Gevo - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Gevo Incorporated Q4 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one, one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Dr. Eric Frey, Vice President of Finance and Strategy. You may go ahead.

Eric Frey (VP of Finance & Strategy)

Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. I'm also responsible for investor relations here at Gevo. Thanks for joining us to discuss Gevo's fourth quarter and year-end results for the period ended December 31, 2023. I'd like to start by introducing today's participants from the company. With us today are Dr. Patrick Gruber, Gevo's Chief Executive Officer, and Lynn Smull, Gevo's Chief Financial Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.gevo.com. Please be advised that our remarks today, including answers to your questions, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those statements include projections about the timing, development, engineering, financing, and construction of our sustainable aviation fuel projects, our recently executed agreements, our renewable natural gas project, and other activities described in our filings with the Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligation to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information on this call. The relevant definitions and GAAP reconciliations may be found in our earnings release, which can be found on our website at www.gevo.com in the Investor Relations section. Following the prepared remarks, we'll open the call for questions. I'd like to remind everyone that this conference call is open to the media, and we are providing a simultaneous webcast to the public. A replay will be available via the company's investor relations page at www.gevo.com.

I'd like to turn the call over now to the CEO of Gevo, Dr. Patrick Gruber. Pat?

Patrick Gruber (CEO)

Thanks, Eric. Good afternoon, everyone, and thanks for joining us on our call. We are filing our Form 10-K today, and we ask that you refer to it for more detailed information after this call. We entered the fourth quarter with about $376 million in cash, cash equivalents, and restricted cash on our balance sheet. The total that Gevo expects to have to spend to achieve FID for our Net-Zero 1 project is $236 million-$286 million, excluding certain internal cost allocations, of which only $125 million-$175 million of cash is left to spend to get that project complete to FID. So it's a downhill slope to get there.

I'd like to thank the U.S. Department of Energy Loan Programs Office for the thorough and diligent work that their team is doing to help us secure a loan guarantee as part of this construction financing. Now, we are quite excited about Net-Zero 1. In fact, even more excited. In the third and fourth quarter of last year, we had McKinsey in here working with us to challenge our assumptions, competitive position, competitive economics, and such. The results of their work with us reaffirmed that the NZ1 plant design would be expected to deliver the lowest cost of carbon abatement compared to other SAF technologies, including HEFA, other ATJ routes, and especially direct air capture routes.

The reason the NZ1 design is expected to win economically is because of the mass reduction in the use of natural gas, the efficiency of the use of resources, creative integration technology, optimization of unit operations and overall efficiency, and selectivity in getting to high yields of SAF or other valuable products that we want to make. More effective carbon abatement means that less carbon value has to be recovered in the marketplace to make economic returns. Think of it as more carbon reduction per gallon. That means more carbon abatement per gallon, more bang for the buck, if you will. All of this should result in a competitively priced product for customers and less burden on consumers and taxpayers. It's a good result. It reaffirms and makes it more clear why what we are doing matters.

We are laser-focused on delivering EPC contracts, a set of customer contracts with terms that work for the DOE loan guarantee, and a DOE project loan lockdown so that we can begin construction, which we estimate would take 24 months. We have still work to do in front of us. We're making progress on the DOE and all the rest of it. In addition to the equity that we have built in the Net-Zero 1 project, through that money that we've already spent developing, we have also generated know-how and patents that we filed on a reusable asset, that is the plant designs. This is critical because to enable the promise of SAF, you need an industrial process that works at large scale that dramatically reduces the fossil energy footprint. Well, that's what we've achieved, we believe. This doesn't require inventing new technologies.

It requires engineering, systems integration, and know-how. The knowledge, technology, intellectual property we have gained through the work on NZ1, I expect would benefit way beyond NZ1. Why? Because there's 190 operating ethanol plants in the U.S., more than that, actually. We expect that there will be lots of opportunity to leverage our knowledge, know-how, capability, technology to produce higher value, low-carbon ethanol, and SAF over time. So the market dynamics are strong. Dynamics are strongly in our favor to reuse and repeat the knowledge-based assets we've built up in development of our NZ1 business model. That's something that's an important aspect. We are a knowledge business as well, and we've learned a heck of a lot on how to abate carbon.

