales from Shenandoah, Iowa. Finally, the completed Project 24 facilities continued to reduce our operating cost per gallon. Without these improvements and initiatives, ethanol margins would have been very negative.
While cattle in the last half of the year will become more normalized, the rest of the initiatives that provided better performance versus the market margins should continue as part of our ongoing results. While certainly ethanol margins will remain volatile, these initiatives are just the beginning of what is possible as we continue the total transformation of Green Plains over the next several years. We produced approximately 149.9 million gallons of ethanol, which put us at a 53.5% utilization rate for the quarter. We exercised our operational discretion to slow or shut down plants as a result of the negative margin environment. We did not furlough any employees during these slowdowns. We will continue to follow the data moving forward.
While we have seen margins improve off their lows in April and the spot market remain slightly positive, margins are very inverted, which is clearly sending a signal to the market. The weekly EIA data has been negative towards margins as production is now over 950,000 barrels per day, which is too much in our opinion. While EIA stocks got down to levels we have not seen in many years, they began to rise last week. Clearly, this industry lacks discipline. The consolidated crush margin for the second quarter was $0.09 per gallon, which was strongly influenced to the positive due to high-grade alcohol sales. Fuel ethanol margins were generally weak during the quarter, but we believe that through a combination of slowdowns and margin management, we achieved better than the daily average market.
We have now completed the Project 24 upgrade at our Fairmont plant, where we are starting this plant back up and expect to see similar results to what we have realized on our previously reported Wood River facility, as well as our Superior and Fergus Falls plants. Up next for Project 24 is our Mount Vernon location, which will be done by the late fourth quarter. Project 24 has been delayed at our Madison facility due to the State of Illinois permitting and also at our York, Nebraska location, as we will not take that plant offline because of its positive contribution to the overall financial performance of the company. We believe with what we have accomplished so far, we will be at or below $0.24 per gallon by the end of Q4 and expect to complete our Project 24 initiative by Q1 2021, subject to state permitting.
We are excited to have announced that we have secured credit approval for a $75 million financing to continue funding of our protein initiative. This gives validation to our strategy and allows us to quickly proceed with Wood River as our second protein location, as well as to begin engineering a third location as well. We expect Wood River to come online during the second quarter of 2021. When completed, we will have over 200 million gallons of capacity capable of generating $0.15-$0.20 per gallon of incremental margin from this high-value protein feed. This is incremental margin to what Green Plains' historical platform could produce. During the coming months, we'll be working with our strategic partners to increase the value of this product and its nutritional characteristics, allowing us to move further up the margin curve.
We will continue to work on project-level financing for every location in our platform as the product has immediate acceptance. As a high -protein replacement ingredient in aquaculture and pet food. We believe this financing is just the beginning of a rapid deployment across the platform. Green Plains Partners reported $13.2 million of adjusted EBITDA for the quarter. The coverage ratio was 3.99 x for the second quarter and 1.59 x for the trailing 12 months, as amortization of principal for the new loan didn't begin until July. Now I'm going to turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners' financial performance. I will then come back on the call to talk more specifically about our York and Wood River USP and FCC alcohol production, protein and aquaculture initiatives, and a little more on markets and policy. Patrich?
Thank you, Todd, and good morning, everyone. Green Plains' consolidated revenues were $418 million in the second quarter, down $212.6 million, or 34%, from the second quarter of a year ago, driven primarily by lower ethanol production run rates as compared to the second quarter of 2019. During the quarter, we adjusted our run rates down to 53.5% of capacity compared to an 80% run rate for the prior year's second quarter in order to maximize our respective operating margins. Our consolidated net loss for the quarter was $8.2 million, comparing favorably to a net loss of $45.3 million in the second quarter last year. Adjusted EBITDA for the second quarter was a positive $17.9 million, up from an adjusted EBITDA loss of $19.5 million for the same period a year ago.
For the quarter, our SG&A costs for all segments of $19.6 million remained relatively unchanged compared to Q2 of 2019. Consolidated interest expense for the company was $9.7 million, which was $1.6 million lower than the $11.2 million in Q2 of 2019, primarily due to a decrease in overall interest rates. CapEx for the second quarter was $28.9 million, with approximately $4.3 million of maintenance CapEx, with a balance of $24.6 million being allocated to growth capital, primarily for Project 24 and our high -protein initiative. With the continued improvement in our overall liquidity, driven mostly by non-biofuel product sales and financing arrangements, we are revising our target CapEx for the balance of the year and expect full -year CapEx to be between $100 million-$120 million, in line with our original guidance.
This estimate includes $28 million of CapEx spend for our Wood River protein project during 2020. On slide eight of the investor deck, you will see a summary of our balance sheet highlights. We had $243 million of cash and working capital, net of working capital financing, at the end of the second quarter, compared to $387 million for the prior year quarter. The balances for 2020 exclude our cattle business that was deconsolidated in September of 2019. Adjusting for the deconsolidation of the cattle business, the prior year's cash and working capital total would've been $273.1 million, with the difference between Q2 2020 and Q2 2019 being attributable mainly to a change in cash of about $50 million in net working capital financing.
Our liquidity position at the end of the quarter consisted of $183.6 million in cash equivalents and restricted cash, with approximately $289 million in availability under our working capital revolvers. This amount does not include amounts that will be available under the recently announced financing facility or the current credit facility of the partnership. For Green Plains Partners, we had 151.1 million gallons of throughput volume at our ethanol storage assets during the quarter, which was down 75 million gallons or 33% from the second quarter of 2019 as a result of lower production rates at Green Plains plants. However, as a result of minimum volume commitment contracts with Green Plains Trade, the partnership billed Trade Group for 235.7 million gallons of throughput.
