Green Plains Inc.
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good day everyone and welcome to the Green Plains Third Quarter 2013 Financial Results Conference Call. Today’s call is being recorded. And at this time, I’d like to turn the call over to Mr. Jim Stark. Please go ahead sir.

[Jim Stark:]

Thanks, Aaron. Good morning and welcome to our third quarter 2013 earnings conference call. On the call today are Todd Becker, President and CEO; Jerry Peters, our CFO; Jeff Briggs, Chief Operating Officer, along with Steve Bleyl, who heads up our Ethanol Marketing as Executive Vice President. We are here to discuss our quarterly financial results and recent developments for Green Plains Renewable Energy. There is a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website at www.gpreinc.com. And it's on the investor page under the events and presentation link. Our comments today will contain forward-looking statements which are any statements made that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains’ management team, and there can be no assurance that such expectations will prove to be correct because forward-looking statements involve risk and uncertainties. Green Plains’ actual results could differ materially from management’s expectations. Please refer to Page two of the website presentation and our 10-K and other periodic SEC filings for more information about factors that could cause different outcomes. The information presented today is time sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted, or redistributed at a later date, Green Plains will not be reviewing, or updating this material. I will now turn the call over to Todd Becker.

[Todd Becker:]

Thanks Jim, and thanks for calling in today. What a difference 90 days makes. We had a solid performance in the third quarter since our last conference call margins improved quicker than we expected and now we believe the ethanol industry is on a solid of a fundamental footing as we have seen in a long time. During the third quarter the demand for ethanol remains strong, a new overall price structure of the corn market weakened. When you look through all the noise that we hear every day, the facts are very simple. Ethanol is trading at a significant discount to gasoline, we're on pace for record corn crop, conversion of starch into sugar which is our main function, puts ethanol in a competitive position globally as compared to our counterparts in Brazil and domestic stocks remain very tight as evidenced by this morning's EIA data just released. This is the basis for our belief that we expect some continued earnings improvement in the fourth quarter. We're successful in raising $115 million net of fees and expenses on our 3.25% convertible bond issue in September. Our team is working diligently reviewing opportunities to deploy this growth capital. We will be disciplined in our approach and hope to start putting the capital to work very soon. Our focus is on accelerating our growth as we indicated in our earnings release yesterday. Later in the call I'll discuss some of those opportunities we are looking at. For the third quarter we generated net income of $9.4 million or $0.28 a share. This was a significant improvement over last year and a continuation of the sequential improvements we have seen in the last six quarters. We produced approximately 177 million gallons of ethanol and achieved a yield of 2.83 gallons of ethanol per bushel of corn. We expect that our production levels will increase in the fourth quarter as we have already started to increase our daily output. All of our planned shutdowns were completed during the third quarter. In addition we produced 42 million pounds of corn oil have totaled 156 million pounds over the last 12 months. We're finishing up installing corn oil extraction at our Atkinson plant in the next month which will add approximately 12 million pounds of corn oil production on an annual basis. In our marketing and distribution segment we wanted to reduce earnings volatility and our inventory positions as the market inverses were too steep to hold large levels of stock. BlendStar contributed solid results for the third quarter as we continue to experience strong demand at our terminals. Our merchant trading programs were also somewhat stagnant as movements of physical products were limited due to the end of the crop year. We are ready to take advantage of our physical flows and logistical assets now as the new crop harvest is underway. And we expect to see an improved result in the fourth quarter for this segment. We're still adding traders to our merchant platform and expect to see continued growth in 2014. Finally keep in mind while the number of rail cars in the crude program decreased this quarter with the spread between WTI and Brent moving back out we may deploy those cars ourselves entering to return against those asset directly. We paid the first dividend in the company's history this quarter; this milestone was achieved after almost five years of profitability and with the expectation of a bright future ahead of us. We believe we have adequate liquidity not only to grow the company but also to start to directly reward our shareholders for their patience and commitment to our long term growth agenda. I will now turn the call over to Jerry, who will run through our third quarter financial performance and then I will come back to close the call with some additional company and industry comments.

[Jerry Peters:]