We have been pleased to see the progress on 40B in the future 45Z and the federal support for carbon abatement in the IRA bill. The Interagency Working Group and the U.S. Department of the Treasury have indicated an updated GREET model will be used to quantify carbon reduction, and that carbon sequestration would count, as well as certain agricultural practices. The theme is you have to do the work, though, to actually have real measurements, to get it audited and then report it. So you don't get it. It's not a giveaway. You got to do some work for it. Well, that's good. That plays to our Verity business. More on that later.

We strongly believe that field-level measurement and tracking of agricultural practices needs to be part of the GREET protocol because we believe that it is at that level that the strongest data for carbon abatement can be brought forth. We believe that getting the policy guidelines right is important since this, this will be a precedent for the long run. Paul Bloom was with Secretary of Agriculture Vilsack and EPA Administrator Regan when they announced last week that it will take a few weeks longer for the next generation of that guidance to come out, but they are keen on making sure that it's going to work in the long run, and we think that's a good outcome. So we look forward to seeing the result.

We also continue to see strong support for carbon abatement in states, with New Mexico becoming the fourth state to sign into law a clean fuel standard just this week. This is a success for the second-largest oil and gas producing state in the country, as well as other states interested in creating similar programs. We congratulate New Mexico on this milestone and look forward to working with other states to develop similar programs. Now I'll switch gears and make a few comments about RNG and Verity. Last year, we expanded our dairy manure RNG capacity from about 350,000 to 400,000 million BTUs per year. I am pleased that we have generated positive standalone non-GAAP cash EBITDA from those assets for two consecutive quarters now. Last quarter, our production was at 91% of capacity.

This year, we estimate that the non-GAAP cash EBITDA from our RNG business could add up to about $12 million-$16 million on an annualized basis, assuming we get the LCFS pathway approved with the score of -350. Those papers are filed, we're just waiting for the result. There is a lot of embedded upside potential with this asset. We estimate that the number could be as high as $50 million-$60 million per year from this 400,000 million BTU plant if LCFS prices recover to where they were a couple of years ago, and including the biogas production tax credit in 2025-2027. Of course, there can be no guarantee that the LCFS prices in California will recover to that level, but even a fraction of that would be meaningful to us.

I like this a lot. There's a lot of upside potential that's just embedded in it. I'm glad we have the asset. Last year, in our third quarter, our Verity tracking platform went live with farmers in South Dakota and Minnesota. We tracked ethanol plant customers totaling approximately 2% of the U.S. ethanol industry by volume, and of course, we're the world's largest ethanol market. Our initial target market for Verity in the U.S. is estimated to be about $1.5 billion-$3 billion, reducing and tracking the reduction of carbon intensity through the value chain for a bushel of corn to a seed in a vehicle or aircraft. Verity is a capital-light, fee-based software as a service business, so it's a nice complement to NZ1, Net-Zero 1, which is more capital-intensive.

Providing customers and regulators with an audit trail so that they know what they are getting in terms of carbon abatement when they're paying, and they're paying for that carbon abatement, is a necessary and valuable component to everything we do at Gevo as a carbon abatement company. Now, I'll pass it off to Lynn to talk through the operations and numbers.

Lynn Smull (CFO)

Thanks, Pat. Gevo's Q4 combined revenue and interest income was $9.4 million, with the interest income benefiting from higher interest rates. Our corporate spend, that is G&A, was $25.5 million for the year in 2023, excluding non-cash stock-based compensation of $17.1 million, which is $2.5 million increase from a 2022 number. Debt related to our RNG project was $68 million, consisting of $68.2 million of face value, less unamortized premium and issuance cost of $0.2 million. As Pat mentioned, we ended the fourth quarter of 2023 with a strong liquidity position of $375.6 million in cash, restricted cash, and other liquid investment. The restricted cash portion is associated with our RNG bonds and certain collateral related to the development of Net-Zero 1, and totals $77.2 million.

During the fourth quarter of 2023, we invested and capitalized $13.5 million in cash in capital projects comprised of $1.8 million into Net-Zero 1, $0.3 million into the expansion of our RNG project, $7.4 million into other Net-Zero projects, and $4 million for our fractionation and hydrocarbon skid. We also advanced $1.1 million of reimbursable expenditures to our partner developer for the purchase of wind and hydrogen equipment to support Net-Zero 1. On Net-Zero 1, the DOE and its suite of independent experts are working with us in due diligence and loan guarantee structuring.