Accordingly, the partnership reported an adjusted EBITDA of $13.2 million for the quarter, down slightly from the $13.9 million reported in the second quarter of 2019, due in part to the timing of accounting recognition of railcar lease expenses and other items. For the partnership, distributable cash flow was $11.3 million for the quarter compared to $11.7 million for the same quarter of 2019. On a last 12-month basis, adjusted EBITDA was $53.1 million, distributable cash flow was $45 million, and declared distributions were $28.2 million, resulting in a 1.59 x coverage ratio. Lastly, as Todd will discuss more in detail a bit later, we successfully refinanced the partnership with our existing lenders in June. As part of that financing, we will initially amortize $2.5 million of debt per month.
With the principal payments on our debt not beginning until the third quarter, our coverage ratio was 3.99 x the second quarter. I'd like to turn the call back over to Todd.
Thanks, Patrich. Over the past few months, we have witnessed the industry production drop to levels we have not seen in modern history and come back just as fast as overall industry production dropped to about 50% of overall capacity. While the industry moved faster than other energy industry production to shut down during COVID, it came back possibly faster than those same industries. However, for Green Plains, we are in a better place than we would have expected at the start of the pandemic. What we learned was York, Nebraska, produces a great product that was previously exported to industrial markets and now has almost fully transitioned to domestic use. The quality of York's product is very unique, as it was originally a beverage facility that has a very different profile than FCC and industrial alcohol being produced by others.
That is why we chose this plant to immediately upgrade to USP. We have been able to redeploy some of the equipment we have in inventory from dismantling our Hopewell location, which is adding to the speed of completing this project. There are a lot of fast followers. Just because you have a grade certificate that says you make that specification doesn't mean it's a good product. In fact, many of York's early sales were replacing substandard products from other ethanol plants. We have worked closely with branded consumer product companies to get our product into their cleaning lines. Meeting their strict QA/ QC requirements from such companies is something that sets us apart, and our continued development of York and Wood River to USP secures our position to be a long-term player in this important segment of the industry.
These customers know there are many ranges of quality and know that ours is exceptionally high. In fact, we believe the U.S. government should crack down on imports of B -grade and USP from Brazil, Pakistan, and other countries, as these products should not make their way into our supply chain, and they should be vigilant on making sure these meet U.S. specifications, which we believe many do not, as they are not getting tested adequately. Our high-grade, high-quality alcohol sales have been a strong contributor to the positive EBITDA achieved in the second quarter and should continue to help the balance of the year and through 2021. We now have almost 75 million gallons of capacity, which is important to our customers. We can provide a high-purity, high -quality product at scale, unlike many of the one-off projects that have occurred in this industry.
We have already executed contracts with significant customers through the end of 2021, as demonstrated through our very important partnership with Lysol announced this morning. This affirmed that we have something unique happening at York. During the quarter, we were pleased to complete the refinancing of our GPP debt. We extended it for 18 months and are required to pay a higher principal amortization, but we believe this benefit accrues directly to unit holders, of whom we remain almost 50%. In addition, we are also very excited to be finalizing a $75 million loan facility to support the execution of our protein strategy. This project -level capital is just the next step in our transition to Green Plains 2.0, but it gives further validation of the financability of these projects and enables us to accelerate our transformation. Our wholly owned Optimal Aquafeed is continuing to make progress as well.
The high -protein ingredients we are making at Shenandoah are serving as a delivery mechanism, replacing traditional products in aqua feed. Green Plains is now selling various aqua feeds for bluegill, tilapia, trout, and other species. We have always believed that this would occur, and this is only the beginning. Let me explain a little bit about our Optimal Aqua company and how it fits into the overall strategy. We long said that the world protein market is growing by 10 - 12 million tons per year, and one of the drivers is the need to provide feed, resulting in clean, healthy fish protein for human consumption, as it is a very efficient converter of feed to edible proteins.
Utilizing our high -protein ingredients in aqua feed produces a better overall feed product with improved nutrition and digestibility profiles, as it includes both the corn protein and the yeast from the process. It has all veg and positive fungal components. It possesses other positive qualities our aquaculture customers have discovered and replaces the negative dietary effects of soy along with the negative environmental connotations of soy, especially from Brazil as well. We have introduced real -world commercial feeds as well as continued with additional feeding trials of novel ingredients at our world-class aqua lab in Shenandoah. We are just scratching the surface on what this could become, and we'll have more announcements on this strategy forthcoming. To sum it all up, we continue to put strategic partnerships together with world-class companies along our total supply chain.
On the front end , we have our 10,000 farmer customers , for whom we are rolling out our customer-facing mobile apps this month for a more interactive relationship with them. We are using and developing AI, or artificial intelligence, to make our interaction more efficient and predictable, and we are seeing very good early results. We believe this will not only take our ability to buy it better, but we'll also be able to offer solutions to the U.S. farmer base so that we have to be able to sell it better. More to come on that initiative. To our high -quality alcohol business, where we are tailoring very specific qualities and logistics to our customers' needs and in return developing long-term sticky partnerships.
To our innovation platform with companies like Novozymes, where we are tailoring nutritional solutions for our aquaculture customers and pet food customers, and this is just getting started, which will increase the value of our high -protein products. To our technology partners like Fluid Quip, where we are rolling out a high -protein, high-quality production platform of new products that our industry never had before. To our Optimal Aqua business venture, where we are tailoring custom solutions to help bring more and more aquaculture production onshore. As I said, we already have game-changing solutions under development, and some are already in full -scale commercial trials with more starting soon and results forthcoming, but so far the outcomes are positive.
To our world-class aquaculture laboratory, where we are using our new high -protein feeds as a delivery mechanism for new and innovative products, all of which are located on our biorefinery site in Shenandoah, Iowa. All of these initiatives and many more are important as you make your decision whether to stay the course with Green Plains. Know this: our goal is, within a few years, to totally transform our platform where we intend to never be prisoners to government policy again and minimize the impact of an undisciplined industry on our shareholders and stakeholders. I'm proud of the Green Plains team for executing during the quarter, resulting in positive EBITDA. They have been focused on maintaining liquidity and a strong balance sheet and rapidly executing at every turn.
Lastly, I want to thank our employees, many of whom are listening in right now, as it's with your dedication to safety and quality every single day that makes everything else possible. Thanks for everybody joining the call today. Now I'll ask for the Q&A session to start.
