Gevo - Earnings Call - Q1 2020
May 12, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Gevo Incorporated First Quarter twenty twenty Earnings Conference Call. At this time, participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your host today, Mr.
Jeffrey Williams. Sir, please begin.
Speaker 1
Good afternoon, everyone, and thank you for joining Gevo's first quarter twenty twenty earnings conference call. I would like to start by introducing today's participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer and Carolyn Romero, Gevo's Vice President and Controller. Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com.
I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public. A replay of today's call will be available on Gevo's website. On the call today and on this webcast, you will hear discussions of certain non GAAP financial measures. Non GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today, which is posted on our website.
We will also make certain forward looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo's operating activities for the remainder of 2020 and beyond. These forward looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10 ks for the year ended December 3139, which was filed with the SEC and in subsequent and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10 Q. Investors are cautioned not to place undue reliance on any such forward looking statements. Such forward looking statements speak only as of today's date and Gevo disclaims any obligation to update information contained in these forward looking statements, whether as a result of new information, future events or otherwise. On today's call, Pat will begin with a discussion of business developments.
Carolyn will then review Gevo's financial results for the first quarter of twenty twenty. Following the presentation, we will open up the call for questions. I'll now turn the call over to Pat.
Speaker 2
Thanks, Jeff. In the first quarter, we engaged Citigroup Global Markets to assist us in exploring project financing for our planned plant build outs. Citi will be working with us on both project equity and debt for these build outs. We envision that we're going to need 60,000,000 to 70,000,000 gallons per year of capacity in 2024. That's way more than the 17,000,000 gallons per year we currently have under contract.
The project economics look attractive. We all believe that oil pricing is expected to come back to reasonable prices by the time the build outs are online and value for low fossil carbon products are expected to increase. It is with this background that our customers continue to negotiate additional offtake agreements, even in spite of the recent crazy oil market and COVID. I hope to get these contracts for renewable gasoline and jet fuel done soon. That would help us in the project financing.
We see the opportunity for building out three projects. One, of course, is to expand the Luverne plant to make renewable premium gasoline and renewable jet fuel. We currently believe that we will need two additional plant production sites. The discussions to secure those sites are already underway. Now COVID-nineteen has provided for an interesting and challenging backdrop for everyone.
As previously announced, we shut down ethanol production at Luverne in the first quarter. Initially, we suspended ethanol production operations as we've done in the past, simply because the margins were too low. But this time, we ultimately shut down the ethanol production for the foreseeable future due to the impacts of COVID. In particular, we did this considering that A, ethanol prices are too low B, ethanol margins for our plant would have been very negative C, and this is really important, we don't have a line of sight to a strong ethanol turnaround. D, ethanol isn't strategic for us.
And importantly, we can conserve cash by doing so. Unfortunately though, to conserve cash, we had to lay off members of our team. The plant in Silsbee, Texas continues to make renewable premium gasoline or renewable jet fuel and we continue to sell products. That demand hasn't slowed down. It's been encouraging to see that even in the midst of COVID, we actually have new inquiries to buy our jet fuel.
It's clear that customers are looking beyond COVID. It's also encouraging to note that carbon value has held through COVID and there's a lot of talk from governments to push for cleaner fuel products as everyone gets back to work and the economies come back. I think that with the air clearing around the world, because of the reduction of burning of fossil fuel, it's easier for people to understand the potential products like ours delivers, low greenhouse gas emissions and low emissions for the pollutants that cause air pollution. We are busy working with our advisors to raise the money that we're going to need. Clearly, we're going to need to refinance White Box again.
We are also working on the project financing with Citigroup. And as we do these things, we also need to work on financing for Gevo at the corporate level. Many people have pointed out that as we work on these financings for the projects, additional doors for strategic options for Gevo Inc. Could open, especially given the attractiveness of our build out projects. It seems that we hit a lot of key points with what ESG investors talk about.
We need to continue to catalyze these things. Now I will turn it over to Carolyn, who will take us through the financials. Carolyn?
