Gevo, Inc.

Q1 2023 Earnings Conference Call


spk03: that applies broadly to tracking environmental attributes for any supply chain. As we develop this business, we expect to add more customers and partners. We will continue to inform you all and eventually put forth revenue projections. Final note, the VCS business model is a capitalized business model. VCS is developing software, tools, and providing business system advice, engineering, sustainability consultant services, and creating the carbon insets. Ultimately, we'd expect that the carbon insets can be monetized one way or another, and that we'd share in that value with our customers and our partners. Before I turn to the staff projects, I want to make very clear an important point. We are primarily project developers, licensors, and business developers. We may indeed invest equity into projects, but our cost of capital is expensive. and we will be prudent with our cash. We expect to secure third-party debt investment for our net zero projects. We also expect to secure third-party equity. We expect to make money through development, fees, licenses, and what commonly is called a carry in the project. A carry means that we expect to receive an equity interest in the project without necessarily making a cash investment per se. The SAF and hydrocarbon markets are so big, We want to enable as many projects as possible and make money while we're doing it. In addition to playing the role of enabler and project developer, we expect that for certain projects, we can provide operation, maintenance, engineering, and even training services or other support as necessary. Now, turning to our net zero SAF projects, specifically NZ1, since our last call, there have been several things that have impacted our thinking. First, interest rates are high and expected to go higher. After discussions with potential equity investors, we believe that the right approach is to secure financing using the DOE loan. This is expected to be the lowest cost source of debt and require the least amount of equity. However, this would delay the timeframe for financial close, pushing financial close into 2024 based on current expectations and assumptions. The DOE has a lengthy and time-consuming process that must be followed. A 2024 close would mean the earliest possible plant startup for NZ1 would be in 2026. In any event, the schedule and timing of NZ1 will be driven by our ability to obtain third-party financing, both debt and equity. What does this mean for GEVO? This means that recovery of our development costs and fees for NZ1 will be delayed until the financial close of NZ1 expected in 2024. As a result of this delay, we are reducing our spend of capital for NZ1 to better align with the timing of the DOE loans. Said differently, we're being prudent and careful with our cash given the timing of the DOE loan and the volatile macroeconomic conditions in the world today. Another issue that we're watching closely is the rulemaking regarding Section 45Z for SAF in the Inflation Reduction Act, or IRA law. What is weird is that Section 45Z refers to Corsia, which it just turns out isn't even a method of counting carbon. CORSEA is a policy framework, not a scientific method to measure carbon intensity. We note that according to ICAO's website, they're the sponsors of CORSEA. CORSEA, quote, moves away from the patchwork of national and regional regulatory initiatives and offers a harmonized way of reducing emissions from international aviation while respecting special circumstances and respective capabilities of ICAO member states. Having CORSEA cited in this bill for counting carbon It doesn't make practical sense. It isn't a method of counting carbon. However, applied correctly as a framework and taking into account modern U.S. data and the gold standard for counting carbon, that is the argon-grit model, I could see how it could work. Contrast this to the sections of 45Z regarding transportation fuel that are specifically called out to use the argon-grit model. So something strange is going on in the SAF section that needs to be resolved through rulemaking. I know it is, of course, the government, so I do expect some sausage making. It will eventually come clear the world needs SAF, and the world really does need to use these excess carbohydrates to make it happen. But enough of that. So to be really clear, for SAF, we do not have a traditional build, own, operate business model. We are pursuing a capital-like project developer role that is projected to give an attractive return on our investments. such as in the P66 ADM deal. The idea that GEVO puts up all the money or is obligated to put up the billions of dollars needed to build the plants is wrong, wrong paradigm. We expect to play the role of market developer, project developer, technology developer, licensor, and all the while managing our cash wisely. When we bring projects to financial close, we would expect to recover our project development costs and keep that carry interest in the project. Capital light mob. Now, we may choose to invest in particular projects along the way too, but it'll depend upon our view at the time of what's the best use of cash in our balance sheet. What generates the greatest potential for GEVO? In this difficult economic environment, we are glad that we have a very strong balance sheet. We expect to have multiple routes to generate cash for this balance sheet going forth. These routes are expected to include R&G business, priority business solutions, our project development businesses, licensing, and eventually our retained interest or equity in the projects that we develop. We're just beginning. Now I'll pass it off to Lynn to talk through the operations and numbers.