Thank you. As a reminder, ladies and gentlemen, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please limit your questions to no more than two at this time. If you wish to ask additional questions, please rejoin the queue. Please stand by while we compile the Q&A roster. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Yes, thanks. Good morning, everyone.
Good morning, Adam.
Hi. I guess first, Todd, there's a tremendous amount of moving pieces between kind of market volatility and the internal initiatives you've had underway in the quarter. I guess I'm trying to parse through the ethanol crush margin that you achieved, and it was up about $0.18 a gallon year-on-year. Is there any way we can kind of dissect the drivers of that between the industrial hand sanitizer sales, Shenandoah ramping from the Hi-Pro Project 24, changes in market crush margins, and your internal hedging activities that seem to have been beneficial? I'm just trying to get my head around how to triangulate the performance between some of those different factors.
Well, as we're not going to break out all of that because of competition reasons, I would tell you that if we had none of that, we would have had negative double-digit EBITDA crush margins. From there, you can see that we achieved a positive $0.09 a gallon plus the uplift from cattle. You can assume that much of that came from all the initiatives that you talked about, but we really don't want to break out the uplift from some of those initiatives individually at this point, because the industry, I think at this point, is watching closely, and we don't want to give them a roadmap to success.
No, that's fair. I appreciate at least that limited color. As we think about kind of the balance of the year and we think about Shenandoah continuing to operate at full rate and Wood River launching mid- next year, help us think about kind of the premiums that you're starting just to realize on the Hi-Pro that you're producing and kind of what's the roadmap to getting that higher from both a protein kind of content perspective, which obviously adds value, but also the different addressable markets as you start getting those redundancies in place from a quality control and supply chain resiliency.
Yeah, that's a good question. Thank you. If you think about the baseline distillers' grains that we produce, which are worth somewhere in the $100 to maybe $120 range, and every $100 you achieve as a premium over that for this product that we're producing adds about $0.06 a gallon of margin to our production platform. As we indicated, we believe baseline, this margin, before other improvements, trades at a premium to high-protein soybean meal because right off the production line, first week that we are producing product, we are producing protein in the 51%, 52% range, as high as 53% mechanically, with no other technology added on top of that, which was really beyond our expectations.
The overall business thesis was made as a baseline high -protein soybean meal replacement. That added about $0.12 a gallon or a couple of hundred, a $200 a ton premium, to distillers grains. Because of the protein level and as we've talked about, the J-curve, where as the protein level increases, the margin increases faster, the margin improvement increases faster. As high -protein soybean meal is about 47% pro, and we're putting 51% pro out right away, as high as 53%, we're getting premiums above high -protein soybean meal as well. Our first initial sales we had in place gave us somewhere between a $0.14-$0.17 a gallon uplift depending on the customer, which basically was a $200-$300 premium over distillers grains or up to a $100 premium over high -protein soybean meal. We believe it'll just go up from there.
The addressable markets, and I will tell you that the value of the product doesn't, in our view, and this is a strange way to think about it, but the value of this product doesn't go down with more quantity. It actually goes up with more quantity. Now you can provide a consistent supply chain with redundancies to a bigger and larger addressable market. If you just go to some of the largest buyers of feed in the world, they won't even look at you until an industry can make 1,000 tons a day. That's 365,000 tons a year. If you think about today, there are three or four of these plants running. Once Wood River comes online and others that have bought this technology come online, we might start to be able to reach that to get to even bigger addressable markets.
Right now, what we're focused on is addressing the needs in pet food and aquaculture. I think it'll take us half of our platform before we even start to move into other markets other than maybe all veg specialty diets and poultry, which I think will pay a premium as well. Again, it's really just a matter of every $100 being worth about $0.06 a gallon. If you take distillers grains as your baseline and you decide what this product is worth as a replacement protein up that J-curve that I talked about, it's very easy to see the ability to add margin.
Lastly, when we have Wood River and Shenandoah running, that's about 200 million gallons at a baseline; we think $0.15-$0.20 a gallon, which is $30 million-$40 million of additional EBITDA over our whole platform just on those two plants. An investment between those two plants should be under $100 million for both of those plants. You could see it's less than a three-year payback.
That's a lot of great color. I really appreciate it. I'll pass it on. Thanks.
Thank you very much.
Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Your line is now open.
Hey, thanks. Good morning.
Good morning.
Really, to Adam's point, really solid consolidated crush margins. Congrats on that. It sounds like it's largely internally driven. I wanted to focus on the hand sanitizer business, less so in the quarter in and of itself, but in terms of how you are arranging your assets to be a more substantial player in this market going forward. I'm curious, when you think about making those commitments and converting some of your capacity to produce that product, how do you think about the demand for the product relative to what you supply in a world beyond COVID, where we've seen elevated demand? How variable is the revenue per gallon for this product that you sell?
First of all, we are not just selling our alcohol for hand sanitizer. I think that's a really important point. It's going into many things, from cleaners and disinfectants to hand sanitizers. The hand sanitizer revolution that we saw early was the initial driver of the euphoria around high-quality alcohols. What happened was the market got very confused, as you see the FDA recalling and putting out warnings. Other companies were thinking they made the grade, selling it, and then the quality and the smell and the wear were off the charts negative, and then they found their way back to York, Nebraska. The early euphoria, I would say, was mostly around sanitizers like that.
We made our way into that, and the reputation of York was that it was a replacement for bad odor and bad-quality products , so they came and got a higher -quality product from our company. Led us then into moving away from Ted and John's hand sanitizer company into more of the branded products companies, where they were needing long-term supply as their demand grew as the move to quality took place on these products, and less about euphoria and more about quality, which is what we announced earlier in our partnerships with GE Current, our partnership with Xerox, and our most recent announcement with our partnership with Lysol. That was a flight to quality, and I think that's lost on many who think they're just going to start up and access the market and get themselves injected into the supply chain.