Speaker 3
Thank you, Pat. Gevo reported revenue in the 2020 of $3,800,000 as compared to $6,400,000 in the same period in 2019. During the first quarter of twenty twenty, hydrocarbon revenue was $100,000 compared with $700,000 in the same period in 2019. Hydrocarbon sales decreased because of lower production volumes at the Southampton Resources Inc. Facility in Silsbee, Texas.
During the first quarter of twenty twenty, revenue derived at the Luverne facility from ethanol sales and related products was $3,700,000 compared with $5,700,000 during the same period in 2019. As a result of unfavorable commodity environment during the three months ended 03/31/2020, compared with the same period of 2019, we reduced our production of ethanol and distillers grain, which resulted in lower sales for the period. Cost of goods sold was $8,100,000 in the 2020 versus $9,000,000 in the same period in 2019. Cost of goods sold included approximately $6,500,000 associated with the production of ethanol, isobutanol and related products and approximately $1,600,000 in depreciation expense. Gross loss was $4,300,000 for the 2020 versus $2,600,000 for the first quarter of twenty nineteen.
Research and development expense decreased by $400,000 during the 2020 compared with the same period in 2019 due primarily to a decrease in personnel and consulting expenses. Selling, general and administrative expense increased by $700,000 during the first quarter twenty twenty compared with the same period in 2019 due primarily to an increase in personnel consulting, partially offset by decreases in professional fees. We incurred 300,000 of restructuring expenses related to the termination of the total 30 employees and renegotiating contracts in March 2020. Within total operating expenses for the first quarter of twenty twenty, we've reported approximately $200,000 for noncash stock based compensation. For the first quarter of twenty twenty, we reported a loss from operations of $8,000,000 compared to $5,600,000 for the same period in 2019.
In the first quarter of twenty twenty, cash EBITDA loss, a non GAAP measure that is calculated by adding back depreciation and noncash stock based compensation to GAAP loss from operations, was $6,200,000 compared with $3,800,000 in the same quarter of 2019. Interest expense for the 2020 was $500,000 a slight decrease compared to the same period in 2019. We incurred $700,000 of legal and professional fees related to the modification of the 2020 notes during first quarter of twenty twenty. For the first quarter of twenty twenty, we reported a net loss of $9,300,000 or a loss of $0.64 per share based on weighted average shares outstanding of 14,472,798. This compares to a loss of $6,100,000 in the 2019 or a loss of $0.60 per share.
In the first quarter of twenty twenty, Gevo recognized a net noncash loss totaling $100,000 due to changes in fair value of certain of our financial instruments such as warrants and embedded derivatives. Adding back these non cash losses resulted in a non GAAP adjusted net loss of $8,500,000 in the 2020 or a non GAAP adjusted net loss per share of $0.59 This compares to a non GAAP adjusted net loss of $6,400,000 in the first quarter twenty nineteen or a non GAAP adjusted net loss per share of $0.63 Now I'll turn it back over to Pat to wrap things up. Pat?
Speaker 2
Thanks, Carolyn. Let's open up the call for questions. Operator?
Speaker 0
You. Our first question or comment comes from the line of Amit Dayal from H. C. Wainwright. Your line is open.
Speaker 4
You. Good afternoon, everyone. Pat, so with respect to Luverne, I mean, what would it take in terms of changes in the market for you guys to consider sort of restarting production over there? Or should we expect this to be out of commission for the rest of the year?
Speaker 2
I think for the rest of this year, it will be out of commission based on what we see for demand for gasoline and then how out of balance ethanol was in the first place. So next year, there's a possibility we'd run it, but we'd have to see a turnaround across the industry in total. The it's a substantial amount of savings that we make by having a reduced staff up there. The plant is we still have staff up there. It's just reduced.
And so the margins have to overcome all that and be profitable. As the wind power is up and running, that's useful. We have our biogas projects moving forward. And so we'd want to see those things online and operational in order to drive the carbon score down. So that makes more margin.
So that would probably be the latter half of next year if we did it. But by then, we should be well into the build outs as well, the maybe even starting construction, the big the plant expansion. So we'll just have to see how it unfolds.