Thanks Todd. Good morning everybody. On a consolidated basis for the third quarter we reported revenue of $758 million which was down 20% from a year ago, primarily as a result of lower grain and agronomy sales, as well as lower ethanol volumes sold. Our operating income for the quarter was $25.5 million which was a steady improvement from the last quarter and versus a year ago when we generated 8.6 million of operating income. Our ethanol production segment generated nearly $18 million of operating income or 56% of the total segment operating income. This was a $25 million improvement over the third quarter of 2012 and represents the best performance of our ethanol production segment since the fourth quarter of 2011. Taking a look at slide 4 of the online presentation, you will see that we generated operating income before depreciation in the ethanol segment of $0.16 per gallon, compared to $0.02 on a per gallon basis realized in the third quarter of 2012. We generated 14.2 million of non-ethanol operating income for the quarter which was down approximately 6.6 million versus the third quarter of 2012. The decline was driven by the Agro business segment which was down 5.7 million from the previous year as a result of selling the 12 grain elevators in the fourth quarter of 2012. Just a reminder here, the Agro business contribution in the third quarter of 2012 was unusually strong due to the early harvest in that year. As you look at Agri business segment revenues you may be surprised to see an increase of $103 million or 59% over last year. This increase as I explained on the second quarter conference call is due to the realignment of our grain operations with our ethanol production segments, where we originated approximately 43.5 million bushels of corn or about 70% of the ethanol production feedstock requirement. That compares to 6.2 million bushels originated approximately 11% of the segment’s grain requirements in the third quarter of 2012. Gross margins for bushel in this segment are down as we charge a nominal fee for direct grain origination into our own ethanol plants. In addition to this origination fee the Agro business segment will earn normal elevator margins on the 17.7 million bushels of seasonal storage capacity at our ethanol plants in our elevators. As a result with a good harvest in process we expect an improved contribution from the segment in the fourth quarter compared to earlier quarters of 2013. The marketing and distribution segment was down about $2.7 million from last year primarily as a result with reduction in income generated by our trading and logistics business, due to our reduced inventory positions and lower merchant trading activities as Todd mentioned earlier. Although we had strong income from our railcar program, we do expect to see this contribution decline in future quarters. Since the peak at June 30, we have had about 250 railcars coming out of our crude oil transportation program. As Todd mentioned spreads have increased somewhat recently so there may be an ongoing opportunity for these cars, but most likely not as significant as in the past. Operating income from corn oil production was strong coming in at $9.6 million in the third quarter which was $1.8 million higher than what we reported in the third quarter of 2012. The higher operating income was the result of a 13% increase in corn oil production volume as well as slightly higher prices realized for the third quarter this year versus 2012. Our yield from corn oil production increased to a record 0.71 pounds per bushel in the quarter. Interest expense declined approximately $2.2 million in the third quarter of 2013 compared to a year ago, due to a reduction in the average outstanding debt balance that we’ve had. Our income tax expense was $7.6 million for the quarter, which was higher than our expected 38.5% effective tax rate as a result of some adjustment to discreet items in our book tax expense. So, net income improved by $10.4 million from a year ago, coming in at $9.4 million or $0.28 per diluted share. Earnings before interest income taxes, depreciation and amortization or EBITDA, was $37.4 million for the 2013 third quarter compared to $21.7 million in the third quarter of last year. On a trailing 12 month basis, EBITDA totaled approximately $173.5 million including a $47 million gain on the sale of the grain elevators in the fourth quarter of 2012. On to the balance sheet, as Todd mentioned we completed a $120 million convertible notes offering in September. The notes will mature in October of 2018 and will bear interest at a fixed rate of 3.25% per year. The initial conversion rate is equivalent to its stock price of approximately $20.85 per share. The notes are similar to those we issued in 2010, except that they contain an option for net share settlement which means that if the notes are converted we may settle that conversion in shares of our stock in cash or combination of both. As a result the accounting for these notes is different than our five and three quarter notes that we issue in 2010. Under GAAP we are required to separately account for the equity and debt features of the new notes. The equity feature which is essentially the $20.85 call option on our stock is treated as equity. The rest is treated as a liability which is based on the discounted value of the note payments using a discount rate that approximates our street borrowing rate. Amount of the equity component is approximately $24.5 million with the balance of 95.5 million classified as debt on our balance sheet. While the accounting is a little bit more complicated, we believe the flexibility of the future settlement option maybe valuable to us. If you turn to slide eight I’d like to walk you through balance sheet net-debt as of September 30, 2013 has been reduced to approximately 189 million, the lowest in our history. In the third quarter we paid approximately 12 million in principal on our ethanol term debt. While we are focused on growth we also remain committed to our goal of zero net debt by the end of 2015. Capital expenditures for the remainder of 2013 will be approximately $7 million as we sent approximately $8 million in the third quarter and on a year-to-date basis we’ve invested approximately $30 million in capital projects, not including acquisitions. To summarize, we reported a much improved quarter compared with the year ago and on a sequential basis. Our balance sheet and our liquidity have us well positioned to support our current operations and fund our future growth initiatives. With that I’ll turn the call back over to Todd.