Once the debt component is pinned down with a formal term sheet, we'll formally ramp up the third-party equity capital raise and work towards the close of funding necessary to finance the project construction budget and all the project finance elements, such as interest during construction, various reserves, and transaction costs. Equity investors are standing by for a clear line of sight to the debt terms, which is underway and will be announced when the DOE term sheet is agreed. During Q4 2023, our dairy RNG assets in Northwest Iowa sold 90,666 MMBtu of RNG. Revenue of $4.4 million for the quarter included RNG sales of $0.2 million and $4.2 million net proceeds from the sales of environmental benefits. Between RNG and Verity growth, we continue to close in on positive cash flow for the company.

As Pat mentioned, we see a lot of embedded growth in RNG just by continuing to operate that asset. We also look forward to announcing the first revenues at Verity this year, which is a capital-light, fee-based business. Now I'll turn the call back to Pat.

Patrick Gruber (CEO)

Thanks, Lynn. Let me wrap up our prepared remarks by saying we believe Gevo is undervalued, given our balance sheet and growth potential. We plan to address that first through execution and second, by getting our message out. I hope everyone will take a look at the corporate investor presentation on our website, which lays out the enormous upside potential that we see and why now is such an exciting and pivotal time. Let's open it up for questions.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Amit Dayal with H.C. Wainwright.

Amit Dayal (Managing Director and Senior Technology Analyst)

Hi, everyone. Good afternoon. Thank you for taking my questions.

Patrick Gruber (CEO)

Yeah.

Amit Dayal (Managing Director and Senior Technology Analyst)

Pat, just to clarify on the $125-$175, you know, to be spent on NZ1, is that for 2024, that spend coming into play, or is that going to be over, you know, the next few years as you build everything out?

Patrick Gruber (CEO)

No, that's to get to FID from where we stand today.

Amit Dayal (Managing Director and Senior Technology Analyst)

Okay.

Patrick Gruber (CEO)

So it's a budget that'll be measured out over time. If FID is in 2024, that's what it will—It'll be, it could be... It's going to be—That's the money it takes to get to FID.

Amit Dayal (Managing Director and Senior Technology Analyst)

Okay.

Patrick Gruber (CEO)

It's not a timing thing.

Amit Dayal (Managing Director and Senior Technology Analyst)

Thank you.

Patrick Gruber (CEO)

It's what we have to spend to get to FID.

Amit Dayal (Managing Director and Senior Technology Analyst)

Just to follow up on that, some of this you will get back, I guess, right, as you are spending up front?

Patrick Gruber (CEO)

Yeah.

Amit Dayal (Managing Director and Senior Technology Analyst)

Okay.

Patrick Gruber (CEO)

Yep.

Amit Dayal (Managing Director and Senior Technology Analyst)

Do you know what the-

Patrick Gruber (CEO)

Yeah, yeah.

Amit Dayal (Managing Director and Senior Technology Analyst)

Amount is potentially that you?

Patrick Gruber (CEO)

Yeah. So it is, I think it adds up to be like $235 million-$236 million or something like that, and all of that would be reimbursable upon FID, at which time we'll probably reinvest it into the project to take a big chunk of the equity of the project. Or, you know, it may be that we have better opportunities, which I can't see right now, but that could happen out in the future. So it's a reimbursable in its full amount.

Amit Dayal (Managing Director and Senior Technology Analyst)

Understood. And then in parallel to that, I think in the January update, you said you may be spending some funds on future NZ projects. Is that still on the table as well?

Patrick Gruber (CEO)

We are, but and we're doing. It's a low level of spending, but one of the things that we're seeing is that a lot of the customers want to know how to get to way beyond 65 Mgal. And so it's about developing some other sites and making sure that we have good ones locked down. We aren't announcing where they are. It's just that that's not to our benefit because there's so much work of development work that needs to be done. But we have spent some, so we're doing it in moderation. But yep, it's for locking down additional sites.

Amit Dayal (Managing Director and Senior Technology Analyst)

Okay, thank you. Just last one from me. You know, with respect to Verity, it looks like it's starting to get into the hands of customers, et cetera, and you are leveraging blockchain, you know, for this.

Patrick Gruber (CEO)

Yep.