There are many plants that started up with a USP or an FCC grade that will never make it through the QA/ QC of these organizations. That's the one thing that I think makes Green Plains very special and unique and differentiates us: our ability to get through global quality control and quality assurance processes with these companies. The demand, I think, is still variable, although we have seen a pickup more on the larger global companies and a slowdown on some of the startups. That demand is outweighing the slowdown that we have seen.
Again, at this point, it's the professionals that start to get involved, and they are coming to Green Plains, as you can see by our announcement this morning, because of our ability to manage quality and logistics, our ongoing ability to help with providing a product that is what it says and does what it says, and our ability to deliver on a timely basis and supply large quantities. I would say our view, and the view of our customers, is that this is not going away anytime soon, as evidenced by wanting to put together longer -term off -takes and contracts with our company because of the security of supply but also the quality of the product. Our view is this is easily through 2021, if not 2022. Any increase in COVID and/or other viruses that come will just make this an ongoing business.
Again, you see a lot of announcements of fast followers, and I don't really fully believe some of them know what they're getting themselves into and will have a customer to sell to, because it's becoming very professionalized very quickly with high -quality control. With that said, it's also becoming global in our view. We're starting to see global growth as well. Those markets coming up, typically we would have sold the export market at a much lower price than the domestic market historically; that export market is starting to have to pay up. We're finally starting to see movements in Asia, the EU, and a little bit in South America of those prices starting to reach as high as domestic prices. When this all started, obviously, it was like the Wild West; I would say it's starting to mature very quickly.
Our view is that the demand is elevated today, but it's going to remain elevated for at least 18 months, if not a year after that.
Very helpful. Todd, is the revenue per gallon variable or fixed in the contracts that you supply? Or give us a sense of what's embedded in it, whether it's volatility or line of sight to pricing.
Yeah, for us, what's more important is line of sight and putting together partnerships that work for both ourselves and our customers. I'd say we have taken business away from others because of our ability to commit to volumes and be fair with our customers and the people that we supply our product to and our partners, as they will extend contracts further out. More importantly to us than getting an elevated price in the spot market is actually locking in a margin for a longer period of time with a partner and helping them make sure they can lock in their needs at what I would say are reasonable terms, and we can lock in our margins at reasonable terms, and we work together on that instead of just trying to get the best price you can in the spot market.
We've always taken the view as a company that if we can lock in and become more predictable and know where 75 million gallons of very high-quality alcohol will have a home, we'd much rather have that than playing around and messing around in some of these spot, high-priced markets. Although we still have product for that as well, and we are still selling some of that, the long-term offtakes are much more important to us. They're definitely not at the same level as the nearby prices, but they are at levels that give our shareholders a very good baseline earnings at least, or baseline EBITDA , before everything else starts.
Okay. Very helpful. My second question is around Project 24. You guys have made really solid progress there to the point where it seems like you might need to start to rename the project to, I don't know, Project 22 or 20. Can you help us think about what the barriers or governors might be on getting your network below that $0.24 level from a cost perspective and just kind of quantifying or putting parameters around what we should be considering with respect to what that ultimate opportunity looks like?
I think you're on the right track when you think about where we're going to end up because of the results that we've seen with our partnership with ICM as well, who I was remiss not to mention in our other partnership discussion and who has really worked closely with us on driving the cost of our operations down. The results we saw in Wood River put Wood River into world-class facility and OPEX Mode, much like modern and best-in-class ICM plants. In fact, as we said, we're basically converting the biggest part of the plant to an ICM facility, and it's operating consistently like that. The Fairmont facility is starting up right now. We had a bit of a COVID outbreak there, but now that's under control, so we're back in startup mode. We should have that running sometime next week.
That's our second big Delta-T after we did two also smaller Delta-T 's. The big driver will be our eastern plants of Mount Vernon and Madison. Those are the Vogelbusch plants. We're going to do the same thing there. We have started to convert Mount Vernon as we speak. We should probably take that plant down in a couple of months for conversion. That'll be really the telltale sign of where we end up at the end of this program. I would agree with you; it will not be Project 24. It will be probably closer to Project 23 or Project 22. From there, I actually think there are next steps that we'll be able to take once we're at those levels to drive our cost structure down further, where we can get our whole platform down into probably that 22 type range.
I think what's really dramatic is what we've done, not at our large plants, for which we saw the path was there. If a plant like Superior, Iowa, or a plant like Fergus Falls, Minnesota, which traditionally was a high-cost, small Delta -T plant running in OPEX after the four basic commodities, and we've outlined that in the past, how that works, so we can do like -for-like comparisons because some have been skeptical of what OPEX is or said theirs is better, which we would disagree with. With that said, we've taken two small Delta -T, high-cost production facilities, and they have run as low as $0.22 and $0.23 a gallon OPEX, comparing favorably and better than many large ICM facilities because of what we were able to do with our technology upgrade.
That is just game -changing to a platform like us when we have various amounts of technology, which many said could never be reduced to a level that is the average best in the industry for a portfolio, which we believe. Lastly, in comparison, just one comparison point for you. A Delta -T 50-million-gallon plant traditionally ran at $0.32 to $0.35 a gallon in operating costs. Right now, our plants are below $0.24 a gallon or right at $0.24 a gallon on the small plants' operating costs. It's just a dramatic change in our ability to withstand margin volatility.
Okay, great. Thanks for that, and best of luck.
Thank you.
Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.
Good morning, everyone.
Morning.
Hey, I just want to get back to the FCC and the USP alcohol. Just curious, obviously, much more, as you said, after the early days, much more of an emphasis is put on a higher quality or meeting certain specifications by some of your partners. With that in mind, what are your thoughts about what your ultimate volume levels could be? We know 75 million gallons at York. I'm not sure if you've ever disclosed what your production level is at Wood River, but I would love to know kind of what you think this can be going forward for the overall platform.
No. York is about 50 million gallons. Wood River is 25. That's the two plants combined.
Okay.