Speaker 4
So with some of the sort of layoffs, I guess, with respect to that facility, what will operating costs sort of look like over the next few quarters for you guys?
Speaker 2
Operating costs for the Luverne plant or how tell me what are thinking about in terms of a model that you're talking about or in terms of
Speaker 5
At the corporate level,
Speaker 4
including the cost cutting measures you've taken, that set of Or operating costs?
Speaker 2
We should be zeroing in on $1,000,000 a month or less. Okay.
Speaker 4
Understood. And this $2,700,000 in inventories that showing in the balance sheet, what does it comprise?
Speaker 2
Hey, Lynn, are you on the line?
Speaker 1
Yes. I didn't fully hear the question.
Speaker 4
Yes. Was asking about the $2,700,000 in the inventory in the balance sheet. I was just wondering what it comprises of?
Speaker 1
Those inventories are mostly corn based inventories with we work with FCStone for corn purchases.
Speaker 3
Just to clarify for you, it'll be in our footnote number five, but $1,500,000 of that is related to spare parts.
Speaker 4
Understood. And then maybe lastly on any progress towards securing the project financing for the two additional plants you're looking at?
Speaker 2
Not in terms of something I can't point to or announce and say, Here it is, it's done, but we're making progress. In terms of the models are in really good shape. The reason that this is interesting for people is that the projected levered pretax IRRs are 20% to 25%. The amount of capital that we're talking about is quite large, upwards of $700,000,000 across the expansion of Luverne plus two additional plant sites. We have already under our belt 600,000,000 of contracts under take or pay.
Those are closed, and that's across the life of the contract. We have another 1,000,000,000 point dollars of take or pay contracts that we're negotiating. And what's been surprising for me is that folks have still been plugging along negotiating even with the craziness in the oil. These people who are people who play in oil, they're continuing to negotiate with us and try to get these contracts done. So they almost everybody that we talk to has a view that this oil devaluation is temporary.
It'll come back, especially as oil is cheap and gasoline becomes cheap, people will drive more. And so it's oddly enough, it's been slightly people just kept after it even in the face of all of this. So when you take those projects, you add them up, you have a 20%, 25 levered pretax IRR projection. That's pretty darn interesting for people. And so the models are good.
We're beginning the outreach and city feels pretty good about it. So that makes me feel good about it.
Speaker 4
Understood. And with respect to regulations, you touched on it a little bit. I mean, there been anything brought into place specifically with respect to jet fuels and as part of all this bailout, etcetera, that's in discussion with respect to airlines right now?
Speaker 2
There's been talk, but I haven't seen anything concrete that's going to stick. There's been talk. So the people are talking about bringing the airline industry back and having it be green. There was a language put in two of the bills so far that got taken back out by the Senate, but that would have funded projects that build cleaner, greener jet fuel. It's possible it's something that get back in there.
We see some interest from some of the Senate offices, some of the House players. They definitely are interested. In Europe, it's there. It's been more of a doubling down. People are saying it comes back, it's going to come back green.
And that's we're hearing out of our European partner customers is they're going to make it put more requirements in. So that's good. California has been something to watch. You should everybody should take a look and see how carbon values are trading. They've actually gone up.
That's fascinating considering the underlying fuels demand has gone down. So that bodes well. And as we've talked in the past, many other states are working to adopt a California like system and that work continues. So I think the airline industry, because some of them are down to just, what, 5% or 10% capacity or something, it's going take a little while for them to recover. One of the important things when you look at Gevo, everyone should understand this, is that we're doing premium renewable gasoline.
That's our isooctane. It's premium renewable gasoline. It's a premium product that works exceptionally well on hydrocarbon, and that's actually in a greater demand than is the jet fuel. And so we're not a one trick pony, thank God.
Speaker 0
Got it.
Speaker 4
That's all I have, Pat. I will get back in queue. Thank you.
Speaker 0
Yes. Thank you. Our next question or comment comes from the line of Poe Fratt from NOBLE Capital Markets. Your line is open.