spk00: Thanks, Pat. To start off, we have moved our R&G business into normal operations, and I'm pleased to report that we have revenue that exceeds expectations for the quarter on R&G. Given consistent uptime and strong RIN generation driven in part by a catch-up of RINs received for production in the fourth quarter of 2022, our revenue from operations was $4 million. We received some LCFS revenue in Q1, and we'll continue that going forward based on a default temporary CI score of negative 150 until we receive the final pathway approval from CARB expected early next year, which should improve to something like negative 350. We're off to a great start in Iowa, and I expect continued improvement as our capacity and expansion from 355,000 MMBTU to 400,000 MMBTU is implemented later in the year. We ended the first quarter of 2023 with a strong liquidity position of 453 million in cash, restricted cash, and other liquid investments. Restricted cash totaled 77.8 million and is associated with the Northwest Iowa RNG bonds and certain collateral related to the development of net zero one. Long-term debt outstanding of 67 million is related to the Northwest Iowa RNG project. Our corporate span, that is SG&A, was approximately 6.2 million for the quarter, net of non-cash stock-based compensation of 4.6 million. During the first quarter of 2023, we invested and capitalized $11.4 million cash in capital projects comprised of $8 million into Net01, $1.5 million into the Northwest Iowa RNG project, and $2 million into other projects. We intend to finance the majority of construction capital at the NZ1 subsidiary level with project finance debt and third-party equity. We have strong interest from several potential equity investors based on the amount of due diligence they are doing, although the macro issues Pat talked about are on everyone's minds. We do, however, expect to secure one or more investors, and we are working through the due diligence process with a number of premier infra funds. It's also worth mentioning that while the DOE loan is the primary track to secure the debt, we are running a second commercial debt track as we want to keep our options open. I'll turn the call back over to Pat.
spk03: Thanks, Lynn. Let's open it up for questions.
spk06: Thank you. If you'd like to ask a question, please press star 11 on your telephone. And we also ask that you wait for your name to be pronounced before you ask your question. One moment while we compile the Q&A roster. I have the first question that is coming from Dashlant Alani of Jefferies. Your line is open.
spk04: Hi, team. How are you? Thank you for taking my questions. My first one was just on the PSX ADM agreement. I just wanted to quickly touch on what are the next steps in that, and when can we expect to kind of, you know, see that cash flow come in? Just any kind of more color or thoughts around that.
spk03: What I think is We're going to have the details of how and when people get paid. They're confidential and won't be disclosed yet. ADM and P66 have got to go do their thing. We do expect payments to begin as early as late 2023. They'd last approximately five to seven years. But if we don't make milestones and stuff happens, then, you know, it's so it's not a guaranteed income. They got to go deploy, build plants, get on with it.
spk04: Understood. Understood. Okay. And then on, similarly for the, on my second question was just on the LG agreement. To what extent, or maybe if you can share all, what's the magnitude of the direct payments that you can receive from LG?
spk03: Yeah, it's several millions of dollars as direct payments over the next few years. And then once, you know, as it moves forward, then it would come from licensing or even potential participation and we contemplate a joint venture with them but it's too early to say what that might look like but the opportunity could be really significant and so what's interesting is that refer to algae's press release and how they talk about excited they said quote bio-based plastic production in 2022 marked 4.5 million tons with expected compound annual growth rate of 14 up until 2027 and we think that bio polypropylene can be used in eco-friendly raw material for various plastic products and it's expected to play a pivotal role in the rapid growth of the bioplastics market, unquote.
spk04: Understood. That's helpful.
spk03: Thank you, guys. I'll turn it over.
spk06: Thank you. One moment for the next question.