[Todd Becker:]

Thanks Jerry. When the fourth quarter started, we were about 25% hedged for the quarter and as of today we have increase to approximately 65%. With the tight stock situation we have continued to see the inverse and ethanol prices roll forward as near term margins continue to be the strongest part of the curve. In October though we were still fighting the transition from old to new crop corn but our team executed really well to get into a full new crop supply chain. There is some very interesting facts that are important when we look at the current market situation. The first as I mentioned earlier is ethanol’s competitiveness in the global markets and why this is the case. With the price of corn below $4.50 a bushel, we convert starch into sugar at an effective cost below $0.10 a pound. If you compare that to the world price of sugar, corn based ethanol competes very well with Brazil for demand globally. With that said, we have seen a pickup in export interest similar to that at late 2011. In fact we have sold approximately 7% of our production capacity through March to export markets and we are working hard to increase that percentage. We believe that a large part of the industry production increases we have seen lately could be exported leaving little room for a fast recovery to the tight domestic ethanol stock situation. Finally the distillers’ grain market is unusually strong as well. This has led by great domestic and export demand for the product. We have seen values as high as a 120% the value of corn domestically. We always believe that until the price exceeds the 140% the value of corn in the ration it’s still at a value to animal production economics and that seems to be so lately. More importantly, the world’s market has figured this out. In August, we exported out of the U.S. over 1 million tons of distillers’ grains with half of that going to China. With the high price of wheat, relative to corn, we expect that this market will continue to focus on chip, high quality feed products and continue to support production economics for the ethanol industry. As we have said in our earning release we believe the fundamentals in our industry support a stronger fourth quarter financial performance and looking forward to 2014, we expect that to continue. Part of our growth plans are to continue to expand our grain storage in and around our ethanol plants. We completed our 9 million bushel grain storage expansion for 2013 bringing total company storage to over 27 million bushels. These totals are inclusive of 10 million bushels of working storage at the ethanol plants with the remaining and all additional used from more seasonal storage activities where we realized harvest margins and are in the carry. The space was added at an average cost of about $0.64 a bushel. Based on our expectations the return will earn on the new space should pay back in less than two years. We just started to see some benefit from our increased storage space in this harvest quarter and we’re working up on filling that space as the crops are coming out of the fields. We are currently planning to add an additional 10 million to 15 million bushels of storage in 2014 with the goal to be at 50 million bushels by the end of 2015. While nearly doubling our storage over the next two years may sound aggressive, 50 million bushels is little more than two months of corn demand from our ethanol platform. Our expansions may include acquiring additional locations similar to the Archer, Nebraska grain elevator that we purchased in June, which by the way, we have already expanded. Some of the storage maybe more closely -- more costly as local regulations will dictate the type of capacity we will add. In closing, I’ll explain why growing the storage capacity is important to us. While we have worked over last five years to build a diversified platform, we continue to focus on the next five years. When we sold 12 grain elevators late last year, we indicated that this was not an exit from domestic grain handling business it was merely a reallocation of resources to take advantage of the existing infrastructure we have in place and leverage off of those capabilities. With that said by the end of next year we will have rebuilt 75% of the capacity we sold at a fraction of the cost. We can now originate first handle bushels from the farmer and use the people, road, scales and land we already have to reduce the cost and increase the returns from our grain storage assets. Our focus has been to find more value at the products like corn oil. We still have room to improve in both areas of efficiency and cost. We continue to add selective million technology or find grind to Green Plains across our ethanol platform. In addition, we’re also continually evaluating new enzymatic products to help drive yield improvement. Another part of the corn kernel, we work on extracting value from the CO2 that was captured as it was growing and released during fermentation. This is where Bioprocess Algae comes in to take that CO2 and turn it to algae. As we indicated in last quarter, we slowdown the expansion in order to retrofit all of the existing algae reactors, I am happy to announce that the retrofit is complete and we are successful in completing that task. We have experienced a solid improvement in yields. Productivity data based on early results from recent harvest is very encouraging. We have done few other things with the platform, which I want to share with you. With the realization at an ethanol plant has some of the cheapest and best sugars in the world, we started to feed our algae grown in the autotrophic processes, sugar during the last part of the gross phase to with an increased yield without sunlight, it is only a nutrient boost and not a main input for growth which still remains sunlight, CO2, warm water and waste sea. We call this a mixotrophic process and expect this to be an important part of our technology going forward. We have seen immediate positive results in all our reactors. For certain strains in certain markets, this will be very beneficial to the process. In addition this week, we will install a fermentation process in tank inside which will be fed after the mixotrophic process to determine whether we can supercharge the yield using waste sugars from our ethanol process. Again, all this will be depended on the ultimate use and the value of the strain we are growing. These developments were part of the DOE grant application. We decided the bench trials were so favorable that we would immediately apply this to our existing platform. So now the retrofit is complete. The DOE scope is final -- DOE meaning Department of Energy from the grant that we got last year. Scope is being finalized to determine what the platform will look like in 2014 and 2015. We are focusing our product development effort in nutraceuticals, fishmeal, fish oil replacement products, and different uses in human nutrition. We have hired a BPO of business development as we feel the time is right to start nailing down strategic partners and customers. We also felt that we could growth it, we could sell it, and we’re starting to grow more and more biomass every day. Although, it’s not sound like a lie, we have produced over 20 tons of dried biomass in the current reactors since we wrapped up production last year. We believe it’s a still one of the only turnkey processes that convert CO2 into a finished biomass through multiple steps including growing, harvesting, dewatering and drying onsite in a single location. While we have an enormous amount of work today, we are excited about some of the latest advancements in the technology. We are shipping product this week for fishmeal tie up with U.S.D.A. led by Dr. Rick Barrows and we’ll let you know when we get the results early next year as well. If you like to see the latest video of our process, please click on the link in the presentation and you will be able to view the process and you could see why we’re excited about this. In addition, there is a photo of our largest 400 feet reactor before we inoculated, so you can see the scope and scale of what we’re doing. For comparison, the video shows the one of 200 feet reactors. To as we look to expand our business with the good capital raise in September and our strong overall balance sheet, our focus is expanding and what we have assembled. We believe, our overall platform is ripe for expansion with the vertically and adjacent businesses, we’re well equipped and managed commodity processing businesses across many types of commodities. We are looking for organic expansion and transformational accretive opportunities for our company and our shareholders. As our team has steadily worked on improving our processes, we have become more efficient. We operate our locations in a safe manner. Our back and middle offices are world-class. We have never strayed from our core competency of managing the risk of the commodities that we buy and sell. And we never lost focus on making sure all of this hard is the benefit of our stakeholders. We are for profit enterprise, we appreciate the trust of our shareholders and debt holders have in our business and we plan on being continue to be worthy stewards to capital invest in Green Plains. Thanks for calling and we’ll open up the floor for questions.