Both will be upgraded to USP, and we are actually now engineering or now starting to design and think about going to VHQ, which is Very High Quality. Just continue to go. We don't want to stop. I think from our standpoint, we have to continue to differentiate ourselves. Because we have such a big starting advantage because York was already a beverage -grade facility and Wood River is getting massive columns, distillation columns from our Hopewell facility that we have in stock today that can transform that B-grade column , I'm sorry, York is getting the massive distillation columns, but Wood River, now being a B-grade facility, is going to get the same treatment as well. We could move so much faster, but as I said, we're not going to stop.
We probably won't become a beverage -grade seller of alcohol, but we want to get to the VHQ type specs, the very high-quality pharmacy grade. We want to continue to move because the USP moniker is not really the same with every single plant. We would warn and tell customers out there that buy products from this industry to make sure you know what you're buying, because USP is not USP at every facility. Make sure the odor meets the standard and make sure the quality meets the standard. While you might get the moniker, it might not give you what you're looking for; make sure you're very careful on that. I think we're going to probably stay around 75 million gallons. There are enough projects announced.
Let's see if there's any growth in the business as we move into specialty alcohols and VHQ -type alcohol, and we do have a strategy around that. We'll wait and see if we transform anything else. Right now, I think we're very good at the volumes that we're selling today. The market is active, but I wouldn't say it's deep without a lot of work.
Got it. Maybe just follow up on that. You just, in response to a previous question, talked about your preference to be under long-term contracts. Just wondering, are you able to or willing to disclose the contracts that, like the one this morning, you've got through the end of 2021 versus ones that have yet to come up for renewal? Just trying to get a sense of the contracts that reflect today's environment and going forward rather than ones that maybe were signed in 2019.
I can only comment that in the beginning of the COVID crisis, the market was in that $5-$10 a gallon range for some volumes because of the shortness of supply, and then it's come down from there. It's definitely a premium to fuel grade because it costs more to make. It's a much different supply chain, much different logistics, and much different cost structure. It's definitely not in that initial euphoric price range. Either way, when you take 75 million gallons and you multiply it by something better than fuel grade, and as I said, probably not over that low end of that euphoric range, it's still meaningful. It's just different customers will pay different amounts for different needs, whether it's long-term versus short-term, totes versus rail, or trucks versus gallons. You can go on and on and on.
In fact, we are starting up two packet lines at the end of the month that Green Plains owns. We have a partnership with a pharma -grade company, a pharma company in a clean room facility. We're starting up two packet lines to give a one -milliliter single -serving delivery mechanism for the market, and we're going to make packets not just for our own distribution but also for customers that will buy the one -milliliter and one-and-a-half-milliliter packet lines that we ordered from European manufacturers right at the beginning of this, as we saw the vision for the need for different delivery mechanisms. We've partnered with others that make one-gallon jugs that trade a lot higher because of the cost of production. It's really all over the place.
We're involved in all the different sizes and all the different delivery mechanisms. If somebody needs to move from totes to rail and rail to truck and truck to gallons, we can deliver all of that. That's what I think makes us very unique in our ability to service very high-end, high-quality customers better than anybody else today.
Okay. Very helpful. Thanks.
Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question. Kind of a high-level policy dynamic. We're obviously watching the stimulus conversation in Congress wrapping up here, presumably. What do you think the ethanol industry can realistically get from the next stimulus package in your mind?
Well, the difference between reality and hope is wide, right? While hope is not a strategy, it's sometimes all this industry has. The reality of it is we're probably not going to get very much, and everything else is wishful thinking. I think that if we get something, we're obviously not going to say no. I think it's a very hard ask, and it continues to try to get pushed out of the legislation, and our champions continue to try to keep it in; they believe this industry was damaged from many different policies and many different issues that took place. This EPA damaged this industry beyond reproach. The China trade war was damaging to us. I think that a little payback wouldn't be so bad, but I'm not sure that that's going to happen.
I say that the chance is low that we probably see much. Relative to what we've endured, more probably than any other industry impacted by China trade, EPA, and other policies, we are probably the most impacted. The industry that had the most impact negatively is the ethanol industry. I think that needs to be taken into consideration.
Okay. One other kind of policy dynamic, this one from the other side of the Atlantic. When we talk about exports, it's usually the Western Hemisphere and China in the conversation. We're seeing more and more headlines from Europe about the European Green Deal, the climate law, et cetera. Why is the U.S. industry not exporting billions of gallons to the world's largest fuel market?
Because exactly what the administration is fighting, which is breaking down tariffs, is exactly what has to happen. It's a very unfair system where we'll bring in Brazilian ethanol without a tariff, but they tariff us to go into Brazil. We'll bring in Chinese products without a tariff, but we pay a tariff to go into China. We'll bring in EU products without a tariff, but we pay a tariff to go into the EU. We continue to have unfair trade policy around ethanol everywhere in the world that we have to compete, not only to be cheaper but also to have to be cheaper when you take into consideration a tariff while our boats pass in the night, as our policy is flawed on many different fronts.
We've done a good job building up our exports of ethanol around the world to what is going to push probably two billion gallons. I would say because of COVID and because of the lack of movement, we're going to be significantly hampered, at least over the short term, to get ethanol out of the U.S. It's going to be driven not just by COVID but also by trade policies and tariffs. That's what I think; where we support this administration is in the fact that they are trying to break down these tariffs. What's crazy is that while we can't get our ethanol into China, they're stealing our corn at the lowest farm prices that we've seen in how many years?
I mean, this is an unbelievable grain robbery from China, stealing the corn out of the United States and stealing farm products from the U.S. farmer while not having to buy U.S. ethanol and putting a tariff on that while they come into our country and let COVID and this trade policy drive U.S. corn prices lower, and now they step in, and now they're going to buy. That, to me, is a complete, what I would say, mistake of our agricultural policy to let that happen, and I think we need to stop it.
Appreciate the color, guys. Thank you.
Thank you very much.
Thank you. Our next question comes from the line of Craig Irwin with Roth Capital Partners. Your line is now open.