spk03: Oh, hey, just a second before we go on to the next question. I just got word here that we got $187 million of private activity bonds approved. I just got that. I thought I was hoping to have it just before the call started, but we just got the word of it. So that's good. The state of South Dakota is stepping up and doing their part to help us get the private activity bonds done. That's great. And that'll help us as we put together the overall financing package. Cool. Go ahead.
spk06: Okay. The next question, it will be coming from Derek Woodfield of CFO, please wait for your name to be announced again.
spk02: Thanks, and good afternoon, all. Regarding NZ1, I completely understand your decision to pursue the DOE loan. Based on your prepared remarks on licensing, are you suggesting that you will sell down nearly all of your equity ownership in NZ1? And if so, does that or any timing of first production impacts in any way impact your supply contracts that you have as offtake?
spk03: Well, let me address that latter one first. We announced last week that we just couldn't come to agreement with Tropica about what to do, how to do it, so we parted ways. They had a reservation on the capacity of net zero one, so this gives us a little more breathing room. The airlines want to pick it up and pick up the pace, and so we have an opportunity to work with the airlines and bring them in. and solve some of their problems. So that's all good because we have, you know, everybody knows we have a whole lot of off-take agreements in place. So that part's all good. I think. And it'll be interesting to see who we fill the plant up, who wants that volume, et cetera. There'll be a bit of a discussion, negotiation along that. We recognize that airlines really got to have their stuff. So I think I feel pretty good about it straight away. And then your second question was what? Remind me.
spk01: Sure.
spk02: Just on your prepared remarks on licensing, are you suggesting that you're going to sell down your equity ownership almost entirely in NZ1?
spk03: I don't know what for sure we'll do right now. It depends. We think that there's opportunities for many plants. And so what we're doing is we're doing really a lot of work to modularize these ETJ plants based on 100 million gallons of ethanol input to make 65 million gallons hydrocarbon output. We're getting it pinned down so we can put them anywhere. And the idea would be to instead of field building these plants, you know, stick built, you build them in modules at a factory and then be able to deliver those plants. We've got enough interest in enough plants. It looks like we want to do multiples at once. Everybody's always wondering about how we're going to afford all this stuff. Well, the way you afford it is to make a turnkey project that's ready to execute straight away. We think that's a better return on our money. However, we still may invest. It depends on how much cash we have in the balance sheet. I'm not a big fan of raising money up here at Jivo Inc. level. I'm just not. We can do project financing, and it's ripe for it. We should use it.
spk02: And as my follow-up, perhaps building on your comment on modularization, if we were to think about NZ1 and your modularization approach, what could the install cost be if you were to pursue a brown filled plant with an existing ethanol plant as a partner?
spk03: Probably in the, these are swag ranges. So depending upon what infrastructure they have on their site and for instance, they have railway and tanks or something that can be repurposed or something like that, you know, maybe that'll be on the cheaper side, maybe 400 million of capital. And if they have to build in something else new, that's maybe $500 million of capital. And so we're actively looking at several brownfield sites in discussions. We like some of these sites we see. So when we first chose the NED01 site, that was several years ago. And it's a great site. Don't get me wrong. But you know what? Incremental returns look like they're going to be better from certain brownfield sites. And what's happened in the ethanol industry is some of these people woke up a few years ago and started really paying attention to how to decarbonize their ethanol. So they've been doing the work of, you know, decarbonizing ethanol. And so we bring along the integration packages, the knowledge of how to put it all together, the accident stuff, the fentanyl process, and put it together. And these can be pretty darn interesting. And it'd take a lot less of a capital bite from us. And I like that approach. So that's something we're all over.
spk02: And Pat, just to build on to that last part of the comment, When you think about the modularization approach that you guys are perfecting, as you think about scaling that up to, let's say, an NZ2, which would be 3x, are you seeing some capital efficiencies now with this modularization approach that you guys could articulate?