[Operator:]

(Operator Instructions) We will take our first question from Farha Aslam with Stephens Inc.

[Farha Aslam:]

Hi, good morning. Congratulations on a great quarter and then just talking about your first point you made today which was on the tight supply of ethanol in the U.S. market, I think that the days inventory is down to 17 to 18 days of inventory, could you share with us what has driven inventories of ethanol so low? And how you expect that to progress and I believe at around 17 to 18 days that’s when ethanol really has pricing powers, so any color you could give about pricing would be helpful as well.

[Todd Becker:]

Yes, we saw a pretty large stocks draw again this morning on increased production. We think that a lot of what we're starting to see is the impact of the price structure of ethanol globally. We are seeing good demand for exports literally on a daily basis. We are getting inquiries. We think between that and the price competitiveness that ethanol has to gasoline has really been what’s driving stocks and stocks draw continually. I think also with the price spread that it has been, we’ve seen demand for E85 increase in the previous quarter and we’re starting to see actually some demand for expanded plans, pump stations across Iowa for 2015 as well. So, I think in combination with the fact that we think U.S. fuel demand is stable or possibly even up, we showed even a little bit up today overall fuel demand in the U.S. which we haven’t seen, I don’t think for quite a while between that the pushing ethanol into every nook and cranny in the U.S. the domestic use of E85 because of the economics of that as well as the export market we think, from that standpoint we’re still seeing an inverted market in ethanol and the inverse continues to roll forward. So the best margins continue to be in the spot. I will tell you though that as latest or starting this week we actually had some opportunities to lock in some stuff Q1 some of our margins in Q1. So, right now as a Company we are about 7% hedged in Q1 right now and we have corn bought in lot of our locations especially in our eastern locations at values that makes it certainly interesting out on the forward curve which I would say this early looking out at Q4 or I am sorry 2014 next year’s curve, we’d haven't a lot of opportunities to hedge. I think the final thing is that we’re starting to see a lot of RBOB interest as well so ethanol prices against RBOB very well. So, we have lot of demand, I know it’s a long answer to your question. I’ll finish with this. There is lot of demand ethanol as price against RBOB. So the planned economics are so good that that driving as well some of the margin on the front end and lead the stability on margin on front end, and I wouldn’t say it’s blowing out like we saw late -- at peak margins at all anything like that but it is stable which is good as well for our industry.

[Farha Aslam:]

And when you look at the international demand, what are the key markets you’re seeing demand from and what do you expect 2014 exports to be for U.S. ethanol.

[Todd Becker:]

From standpoint of Green Plains, I say about 50% of our capacity at this point is to make exports back for various different markets. So, when we look at what we do we sell when interest comes in we'll sell the specs that they need, which we can pretty much hit any of the global markets whether it’s Brazil, whether it’s Europe, whether it’s Canada or whether it’s Africa or whether it’s Asia. And so we think from every single one of those areas around the world, we’re seeing demand as an industry, again we’re direct sellers of Ethanol into export markets, we are just supplying the products so somebody can load a boat but I would say all of those demand markets are at least inquiring or are active all driven by price of ethanol against gasoline further driven by the fact that corn is making new four year lows. In terms of what our expectation of exports, we just finished the crop here, so I think when we look at kind of the 12 months that we’re in right now, we expect exports and this is just an internal estimate to be potentially over a billion gallons recovering from last year and mainly driven by the fact that when corn converts into sugar, sugar is very cheap feedstock for us now and we competing very well with Brazil and we actually think some of that export demand will be driven by some of the Brazil economics as well. We are hearing that there is interest from Brazil, I can’t confirm that any business has been done directly but we think that’s part of the demand driver.