Thank you. Todd, I would agree with you. Blatant ineptitude at the head of the EPA. My question is about Hi-Pro. Can you please update us on the collaboration with Novozymes, what you're working on, and what you expect within the next few quarters in incremental production available from the yeast strains that you're using and other potential enhancements to the product? The Norwegians obviously want soy out of salmon. They've taken some specific actions there already. Can you quantify for us what the size of the Norwegian aquaculture market is? Is it going to take many high -protein plants beyond what Green Plains can do to satisfy their demand?
With regard to what we're doing on moving up the price curve, it's not just a combination of just the level of protein, which has been done for Fluid Quip, which was doing that long before, and collaborating to move up the protein J-curve, long before anybody else even thought about it. We believe that won't be the biggest issue to do that. In fact, it's a combination not just of protein but, as you said, yeasts and other things that we're working on to really create a product. If you think about the J-curve that we've talked about, which is the higher the protein, it's not a linear price move on value. It's a J-price move, meaning the higher the protein you get, the actually multiple times higher the price.
When you think about that, if you flatten out that surface all around the J-curve, that's where we're going to operate, because it's not just about a higher protein; it's about nutritional solutions. That's where we believe the partnership with Novozymes is really what that takes us to. It's going into their libraries of other things that they do other than just moving protein higher, and partnering with them to provide solutions to our customers that are much more valuable than just the level of protein. What we wanted to do is get to a steady state in Shenandoah and run that way for a while before we start to bring these other nutritional solutions into the product quality, and that's probably going to start to begin shortly. Our partner is chomping at the bit and ready to go.
We believe that we have lots and lots of innovation to add in, and we're literally on the cusp of beginning these processes today. Again, it's not just about raising the level of protein, which Fluid Quip has been doing for many years through different technologies, both biological and mechanical. Then we'll just tap into that expertise on top of what the library of solutions that our great partner of Novozymes has. This partnership at Novozymes, a lot of things that we have seen around just some of our customer development in other areas are because of our partnerships that we're putting in place. They're definitely achieving other things other than just product development. We're excited about that. We're just kicking this off.
What that will allow us to do is once we start Wood River, facility number two, we will already know what we can immediately add to increase the value of this product. When we look at the world thinking about high -protein cornmeal as a delivery mechanism for aquaculture, right now, obviously, you see the fallout of soy is just beginning , not just negative nutritional characteristics but negative connotations around land use and other things that obviously we've dealt with a lot in ethanol, which we've proven to be incorrect. Today, we're still working on trying to figure out how to give Norway and other markets like that a non-GMO solution. We are considering taking one of our refineries to a non-GMO corn supply where we can make a non-GMO high -protein cornmeal right off the bat.
We think that we can do that as the next one; possibly we have chosen number three or number four, which would probably be a non-GMO solution and work with farmers to grow non-GMO corn, and we have time to do that. Today, we think in the Norwegian salmon market, if you just look at that in a vacuum, what the opportunity is; we think there's about two million tons of demand for feed there. A 20% inclusion rate would come from corn, high -protein cornmeal that we produce at a high -protein corn fermentation, and products that we produce. Just that market alone is a 400,000 -500,000 ton opportunity. That's just one single country. That's just to include this as a delivery mechanism of high protein. That doesn't include the nutritional characteristic that we can add on top of that.
That's just the salmon market. That's not inclusive of all the other aqua markets there are as well. I think we're working with customers around the world and partners around the world. More to come on that, more relationships that we're putting in place that I think will be very exciting for our shareholders.
Thank you. My second question: I guess I should start by saying congratulations on the $75 million debt financing. It really does give you a cleaner runway. Many of us thought you would probably monetize your cattle assets; sort of back -of-the-envelope math is you would get something similar to what you got for the other half, $75 million. Is there maybe an opportunity to do Hi-Pro faster on monetizing cattle or maybe a plant sale if that's still available to you? What would it take to do Hi-Pro faster? Is that potentially under consideration for the next couple of quarters?
Yeah, we're looking at accelerating and moving at warp speed if we can on Hi-Pro . We want to get it rolled out across all of our production facilities that we have, and we're working on a financial strategy to do that, inclusive of many of the things that we've mentioned in the past, some that you've mentioned on this call. The great thing about this announcement and the approval that we got and are now getting to a close, hopefully mid- to late August, with the lender, who we will announce at that time, is that it validates that this is a financeable asset. Now remember, what's interesting is this is not just bolting on a few pieces of equipment. It's a standalone high -protein production facility that gets fed a stream from the ethanol plant, but that's it. At that point, it's on its own.
It has its own dryers, its own production facility, its own load -out, and its own quality control. It's much higher in standard too, as we service pet and aqua markets. As you've seen, actually, you have seen it's its own standalone facility. Now as the lenders and as financing understand that we believe will kick off other project -level financing in different forms. Obviously, we have to wait and see what those are, as this was so important to get that first one, that first announcement, out to get the first $75 million at what I would say are very good terms for this type of investment. Which is even another validating point on how much our partner believes that this investment is financeable when we look at the terms that we announced.
We think this will lead to many other announcements, whether it's going to be through monetization of assets, through partnerships, or through project -level financings. I think you'll see more to come on that, but we want to move at warp speed.
Great. Congratulations again on surprisingly strong execution.
Thank you.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.
Hi. I guess two things. First, in the very near term, can you just confirm that the High Protein will be accretive in Q3? Or is there any offset or ramp time or lag in running it through the P&L?
If you think about Shenandoah, it's obviously going to be a contributor. As you run, we said Shenandoah has the capability of running about 40,000 tons a year, 40,000-45,000 tons a year. If you just take a $0.15 -a-gallon uplift on those 45,000 tons at an 80-million -gallon plant, it'll start to have a run rate of about $12 million of EBITDA a year, $10 million-$12 million of EBITDA a year. We'll start to see that contribution start to come in in Q3 as we've ramped up now to 100%. We do have some downtime just to upgrade some systems in this quarter as we learn some new things and we want to add new things to it. In general, you should start to see progress after some downtime this quarter.
Starting in Q4, you'll start to see that run rate of $0.15-$0.20 a gallon at 80 million gallons for 40,000 tons of production.