Speaker 5
Good afternoon, Pat. If you could just clarify your $1,000,000 a month of expenses, where is that can you are we looking at SG and A and R and D as a total of $3,000,000 per quarter roughly? Or sort of where are we going to see that hit on the income statement, if you don't Yes.
Speaker 2
Yes, that's right. It would be SG and R and D.
Speaker 5
Okay. And then you're going to be running the hydrocarbon plant down in Texas. That will change your cost of goods sold structure. What will happen to your will you continue to depreciate the Luverne plant? Or will that essentially become a held for investment or something like that?
Speaker 2
Well, first on the yes, we never did shut down the hydrocarbon plant down in Silsbee. We've continued to run that. We plan on continuing to run it, so nothing changes on that front. So we have isobutanol. We'll continue to run and make premium renewable gasoline, ship it to Europe, and we'll make jet fuel.
And I think we might even turn up with some new customers for jet fuel. As far as how we're treating the plant at Luverne in terms of depreciation, Carolyn, you want to answer that question?
Speaker 3
Yes. Since it is still operational, we intend to use it going forward. It is continuing to be depreciated.
Speaker 5
Great. And Pat, does this change your sort of shutting down the near term, the operation down at or putting a follow at Luverne, does that change your biogas strategy at all? Or are those or are you going to continue to move forward on the biogas strategy?
Speaker 2
We're continuing to move forward in the biogas strategy. We've actually signed exclusive deal so far with someone we haven't announced yet, who is looking at putting up the money to build the plant, and then we are taking a developer role. And so we get paid back out of that. It's possible, depending upon how things unfold and how people view it, that we may want to roll those into one of the bigger projects. I don't know that the timing will work for that.
But what I can say is that we have a serious counterparty that we're working with during their diligence phase. They and the way that this deal would work is I get the gas that I need for the Luverne plant, but they take on all that capital burden.
Speaker 5
Okay, great. And then when you talk about starting up, I think the wind power generation started up about We'll ten days see that as far as any value potentially there accruing in your equity investment in Joule Power. Is that correct? Or will there be
Speaker 2
any Yes, that's right. No, I don't expect cash. We have renewable energy credits to trade, and we work with JUUL on that. And but we'll do it for the benefit of the project because we invested, what, dollars 1,000,000 point out of the 9 point something million to get them built. And so that's where it would accrue is on that side.
Speaker 5
Okay, great. And then when I look at it, the impact on your cash burn, it should it looks like you might be able to get the cash burn down to into the $4,000,000 quarter per quarter range. Pat, is that a roughly or 4,000,000 to $5,000,000 Is that I a reasonable
Speaker 2
think it should be to the lower side of that.
Speaker 5
Okay. So you probably won't have any CapEx too. So and then
Speaker 2
We don't. Yes, we're done. Yes, we've done this most of the spending that we had planned to do for this year, we already did. So yes, we should be pretty low. So yes, that's right.
Speaker 5
And then when you look at I think since the last call, framing is a little more aggressive on the total size of the capital commitment or the capital projects. And it sounds like you may have added a third plant? Or did you break the second plant that you expected into sort of two parts to get some geographic diversity? Or can you help us understand how the development plan has maybe changed a little bit since the last call?
Speaker 2
Yes, sure. So we previously disclosed that we had about 70,000,000 gallons. We expected that we expect to have about 70,000,000 gallons under contract. And of course, when we talk about those contracts, those are take or pay contracts. They collectively add up over a couple of billion dollars of revenue across the life of the contract.
So we're feeling pretty good about where those are. Now we were looking at the size of plants we need and how to think about it, and we're looking at doing the capital optimization work. And this has come out of some of the work that we've done with Citi and optimizations of capital and trying to improve returns. So there's a size at Luverne that makes a lot of sense, call it 10 to 12,000,000 gallons of hydrocarbons. We've already installed much of the capital on the isobutanol side for that.
So if we stay within that kind of a boundary, that is already sunk capital. It's gone. We've already been using it. It works. We'd have to add a hydrocarbon plant.
That saves some money and improves the returns. And then we looked at it said, well, okay, well, look, now we got to cover the next 55,000,000 to 60,000,000 gallons. Where do we do that? How do we do it? And where can we get probably the best deals?