[Farha Aslam:]

And my final question relates to the EPA and the RFS. When do you expect the EPA to make any announcements regarding next year’s RFS and what changes are you looking for next year in terms of the RFS total and corn ethanol in particular?

[Todd Becker:]

So the discussion lately has been that the EPA is getting or is preparing to make some type of announcement possibly in the next couple of weeks, we have no confirmation of that from them so we’re going to go with what some of the discussion in the market is, I think they’re looking at all of the factors right now. They’re looking at what is the base demand for ethanol, what is the E85 demand, what are we starting to see in roll outs of potential E15 demand and then where is the export market as well as well as the import markets, I think they have to take that in to consideration when they look their current situation in Brazil and whether Brazil could be competitive into our California markets or whether you should use corn based ethanol, get the RIN from that, use that RIN to buy the advanced ethanol RIN and satisfy your obligation. So, I think when we look in next year’s mandate, 2014 mandate in to mid '14s do I think that’s going to be something that the EPA keeps, it’s hard for us to say. From our view they don’t have the legal authority to reduce corn based mandate based on what’s in the statute which is corn ethanol being a dollar cheaper than gasoline is provider U.S. consumer a $13 billion benefit today because obviously not doing any economic harm, it’s available to the U.S. consumer so there is no lack of availability of the product. We think that when you look at kind of the other bucket that's probably where an adjustment will come to start and any corn based ethanol adjustment obviously would be outside of the realm of the statutes put, they can certainly do anything they want. So, I think from that standpoint I think overall the bucket probably starts to contract and we'll have to see have to wait to see what they do with corn.

[Operator:]

We’ll take our next question from Lawrence Alexander with Jefferies.

[Rob Walker:]

Good morning this is Rob Walker on for Lawrence. First can you give us a bit more detail on your algae feed trials, as well as negotiations with potential industrial partners? I guess what milestones might they want to see before they commit to a project and what hurdles would you have to overcome before committing your capital.

[Todd Becker:]

So the feed trials that we're sending, we're in lots of different types of trials with our products. I think the key is we actually have products to give people to figure out what to do with it. You know the feed trials are going to start in the next week or so, we're sending products out right now, and if anybody knows Dr. Rick Peroz obviously he's a very well thought of scientist around feeding fish, especially a big supporter of using algae to do that. I can't too deep into the trial but I would say that this is one of the opportunities to see this as part of the overall formula and see how it does from a palatability and a weight gain standpoint so we're going to -- because we really believe that ultimately over the long term that's the market that we want to be in as that part of the corn kernel, gets converted. In terms of other products we have a multitude of discussions going on with people with NDAs in place with again a whole host of demand sources for the product. I think the key is that this is one of the first time they've been able to get more of a commodity availability of product instead of just being driven by small supplies or internal production for certain products. So I think that we're surprising a lot of people that we're able to send them products, everything we send people, people are, companies are pleasantly surprised but again we're in lots of different processes, I think as we develop through the kind of human nutrition, corn oil, or fish oil replacements in those type of markets where we're really heavily focused on, hopefully we can make some progress, but our goal now and I think you see, we really didn't have to spend a lot of time on business development up to this point because we wanted to make sure we can grow something to sell. I think as we've seen the result now and again they're early after the retro fit we've seen yield increase to a point where when you look at op ex, cap ex and yield and revenue per acre based on different selling prices, we're comfortable now that we can start to really ramp up our product development and customer development business evolved in the process and we wouldn’t have done that unless we felt we like we would have a product to sell at a reasonable return on investment. Again it's always chicken before the egg theory, if you want to have a place to sell it first, or you want to be able to make it first, and our view has always been let's try and make it first and we think we can sell it once we do, so I think we'll have more to talk about over the next coming quarters, we are finalizing our engineering for the DOE study because that's really been something that we slowed down because we wanted to use their $6 million and to help build out a bigger platform because that platform only has to be used once we build it out, probably about 90 days with the DOE and then the DOE allows us to take that back for use for food or feed production. So we wanted to make sure we took advantage of that, which probably slowed down the overall expansion but during that time we, the retro fit was, if you look inside the reactors on the picture you'll see that the retro fit was absolutely the right thing to do so I would say more to come in the next coming quarters, we’re doing a lot of work now on business development, so hopefully we can, we can find some strategic partners that want to look at this platform.

[Rob Walker:]

Thanks, and as you look across the industry, the ethanol industry the ethanol industry, how many plants would you say meet your criteria for M&A roughly in terms of you know location, quality and so forth.

[Todd Becker:]

You know when you look at, we break down the industry in several different ways you have, about 40% or more of the industry is with the top five players, we think 20% of the industry is in plants that we probably don’t have a lot of interest in, another 20% of the industry is probably in plants of multiple owned farmer type organizations that are in very strong condition and in good shape. But I think if you just kind of nail all of that down, if you kind of look at that, that other subset of the 55% or so of the industry, we think they're still a good 20-25% of the plants that would meet our criteria, whether we can actually buy them or not is a question but we are absolutely actively seeking acquisitions in that 25% bucket of what we think is available, what we think would meet our criteria but again I think what you've seen is depending on the technology, the location, how the plants whether it's operating or not operating, who owns it, who doesn't own it, they look at all of that, all those come into different aspects of price. We've seen another plant trade here recently an ICM, big inbuilt plant in Iowa, we don’t know the price but we’re assuming that it was a favorable return for the shareholders of that company, so we think the value of different assets have different values. So again we're actively seeking, it's harder to buy but we think we can get some traction in the markets.