Great. How close are these units to the kind of theoretical yields? Should we expect a sort of multi-year optimization cycle once you're done installing the units?
Our models were all built on a little over three pounds per bushel of yield. That's going to be three pounds of protein for every bushel of corn. A bushel weighs about 56 pounds; you could see how much of the corn kernel was going to go into this protein. We believe short -term we'll be at three and a half pounds at most sites. It also depends on , obviously, location, protein, test weight, and all the other types of things. We're moving quickly, and we will move quickly to those three and a half pounds. At that point, it will also come down to the post -MSC distillers grain, the post-production distillers grains.
What we're seeing is the increase in quality of also the traditional distillers grains that we produced because it's a much cleaner product because we are now dividing out corn oil; we're dividing out some high protein. What we're leaving , though, is also a very clean post-production distillers grains product as well. In general, our view is it's a 3.5-pound per bushel yield and can go up from there. At that point, you've got to make sure it's a locational perspective. Some locations don't mind the lower protein remaining distillers' grains because it's a cleaner and better product. Some locations want to still maintain a minimum level of protein on the remaining distillers grains, which will prevent you from maximizing yield.
We believe the effective yield of the Fluid Quip system that we're putting in can go as high as GBP 5 per bushel, which, you can understand , would be a much bigger uplift to the margin structure. You just have to make sure that the remaining post-production traditional distillers' grains still maintain their value. Our goal is to continue to push yield with Fluid Quip.
There's been some discussion in the soy industry about using gene editing rather than GMOs to upgrade the protein content in the soy. Are you seeing the same discussions in corn? Could you have a non-GMO high -protein product that would be easier for you to convert?
Yeah. As you know, we have a strong commercial partnership with Syngenta on Enogen corn. In fact, we're one of the largest commercial partners they have on this type of product. That's why what was so important, as I announced , is we have 10,000 farmers that are coming onto our platform, and many of those farmers are in our Enogen program today. We've discussed with our partner what we're doing with the thought process around the corn kernel and what's important for them to think about as they come out with new genetics.
Interestingly enough, they're very excited as well, and they believe they can help us in the future by working with us on our needs for what needs to get edited into the corn kernel . Obviously, that'd be a GMO product, but it can move under CRISPR and the things that they have. They can move so fast to turn out a new product. Obviously, it still takes a couple of years to scale up seed, but the ability to edit into a corn kernel actually is easier, if I recall, than the ability to edit into a soybean today. What's great about our partnership with the seed company is that because of what we're doing in our platforms, they have an amazing farmer platform as well, a producer platform.
When we put those together, the knowledge base that we have, we believe, will be second to none as we innovate around changing characteristics in the corn kernel that match what we need to do in, say, our Fluid Quip process. Lastly, I think what we also have talked to them about is a non-GMO kernel that we can use to help provide solutions for our non-GMO feed customers around the world. We believe, and what we've seen so far, is they're making advancements on that as well, but we're obviously waiting to hear more about that. They know that those are things that are important to us. Being a very large commercial customer of theirs and a partner, we've been with them for many years.
We use Enogen corn across our platform, which has given us an uplift in yield and better viscosity through our plants. They run better on this product. The best part of it is that when the farmer customer grows Enogen, he has an Enogen field and he has a yellow corn field. We have them all on our platform. We're getting access to all of that product. Obviously it's a two-way street going back and forth, which we think is the value of the coming to an outward -facing app for Green Plains, giving them more solutions, much like you've seen in other farmer entities that are being formed.
When we could put 10,000 customers right onto our platform, it adds a lot of value to many companies, whether they're seed companies, chemical companies, or fertilizer companies. Those partnerships we think will be very valuable in the future.
I guess the other question is when you look at the bundled nutrient profile for , say, the aquaculture application . Are there ways to modify the corn protein to improve the miscibility of other nutrients or micronutrients or the process and stability of the final compound? Is there a layer of differentiation that you can do on the downstream treatment step? Is that something that is two or three steps down the value chain from you?
I think that's a step following exhausting our technology partnerships to increase nutritional value and profile in our feeds, both for aqua, pet, and other animals. I think that's really the importance, as I said, of the Novozymes relationship : that what we're working on is using all of their libraries and technologies. It's not just about protein; it's all about the characteristics of what's in our feed. That's, I think, what makes our situation unique between what we call the hardware and the software. The hardware is the Fluid Quip system, and the software is all the other partnerships we're putting in place that we can deliver. I think the corn kernel will be part of that at some point. In terms of nutritional characteristics, I think we're really focused on the quote-unquote software relationships we have today and the software relationships we're developing today.
We haven't even scratched the surface on those before we even get back into breeding them back into the corn kernels.
Great. Thank you.
Thank you very much.
Thank you. Our next question comes from the line of Kenneth Zaslow with Bank of Montreal. Your line is now open.
I guess right now we'd say good afternoon.
Hi.
I'll actually just limit it to one question. If I were to assume your margins were break -even two years ago, then I would assume they're break -even today, and I assume they'll be break-even in two years. What do you think the difference in your profitability would be on those three different levels of metrics?
Well, a breakeven two years ago was at $0.32 a gallon OPEX. A break -even today is approaching a $0.24 a gallon OPEX. You would say that's a $0.10-$0.12 uplift. A break even two years from now, and this is just OPEX alone, would be Probably, let's shoot for $0.22. You're a $0.12-$0.14 a gallon uplift two years from now, better than four years from now. Two years from now, better than two years ago. Now, two years from now, let's say we have four to five—let's say 400 million gallons to 500 million gallons of Hi-Pro running at, let's use, $0.20 a gallon two years from now. That's going to add 100 million gallons, or $100 million, because I'm using round numbers to make it faster for you, $100 million over 1.1 billion gallons.