spk03: Well, what's interesting about it is we are doing that designing and finishing that design for a 3x size. And, you know, one option actually is to do three of these plants. That is one option. That is a possibility. And we're evaluating it. Now, what's different about that, the 300 million gallon design, is that we're spending the time to learn how to do it from nuclear power. In other words, buying – so it's nuclear electricity, so it's an electric plant, and it makes a massive reduction in carbon. Well, that's interesting to the marketplace at large. Well, we don't have – that's still a big capital bite, right, even with efficiencies at that scale. And we don't have the capital ourselves to do that. So that's done more in the eye of big strategic partners. As far as, you know, so you get the idea of what we're doing is two sides of plants. I think this idea of, remember that any ATJ plant, if you're using grid electricity, any ATJ plant, I don't care whose it is, and it's got 100 million gallons of ethanol coming in and, you know, a high yield of product coming out, it's going to be, that's going to cost, I don't know, 20 to 25 CI points on grid electricity, grid gas. And, you know, we don't want that increase. So this is what we're doing is figuring out how to wipe that out and get it down to net zero.
spk02: Terrific. Thanks for your time and comments. Sure.
spk06: Thank you. One moment while we prepare for the next question. And again, please wait for your name to be called before you proceed with your question. And our question will come from Brian Kuzma of Tomas Capital. Your line is open.
spk01: Hey, good afternoon, Pat. Hi, Brian. Can you talk a little bit more about some of the specific benefits of waiting to get the DOE funding before you kind of move forward with the NZ1 capital deployment?
spk03: Yeah. So we don't have to go blazing speed. We've already, and of course the world's changing around long lead equipment too. I don't expect to spend much of anything on long lead equipment between now and then. So that's good. I don't have to put any more, I don't have to put money out. We have to do engineering work and spend some money on that. And that feels pretty good. It gives us time to get the financing in order, make sure that we've got everything clarified, that we can do the best deal. It's driven by the DOE schedule, and there's just no way that they can get it. That would be the time frame. We've got to go along with their path. Everybody views that as a really low interest rate, and it helps with the overall financing. When we're out talking to people in Wall Street, and in strategics too, actually, they all are like, we think we should try to get that. Why don't we try to get that? Why wouldn't you want to do that? We do want to do it. And so before, we were beholden to the trough, so it was a consequence. But now we don't. We're basically going, no, we want to make sure we're spending our money wisely, and we're going to keep our cash and our balance sheet. My God, we have $450 million here. I'm going to keep it here and use it for development and deploy it when I have to deploy it to move the ball ahead. We don't have to go whole hog. The world has changed, so we don't have to. We've got interest. And this example of the ADMP66, you can see how we think. We're like, well, dang, those guys got billions. I don't have to spend money and I can get paid. I like it.
spk01: Yeah, so at the end of the day, you end up keeping more of NZ1 post-DOE than you would if you just raised a bunch of money to try to do it now.
spk03: That's right. Yeah, that's true. And we have more optionality around it to make that decision of how we do it. Because in parallel, remember we're doing the modularized ATJ plant. That ATJ plant design could be anywhere. We could put it anywhere. In other words, NZ1, cool. That exact ETJ part of the plant, same design, could be plopped down at other sites. So we're getting a twofer, a threefer here in what we're doing.
spk01: Well, I guess that's what kind of has me interested, that when you look at what you guys can do and what you can control, you have over $400 million of cash. That's plenty of capital to do lots of different parts of ATJ across the value spectrum. I have to imagine those rates of returns are better than in Z1 at the end of the day, given what's happened in the financing market over the last 12 months.
spk03: Yeah, I'd say that the brownfield sites generally, if it's the right sites, and we have particular sites that we like, where those are incrementally better returns. than NZ1, but the NZ1s are still real good. But yeah, you're right. There's ones that we could envision could be better. And so the game here for us is to spend our money and make sure we got this modularization right so that we can crank out multiple plants at once. For us, the way we think of it is, and this is the basic reality, is throwing money at NZ1 for speed, just to drive it, is like, man, You know, that's crazy. We wouldn't do that. Why would you do that? We got to have the financing. The critical issue is about getting the financings in place and getting it done rationally and getting it built. We've got a huge balance sheet for a developer like us, and we get to have a carry. You know, a carry is a meaningful portion of the plant. We can invest over that if we want. So it's a little bit different mentality game to play, how to think about it, how to set it up so we can get licensing. And so we see it's just a different world than what we thought.