[Rob Walker:]

And then just finally have you looked at switching the plant to butanol? And kind of what that would entail our cost?

[Todd Becker:]

No we haven't actually looked at switching the plant to butanol, we're always a fast follower of the technology work but we're not going to be the early adopter at this point. So from the standpoint of when that technology is ready for full commercialization, if it's competitive with the economics of what we do with ethanol, we'll take a look at it. But at this point we don't have any plans to do anything with our platform.

[Operator:]

We'll go next to Craig Irwin with Wedbush Securities.

[Craig Irwin:]

Todd can you update us on your hedge book. How much of your exposure in the fourth quarter have you already hedged out and what are we looking at for the first quarter and have you been able to capitalize on the sequential improvement in cross spreads throughout the quarter. Thanks.

[Todd Becker:]

Yes, as we indicated in the call we're 65% done for the fourth quarter which means we really have a little bit of November and some December left. When we look out on the curve we're never going to get the spot, spot, because that's been a volatility -- a volatile area to play in. Albeit over the last quarter if you would have done that, that was the right place to be but the prior kind of nine months or 12 months that was probably not the right place to be. So in Q4 October was a little volatile in terms of the margin structure, whether you were in areas that had new crop corn availability other areas that didn’t have new crop corn availability. So in the east it was easier to buy corn than the west and still is the case today, so the eastern plants are actually some of our best performers which usually the western plants are our best performers, and we're starting to see maybe some of that switch back over. But in general what we said is that we think the fourth quarter will be better than the third quarter, I wouldn’t -- we don't ever, well, I don't think margins are any kind of blow out from that standpoint, the margins are definitely a little better in the fourth than the third and we'll see how we finish up. We still have some work to do towards the end of the quarter. But I think with what you saw this morning in the stock situation we think margins will continue to roll forward at least for the near term. But in general when we see margins -- we can't take the risk of waiting for to be in the absolute -- this week type market because we've seen volatility go the other way where we've seen $0.10 moves up and $0.10 moves down and we find a point we hedge it and we don't want back and continue to try and drive returns.

[Craig Irwin:]

And then how dependent do you think the market is in '14 on that billion gallons in export that you talked about to maintain the strong profitability that we have been seeing recently. Do you think it's likely to persist even if we don't see the exports or do you think that the exports are probably one of the more important things to monitor these days?

[Todd Becker:]

I think exports -- we didn't have that many exports in 2013 and the market performed pretty well for us throughout the year. I mean I wouldn't say it wasn't exceptional but it was stable which we like. I think exports are always very important to us. So if we have a gasoline demand of 133 billion gallons, you have 13.3 billion gallon demand at 133, you probably got -- I don't know if there is a couple of 100 million gallons of demand or not it stays right now, maybe that's a little high. And then if you get a billion gallons of export and a couple of hundred million gallons of imports, net-net you just basically added all that up to get to full production. And at full production I think you will see -- I think people get -- I think the market is obsessed with the weekly EIA data and if they think it's bearish they are not looking deep enough in the numbers. And I think just like we saw last week while production went up stock remained the same, the market came in and spent the whole day taking ethanol down and we just spent the whole week taking ethanol back up, back in today's stocks numbers. I think people are getting too much obsessed with the weekly numbers and I don't think that that's telling the whole story, and I think you will have to kind of look at the overall fundamentals of price. It's the job of the corn market to find demand right now, we have -- carrying out in United States will be too big, it's a job of the corn market to go find demand. There is only really two places to do it. One is the export market for corn and the other one is the ethanol market. So we have to price ourselves in competitively for U.S. demand, for E15 demand, E85 demand and for global demand, and I think that's what corn has done for us. I don't know in fact we're going to be able to gain enough demand for ethanol to stop the overall corn structure. But I think ultimately as we start to see a pickup in export to corn of the U.S. that's maybe is where we have to go next to find more demand, which is all favorable to ethanol over the next 12 months.

[Craig Irwin:]

And then last question if I may, E15, E85 was the current price dynamics of ethanol obviously look pretty attractive to the customer channel out there. So what is there on the horizon or what is there that you are monitoring that you think helps accelerate the adoption of these fuels and helps grow demand for the ethanol industry?