Amit Dayal (Managing Director and Senior Technology Analyst)

Any scope of, you know, bringing AI-related offerings or, you know, capabilities for this? Is there a need for that type of feature in this or use for this in the Verity offering?

Patrick Gruber (CEO)

There is. So what's fascinating about Verity is that we're a little bit different than all the other companies out there, and we're doing it end-to-end. So think of it as, you know, carbon capture at a farm, all the way through to the seat of an airplane or a seat of a car, and how you map everything straight through that, measuring the sustainability and carbon scores, hitting all the regulatory marks that are required for reporting and all of that. It's all of it integrated. And what's interesting about it, as the database builds, I think there'll be opportunities for AI, particularly with farmers, so that they can see how to improve their fields. We've already seen improvements from farmers, and they're excited by it.

And there's—I think we even posted a video on our website talking about it, but it's pretty darn interesting where they can see differences of field to field using the tool that we developed. And that's pretty interesting because that allows them to plan differently for the next year and reduce their CI score. We fully believe that agricultural benefits will be part of the Argonne GREET model as it gets enshrined into the 45Z in public policy. There's a question of how it'll be done, but it's all related to climate smart ag. And, Secretary Vilsack and the rest of the team in the administration seems to be pretty committed to make sure that those improvements are measured and reported and get credit where it's due. So that's an exciting thing.

Of course, that is something that's a pure upside. Our NZ1 needs good corn, but it's also, remember, we're getting our low CI scores from wind power, from how we've done reduction of natural gas and of course, the CCS pipeline we anticipate.

Amit Dayal (Managing Director and Senior Technology Analyst)

Understood, Pat. Thank you. That's all I have. I'll step back in queue.

Operator (participant)

Our next question will come from the line of Shawn Severson with Water Tower Research.

Shawn Severson (CEO and Co-Founder)

Great. Thank you. Good afternoon. Hey, Pat, I was wondering, can you address or any real or perceived political risk, I guess, to the economics of NZ1? I mean, is there anything that, you know, we need to be watching for as far as plant economics and any changes in the political environment?

Patrick Gruber (CEO)

Well, you know, that's what the carbon value is political, right? So, you know, just as to get real grounded, our cash cost reduction is, right now it pencils out to be something around $3.80 a gallon. That's very competitive cash cost basis. But we need another $3.80 to pay for all the capital or something. It's something like that, okay? What we need then is carbon value from the marketplace that covers that cost. Well, it looks like there's more than enough carbon value to cover that cost. That's what creates the opportunity. And that comes from a combination of the RINs, the state-level programs like in Illinois or, or in Oregon, or now New Mexico, or in California, or we expect one in Minnesota, et cetera. That adds value.

Then there's the 45Z potential as well at the federal level. Then there's something else called Scope 3s. We know that Scope 3s are being sold in dollar per metric ton, and substantial in some cases, but you got to be able to prove, in fact, that you really got a carbon reduction for your money. So when you add all of that up, it looks like there's a lot of headroom here for something to give way along over time on carbon value. In terms of the sentiments that we're seeing around 45Z, it's. We're hearing the sentiment of extend it. It makes sense. However, I think having the ability to prove that taxpayers got something for their money is crucial. That's why we're so keen on Verity. That seems to play on both sides of the aisle so far.

I think we're in a good spot overall. It looks like there's more than enough carbon value in the marketplace to accommodate variations of things that might change to some degree, and then it looks like it's headed in the right direction. That's my take.

Shawn Severson (CEO and Co-Founder)

Thanks for that. That was helpful. My next question is, I understand you were at a SAF conference last week, I believe, in London. What's the takeaway from the user environment? And I don't know if it's more on the investment side there, on the user side, but just, you know, what are you hearing in the SAF markets? I mean, obviously, you guys have already had several great offtake agreements, but what's the latest in the demand picture and what some of the, you know, the key points are from the potential consumers?

Patrick Gruber (CEO)

Well, I think that the airlines know that they have to do something, and so it's a question of how do they do it, whether they do it, and what are the, what are the real terms, and that is what are the real terms contracts that lead to financeable debt deals? That's gonna be the critical issue that has to get resolved. And we're working through partners on the customer side and the DOE on that issue, and everybody's cooperative. I think that everybody recognizes that we've run into. They've all seen this McKinsey work. They've seen the competitive analysis. We're very transparent about this stuff, and they see that, the ATJ is the most cost-competitive route to make SAF and to do carbon abatement. And an important point is this: I keep saying carbon abatement.