spk01: And you guys have so much capital, and you're going to the capital light model. It seems like you have all of these options on your table. I mean, taken to the extreme, if you guys went completely capital light, you could pay out a $1.50 dividend right now and still have enough cash and capital to go the extreme capital light model. I'm not suggesting that you guys do that, but it seems like if you took it to the extreme, that's where you would end up.
spk03: It could be. It depends upon how much money we want to make on investments and all the rest. There's always the unknown unknowns. It's not lost on us.
spk01: Yeah. Can you comment at all on where things stand on the Chevron LOI right now?
spk03: You know, the Chevron thing, people ask me, are we still working with them? And the answer is, yep, we are still working with them. And I can't say something specifically, although I think folks ought to scan the press and see what's been done by them lately. That'd be a useful thing to do. And I will point out that we are the only ones in the world who make large quantities of iso-octane and gasoline.
spk01: Got it. But when you think about these other bigger companies that are out there that you're doing deals with and are talking to you, have any of them approached you around, okay, you've got $450 million of cash trading at $280 million worth of market cap. Let's like, let's just do a deal where, you know, we build this and you become the public vehicle, you know, like I will some private equity firm roles in, you know, their navigator pipeline or something into that. And now you have like a well-funded publicly traded vehicle out there. I mean, there's just so many opportunities with that much cash sitting there for someone to utilize all around the ATJ value chain. So, I don't know, it's just like so many opportunities exist right now.
spk03: Well, it is. So I think, you know, it's a question again of timing, but in general, those are natural conversations to have. So what happens when we're talking to these equity firms and the other strategists and talking about how you move this forward, it's not lost on anybody that we have money, we're unusual in that we have enough money to go ahead and be successful developing stuff And some of these things, we don't know what it's going to take fully for financing yet or what guarantees that we'll have to help. There's other things we don't know yet. So I think it's all premature at the moment. But these are national conversations that do occur. And everybody wants to see things like, I think it's really good on, you know, Saxon's technology is the one that's the most developed of anybody's out there for making jet fuel from an alcohol. And I think, you know, we've seen enough data for that. And so it's about we've got to work on the banks. We've got to work on the DOE. We've got to work on, you know, whatever skeptics. We've got to get through whatever committees that we have for equity financiers and stuff like that. So there's still – we ourselves have some sausage to make still as we work through that process. But, yeah, those conversations do come up, and it's not lost on us on any of it.
spk01: That makes sense. Thank you, guys.
spk06: Thank you. One moment while we prepare for the next question. And the next question will be coming from Amit Dale of HCW. Your line is open.
spk05: Thank you. Good afternoon, everyone. So, Beth, I mean, is this a given that you are now basically just going to pursue the DOE option to close on? financing for MZ1?
spk03: No. What we said in our comments was that the DOE should be the primary one, and the reason is that you can get more debt loaded onto a project than you could from commercial debt, so therefore it takes less equity, and it would be at a lower interest rate, kind of a win-win-win all around, right? However, because the DOE is the DOE and they got work to do, And we got to go make it happen. You don't leave that as your only one and only option. You develop the commercial debt market opportunities as well. And you bring everybody along to go get that done. That's how you manage.
spk05: So could you say go to the commercial markets and then refinances from the DOE? Or is that not a path forward?
spk03: No, you'd want to know, what we want to know is, the big deal is, everybody is worried about how much equity is it going to take, right? Because even with all the cash we got, that's still not enough to do that, provide the other guarantees we might need to do or whatever. So what we want to know is, what is that equity bite? And the DOE one is substantially different than what we'd get from a commercial lending. we gotta know what that answer is. And of course, everyone who's sitting around talking to us is going, yeah, we'd like to know what that is too. It's just practical.