[Todd Becker:]

Well what we see and the anecdotal information is that E85 demand has been strong, whatever E85 markets there are, and it’s been driven by obviously the price discount of ethanol to gasoline but also developed all the other end market which even at $0.20 corner end still adds an additional $0.20 to your bond economics as well. So we’ve seen retailers have very strong demand for E85. We’ve seen any place that an E15 pump has gone in, has driven strong demand for E15 albeit it's still very small, in relative terms but I think what people will realize and what the retailers are realizing is that there is a price spread that they can go after and be the cheapest fuel on the street. We have a lot of enquiries in, we've have got a lot chains doing work around it. They’re starting to see some of these small, very-very small retailers start to take advantage of that price spread and they're looking at them and seeing that as an example. It doesn’t take a lot to start a movement. And when you look at the price spread of ethanol to gas, the E15 movement has started. But I would say we’re still -- have lots of work to do.

[Operator:]

We will take our next question from Brett Wong with Piper Jaffray.

[Brett Wong:]

Thank you guys for taking my questions, just wanted to go back to the RFS and give you’re take, if the mandate actually is reduced to 13 and just how you are seeing that would impact industry?

[Todd Becker:]

Well, I am not going to make a comment, whether I think the mandate will be reduced to 13, I would say I think that’s probably overshooting it a bit. But let’s just -- to answer your question in context, if anything below, I think 13-5 to 13-8, is bearish corn, the corn market overall which I think is then bullish ethanol fundamentals. Because I think ultimately you have to look at it. It’s the law of unintended consequences, right. So, if all of a sudden the mandate is reduced to your number, I would say the overall price structure of the corn market is in trouble. If the overall price structure of the corn market is in trouble I would say that’s favorable to ethanol economics overall and we would see even a more pick up, a bigger pick up in possibly global demand but also some of the expanded blends. So I think they have to be careful of the law of unintended consequences, I think overall if that were to happen, I think people would obviously have an immediate negative impact. But in general overall, I think, from the long-term perspective, there would be probably positive ethanol economics. I don’t think that 13 is the number from everything -- even if you go back and you look at the EPA August 8, Federal Register, 13 wasn’t even mentioned. I don’t think -- I think they never went below 13-2 in the mentioning. And I don’t even think -- and that had no consideration for any expanded blends or anything like that, so we just go back to what we know, and all we know is what was mentioned in the Register, anything else will know when the EPA comes out with their next announcement. And the Register was only an example or, but it wasn’t a policy change. So, we'll have to wait and see what comes out. From our standpoint, again, our place in the fuel tank is because we can compete head-to-head with gasoline at a dollar cheaper. Both domestically and globally we think we’ll be able to maintain that.

[Brett Wong:]

Great, thanks, that’s really good color. Just on the recent increase in production -- just wondering according to the EIA -- just wondering what you’re seeing in terms of plants coming back online.

[Todd Becker:]

I think plants are coming back -- I think that a few plants that have come back online, I think we’re about reaching that capacity limit. I think maybe there's few more here and there, maybe one or two. It’s what we can kind of see left here. And then from there I think we’ve all pushed a little bit harder with the production economics as stable. We all drop -- I think the industry in general dropped and didn’t push quite as hard. We are pushing a little bit harder now, both as a company and as an industry which is I think is part of the increase. But it is our belief that a large part of the increase that we see in production is going to be exported and as a net overall it will be hard to build and drive stocks higher. You might do it on a weekly basis but then you will have a big export week the next week. So it’s I think overall, 911 was the number, that 911,000 this morning, right, was the number and but stocks dropped to half a million barrels so. So there might be some noise in that number as well. But in general, I don’t think there is too much more production to come on. I think we’re all as an industry pushing pretty hard as it is. This is a -- what we said to you last quarter is that we were doing shut downs at all of our plants. We did it. I think the rest of the industry, or lot of the industry took advantage of that time period as well to take some shut down and then I think this quarter were probably less overall as an industry. But then eventually you’re going to have to move back into shut down modes of first quarter of 2014 and perhaps 2014 just start to see some shut downs again; overall just to do normal maintenance. We probably won’t do any but, industry still had some realm to see some ups and downs on production when you hit these higher levels.

[Brett Wong:]

Great and just a quick follow-up. Why do you think that you kind of hit the limit of new plant coming on line and are still little bit short from nameplate in the industry, so just kind of wondering what your thoughts are there?

[Todd Becker:]

911,000 barrels a day, our number is always been kind of 935,000 to 940,000 barrels a day maybe you pick little bit higher than that. But there are plants that have been shut down, there are plants that won’t come back up, there are plants that’s been dismantled still, I mean, I think that overall -- we still see a few out there that could be brought back on line but there is some stuff that it’s going to be permanently closed there as well that probably won’t come back on line. So maybe we could pick out at 940-950ish area but I think that’s kind of picking out for the industry capability.

[Brett Wong:]

Great, thanks a lot that makes…

[Todd Becker:]

It’s hard to always run at a 100%, we don’t ever always run into 100%.

[Brett Wong:]

Great.

[Operator:]

We’ll go next to Patrick Jobin with Credit Suisse.