Now you're two years from now from OpEx; you're going to get a $0.12-$0.14 uplift, plus you're going to get another $0.11 a gallon uplift from just half the platform converted to Hi-Pro, not inclusive of nutritional uplifts and other things that we're working on. If you fast-forward two years from there, you're going to be $0.12-$0.14 a gallon on OpEx, and you're going to be a minimum of $0.11 a gallon on Hi-Pro at the first cut of margin at 50 % I would say by then, we should be realizing another potential. No, I'm sorry. At that point, you are now $0.20 a gallon up. Four years from now when everything's built, you'll have $0.20 a gallon uplift over the whole platform because that's the baseline.
Now you're $0.32-$0.34 a gallon higher than two years ago, and that's not inclusive of any other nutritional quality uplifts or protein J-curve uplift. It's a pretty dramatic shift from two years ago at $0.32 a gallon OpEx with nothing else going to today with a $0.24 a gallon OpEx uplift to two years from now with a $0.12-$0.14 a gallon uplift from OpEx at $0.22, $0.11 for half the Hi-Pro, to four years from now to $0.12-$0.14 a gallon OpEx, to $0.20 minimum across the whole platform, which is $0.32-$0.34.
Then from there, potentially it's $0.10-$0.20 a gallon at certain levels, at certain plants that have nutritional characteristics built in, and that's not even inclusive of the USP business that we built, which we're not going to break out. That's fine. That's getting you just to crazy levels. That's the path that we're on. That's why we're so focused on it.
Let me just rephrase this. Two years ago, if there were industry break-even margins, you'd probably be at a break-even margin. Today, if there was a break-even, you'd probably be about a $0.08-$0.10 margin. In two years from now, if there's a break-even margin in the industry, you'd be about $0.22-$0.24. Is that what I'm hearing? Does that make sense?
Inclusive of half the platform delivering on high protein, but not adding any uplift from our USP program. Yes, that is correct.
Okay. Thank you.
You got it exactly right.
Thank you.
Thank you. Our last question comes from the line of David Driscoll with DD Research. Your line is now open.
Great. Thank you. Thanks for taking my questions. I appreciate it. I know what time it is. Here we go. On the utilization for the plants, Project 24, Todd, I think you've said in the past that you expect at the conclusion of Project 24 that your plants will be in the top 20% most efficient plants in the industry. If that's correct, then is it also correct to think that Green Plains should fairly consistently be running at 100% utilization once Project 24 is done?
Yes, because when Project 24 is done as we're embarking on protein across the whole system, our plants need to run every single day. We are going to be at a max run rate at all times. The things that impacted it weren't just a decision to slow down last quarter because of the market. We had Madison down for permitting. We had Fairmont down for finishing up. We had, I have to think, Hereford down for market reasons. We had Atkinson down for market reasons, and we had other ups and downs above that. It wasn't just a market-driven reduction because we did take some plants down for a Project 24 upgrade.
Yes, you are correct to assume that as we push down into that $0.22 a gallon range OpEx and try to get lower, we are going to try and get lower. It's meant to be in place so that we can run high protein every single day. I would say, and we've made it very clear. You should not add on unless you can do that with your plan, because you have got to be running every day, because if you don't deliver to your pet food customer and they run out of product, you will never get that customer back again, and they will probably never buy from this industry again.
Makes sense. On the $75 million in financing, first off, congratulations on that. Very exciting to hear about your Wood River announcement. I think you said Wood River was a $50 million expenditure for that high protein. That would give you $25 million left over. It seems like you have the cash on hand to add another $25 million to get you to $50 million to announce a third plant, but you haven't made that announcement. I was just curious: what is needed to make that next announcement for Hi-Pro number three? Is it engineering or customer interest? Is it the money? Just what's on your mind on that?
No, we basically said we're deciding where number three is; we're rank -ordering our platform. You have to assume that number three will get announced shortly when we make our decision. You can assume that the additional $25 million will get used for that. Whether we monetize assets, whether we borrow more at project-level financing, or any and all of the above, you should assume that number three is coming very quickly. Now it just depends. It depends on the site. If the site doesn't have a dryer, it's going to be more. If the site has a dryer, it'll be around that level. If it's a smaller site, it'd be lower than that level.
We're going to make the best decision, but you should assume that that $25 million is already spent on site number three, and we're just back -solving for the rest of it. It's absolutely a forthcoming announcement. The depth of demand is there. We have our off-take that we announced a few years ago, which is ready to take at least our first two or three or four plants. That doesn't include any of our aquaculture initiatives as well.
If I could sneak in one last one, and I really appreciate those comments, Todd. One last one: Just ethanol inventories certainly look very tight to me. Ethanol prices only look okay. I'm curious what your thought process is on these ethanol prices: are they enough to encourage idled capacity to come back on the market? For me, it's a bit odd. Ethanol inventories look so tight. I'm surprised that maybe ethanol prices aren't better. Just love to hear your thoughts on what's happening.
Well, the ability for ethanol to scale up very fast and have inventories go up very fast is well known. I think when you look at it, we've gone to 950 production. I think we'll learn more about that where we're at this week. We've actually scaled too fast as an industry above demand. Without a big export program, I think the market is not going to give any credit to this industry for being disciplined and is not going to reward them at all in the forward curve, which is why I made those comments about government policy and getting away from undisciplined economics. Where we're at today is, while we are certainly around 20 million barrels, still adequate because of the size of the export program.
While we're at 950,000 barrels a day of production, which is too high relative to demand, and the market knows it. The market also knows the inability of this industry to maintain discipline and knows that we will make too much, too fast, and build inventory way faster than anybody can think, like we did earlier in the year. That's why we will not see anything beyond a spot margin in times of tightness. We do need to have a rebuild of this export program at this point. We're very predictable as an industry.
Thanks for the comments.
Thanks.
Thank you. This does conclude today's question and answer session. I would now like to turn the call back to Todd Becker for closing remarks.
Thanks, everybody, for coming on. I won't take any more time. It was a long call today. We covered a lot of things. We're making big moves as a company. Obviously, we're in transformation mode. We are still subject to volatility in our big business in ethanol. You will see this company dramatically change, and we hope you stick with us. Thanks for being on the call today, and we'll talk to you soon. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.