spk05: Yeah, I mean, the logic makes sense, but I guess maybe investors probably are now keen to just understand how to model cash flows? Because if you pursue the DOE path and we sort of push everything out by maybe a year, year and a half, you know, cash flows and, you know, the valuation aspect, those types of calculations come into play. So how would you sort of, how would you suggest, you know, investors think about from a modeling perspective, you know, about sort of these variables?
spk03: Well, you take the R&D business. You saw that we exceeded expectations for the revenue. We're expanding that plant, so people can calculate that. It's going to be at 400,000 million BTUs a year, you know, in the third quarter, we'd expect. And we also would expect to move from 150, negative 150 CIS score to something like minus 300. once we get that from CARB. So that's part of it. We've got several million dollars of income coming in over the next few years. We've said that. So several is not tens, you know. It's several. So it's like you got that coming in. You heard us talk about the developer fees. So think about that. Here's how a developer model works. Developer recovers usually upon financial close All the money invested up front to develop the project, okay, along with profit. So we said that we'd close it early next year. You can expect that we're going to see that money we've invested so far. We've invested about $75 million for NZ1 so far, plus it'll take like another 30 at a minimum. And if people need to see extra stuff to get to the close, maybe it takes 80 to get close. But we get paid that back at FID unless we decide to leave it in there. So we're going to have a revenue stream from that. And so when you're getting paid like that with profit from recovering your costs, you can do that with multiple projects. So that's part of this game. Now, it also is true then that we'll take a retained income. interest, but it seems to me that everyone is discounting our ability to count any of the profit from an NZ plant anyway. That's what it looks like to me, given our stock price, for God's sakes. So I'm looking at it going, well, no one values that, it seems, which I think is crazy, but it's because it's too far out in time. So how do you make this a credible story? People look at us and go, well, you don't have enough money to execute all that billions of dollars that you need. You're going to have to go to Lutus, blah, blah, blah. Are you kidding me? Think what you know, that's not how this works. That's not what you do. You manage the money. So, yeah, it is a I think that, you know, we're really obviously trying to beat home about what rationality looks like as we do this and we're managing our cash. We're going to use it. Yeah, we got uncertainties to work through, but we're in a darn good situation here.
spk05: Yeah, but I mean, it makes sense. I'll take my other questions offline. Just one last question from me. Are we, you know, deploying the cash balance in a way that, you know, we can take advantage of this interest rate environment and, you know. It is.
spk03: Yeah, I think in our queue, you'll see that. Yeah. Okay. Okay. It's in there.
spk05: All right. Yeah, I'll take my other questions offline. Thank you so much.
spk03: You betcha.
spk06: Thank you. And this does conclude our Q&A session today. And I would like to turn the call back over to Dr. Patrick Guber for closing remarks. Go ahead, sir.
spk03: Yeah, thanks. So, you know, obviously what we're trying to get across is to think actually about how we're going to play our money. We actually are in a really good financial shape. We are finding that there are people who want to invest in these projects. We don't have to make investments ourselves to make money on the projects that we've been working on. We have multiple opportunities along different threads of business from RNG to chemicals with LG to, you know, like I was serious. I'd like to see everybody use the process to make jet fuel from alcohol. I want everyone to do that. And I'd like to take a nick on it, too. And so it's a different paradigm. And we are developing an electric property position. People forget that there really are technology developers who are really good at patents. Anyone knows our history knows that that's the truth. given our track record of winning things. So it is a little bit different. I think our low stock price frustrates me. So I look at it and it's like, that makes no sense at any level. But I get that people are just doing kind of a simple calculation that I think doesn't make any sense. We're trying to blow that up and pay attention to what we're actually doing here. So I appreciate everybody's investment in us and people listening to the call. And it's going to be fun as we work through all these things and make progress. Thank you.
spk06: Thank you, everyone, for attending today's conference call. You may all disconnect. And everyone, enjoy the rest of your evening.

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