What this is, is about the actual cost to reduce the carbon, right? And so we're at about $450 per ton or so, is what we would pencil out to be today. And, you know, the next best alternative HEFA, how it would be about $600-$700 a ton. Power-to-liquids, which everyone is so enamored with, it seems, for capturing CO2 and making liquids, that might be, you know, $1,100-$1,500 a ton. So we're a fraction of the cost of some of those technologies. That data is sinking into people. And so ATJ is a fundamentally long-run competitive product and technology. So it's about sorting that out. So at that SAF conference, a lot of discussion was about the various technologies and the cost of carbon abatement, what's real and what isn't.

And, and then there is a question of financiers, where they say, Well, they hear so much noise about all these different technologies. It's confusing for them. They have no idea because everyone says, "Well, I have the new answer, and it's the greatest thing, and it'll be free," and things like that. "Hi, we can use 3 lbs of hydrogen to make a gallon of jet fuel," like you would with power liquids. "Oh, and it'll be free." You know, it's stuff like that. And, you know, and so it doesn't. It isn't, that isn't real. So I think the reality of things are setting in for people. And of course, we come along and we're like: Hey, this is the real deal. Let's go. So we've got good partners. They're being cooperative.

Shawn Severson (CEO and Co-Founder)

Thanks. My last question, I want to follow up a little bit on what Amit had asked, and that was about the expenditures. I think when you start to peel back the layers, the company is in a substantially, you know, very strong financial position and balance sheet. But I wanted to walk through, and I think you did a little of this in the new deck, which was very helpful. But walk through kind of what's operating expenses in, you know, in the plan for 2024, and what is, let's say, spend that could be done, you know, pushed out or timing dependent. So it's a long way of asking, what do you really have to spend in 2024 and your flexibility in spending cash?

Patrick Gruber (CEO)

Because the main mission of Gevo is to get the NZ1 operating, the number that I threw out there of that range in the beginning is the chunk of the money, the bulk of the money that we're going to spend. If we strip everything away and say money that's not recoverable someday, so not project money, then I think we're left with maybe $12 million-$15 million or so of basic burn, or what most companies would call basic burn. Now, we have a bunch of activities. We have a big-- we're spending a lot of effort and resources, people, on government affairs and all the things we made to make NZ1 successful and profitable, the engineering, and we're developing some other sites. And so when we bundle that all together, it's in that range that we're talking about already.

And we'll moderate the spend throughout the year, depending upon how fast the DOE goes or how fast all the pieces and parts come together, or if there's some kind of a turmoil in the marketplace or whatever. So it isn't like it's, you know, we're just saying, shoot the whole lot and it's all gone. We do careful moderation along the way. So it's, that's a long way of saying that, when you get us down to the really basics, if you just looked at our management, plus R&D, plus accounting and stuff like that, it's a pretty small number.

Shawn Severson (CEO and Co-Founder)

Thanks. That was very helpful. Thanks, Pat.

Operator (participant)

Our next question will come from the line of Kumar Raju with BBG. Kumar, your line is now open.

Patrick Gruber (CEO)

Kumar, are you there? Okay, let's move on.

Operator (participant)

I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Gruber for closing remarks.

Patrick Gruber (CEO)

Thank you all for joining the call today, and I appreciate you listening in. Thank you for the questions, too. I'm glad to clarify some of these, to clarify some of these things that have been confusing. I feel pretty good about where we are, and I like what I see on the Argonne GREET. I'm thankful that they're taking a serious approach at getting it right. That's good for all of us. In terms of the 45Z, and one comment on that, just to be clear, the rule that was going to come out is a 40B rule, right? That's, that expires at the end of 2024. What we expect to see is going to be talking about, here's the key components that are going to be included in 45Z as guidance.

So I expect that people will be a little bit confused about that. 45Z is the thing that actually matters. So whatever they say about 40B serves as some reference and precedent. So I expect them, the two things, to be different. Whatever they say about 40B and how they implement that, I expect that it will be different than 45Z, but I expect them to give guidance to what 45Z will be. With that, thank you all. Thanks for following us and, being part of Gevo. Bye-bye.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.