Because we're going to have to work with existing ethanol plants. And so many of them are shut down now. So we started looking at that, and it is generally true that the bigger the plant in the ethanol business, the better and more economical it is generally. And so we're like, what we should do is we should look at some of these medium sized plants, 50,000,000 gallon ethanol plants. And that would be about right for 30,000,000 gallons of hydrocarbons.
And so we found some very interesting opportunities there with so we're in the diligence phase with several parties looking at their sites in detail. And of course, we care about is the production costs, the infrastructure, how it fits in sustainability footprint. We're keen on having the renewable energy source headed for the net zero carbon emissions mentality. That's what we're out for. But we're finding some pretty good candidates, and that's why we're doing it that way.
Speaker 5
Great. And when you look at it, Pat, how your next sort of trigger, if you will, or gating factor, Is it dependent is your plan contingent on signing a significant or I guess how many additional gallons do you need to commit before you fully before the $700,000,000 CapEx plan is fully committed? Are we 75% there? Or sort of a I guess I'm trying to figure out what sort of the gating factor is as you move forward through this process.
Speaker 2
Yes. So I think it'll come you should think of it in stages. So I don't think we'll do we'll get through those three plants. They would be slightly staggered. We wouldn't do them exactly at the same time, but close.
And with Luverne, we already have more gallons than we can produce. So I already have part of the capacity of the second plant filled up. I think that as we do the next set of contracts, that will exceed the capacity of the second plant. It will be end of the third. And then as we do that final deal with one of the customers that would fill out that last plant, and it would be that kind of a sequence.
All those things are events for the next few months in terms of getting the contracts in place. And then in parallel, we're working it. One of the interesting things when you're doing project financing is that the people who do financing for the projects, they get to see the things under confidentiality, so they know who the counterparties are and can have conversation with them already. So it's a little bit different game than if we're trying to do this public company stuff. It's a different game because they're private separate companies that we're talking about, right, setting up as a project off balance sheet.
Speaker 5
Okay, great. And then you ran through you need to refinance the white box debt. Then you need to do the project financing. And then you thirdly mentioned the potential for opportunities at the corporate level. Can you expand on that as far as is it a part of your potential development role?
Or could you just expand on your comment as far as the corporate opportunities?
Speaker 2
Yes. So the role that we play as a developer and licensor is that we when you do development, you have to do the engineering and preliminary work and show people what it is, pin it down, get the what's called the FEL3 engineering done, stuff like that. And we'll have to raise money to go do that at some point. Now what's interesting is it kind of goes hand in hand with the projects too. So it's all a question of timing of things and how they unfold.
So we'll have to raise some money to do that because everyone can look at our balance sheet and go, well, gosh, are you going to make it till the end of the year? Well, yes, it looks we can do that. So it's a but we got what we can do about white box, okay? We've got to refinance white box. Can you bring any money in without doing dilution?
Well, that's a question. We're going to try. What happens if can you raise can you how can you raise money in a tap into equity markets? We're working on it. We're sorting that part out, too.
How do you do it in a way that makes the most sense? Well, we're working on that, too. How do you do it in a way that creates the most value overall? That's what we're working on. So all those things are part of the overall discussions.
We continue to work with Wainwright. We continue to work with Citi. Everyone's working well together. And it's going to be interesting to see how we piece it together because it's all about timing.
Speaker 5
Great. Thank you so much.
Speaker 2
You bet.
Speaker 0
Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Gruber for any closing remarks.
Speaker 2
Well, thank you all. It's been an interesting time with the COVID. I hate that we've had to shut down the ethanol part. The ethanol margins are so bad that it's the right thing to do. It does save us money.
Well, I like the fact that our projects are turning out very good in terms of what they have the potential to return based upon the pricing that we have in those. And that's even in light of all the world changes that we see regarding the oil industry. So we feel pretty good about that. And there aren't that many projects like ours, especially not that touch gasoline as well as jet fuel. So thank you all for joining us today on this call.
Have a great evening.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.