[Patrick Jobin:]

Good morning. Congrats on the quarter, and thanks for taking the question. First question just a follow up on the media speculation and on your comments on the RFS, I know you’ve addressed it a few times. I guess just looking at differently. If they come out with that 13 billion gallon number, does that -- and you are saying that should improve the margin environment next year. And should we expect the legal challenge from industry or GPRE?

[Todd Becker:]

Again, I can’t comment on the 13 billion number, except to say that I’m not sure. That was -- from our standpoint we don’t believe that that’s a reasonable expectation. My only point is they -- the law of unattended consequences is that the corn market is depending on 13.8 billion plus number I think relative to the current price structure, anything below that we believe is somewhat negative to the overall price structure in the corn market would stand as rise our discount gasoline even lower. If you have a 133 billion gallons of gas demand and you can blend at a base demand of 13.3 anyways, whether mandated or not, you will have a competing place in the fuel tank and when you got 85% plus of refined fuels coming out of -- refined gasoline coming out of refineries at 84 octane then you have to make a massive wholesale switch to the ways gasoline trades in the United States. So overall there a lot of people wishing for a 13 number, it’s our view that it’s probably on the low side of reality. Again, we’re not going to frac into the over under but I would say that the overall structure of the market is driven by discounting gasoline, the demand relative to that and the demand globally relative to that and our conversion of corn into sugar. And so at $4 corn let’s just say you go down there you’re starting to push $0.085 pound sugar equivalent and $3.50 corn you’re starting to push seven and half cent of pound sugar equivalence at that point I am not sure there is anybody in the world that could make ethanol cheaper than us and then the cheapest liquid fuel in the world.

[Patrick Jobin:]

Great. Okay, and just…

[Todd Becker:]

And the second just to follow up will the industry challenge legally? I am not sure. I would say though that somebody will I mean without doubt I mean somebody is going to challenge if they came down I think either way somebody is going to challenge the EPA whether they don’t make any changes all you could expect big oil to challenge the EPA and if they make address the changes at downside I am sure you’ll expect that there will be challenges to that as well because if you look at the base law and you look at the mandate they don’t have the ability legally to change corn based ethanol unless it is causing economic harm or it’s not available in the market, none of that can be proven today. So it will be interesting to see that how they justify a reduction to be that big, which is why we believe that they have to be a little bit reasonable than that.

[Patrick Jobin:]

Great, okay. And then just last question here about deploying growth capital. Maybe a little bit more color on what you’ve evaluating. You mentioned potentially something transformative I mean should we consider that outside of ethanol? And then I would presume given the improved crush environment that the potential prices for some of the facilities has probably increased is that fair assumption?

[Todd Becker:]

Some of the facilities have increased. I think the universe is smaller potential acquisitions but I still there are out there. We’re focused on everywhere that we operate both vertically and horizontally within our supply chain. So from the standpoint of agri business, we absolutely are going to continue to grow that business. We are looking at additional storage opportunities, both organically and through acquisitions. We are focused -- and look we can’t deny it, we make ethanol. We have 10 plants today. We have over $1 billion of capital invested in that space. It has been over five years, a good -- not a bad business to be in contrary to popular belief. We have returned for our shareholders, we believe we’re very good at what we do, we operate very effectively and so we would not be afraid to add the right plan, right location, right technology, but I don’t think you'd see us overpaying for anything based on the volatility of the -- of what we’ve seen in the past 12 to 24 months, we don’t have to add ethanol plants, it’s not something that we have to do, it’s something that we want to do based on the deal economics that we see. When you look downstream, we absolutely love the terminal we built in Birmingham and are looking for additional businesses from there and then there if you look at what our commodity processor, there are other things that process commodities and we think we could be very good at that as well. So we will look at not just corn based products around ethanol, we'll look at corn based products in general. And we'll look at other commodities and process into something else as well mainly focused around agriculture. So, I would say that anything from organic to transformative is something that we’re looking at. We think we should add. We think overtime there is going to be a third leg of the stool here or fourth leg of the stool that needs to get, added to this company based on our balance sheet, the way we manage risk, our trading platform and overall structure of company. So that doesn’t mean that it’s going to come right away, but if we saw the right situation which we think would be good for our shareholders and some type of commodity processing enterprise, we'd have to look at that very closely. But I would say that, that could be within ethanol or outside of ethanol.

[Patrick Jobin:]

Okay and then just one last follow-up -- apologizes, when you look at the grain storage increase that you’re targeting for remainder of this year and ’14 and then target for ’15, how should be expect the operating income from that segment to track on a quarterly basis? Is there a way to look at economic return or contribution bushel, thanks?

[Todd Becker:]

Yes, so, today we have approximately 27 million bushels was of total storage of which 10 of it sitting at an ethanol plant. The other 17 million of that we would say that’s where you can earn your return on space and so the 17 million, we would say has a firsthand margin both some was actually in soybeans, weed and corn, but a lot of it in corn where you fill it up out of the field. You put it away, you earn the carry and you ship against that at some time in the forward market. So with 17 million bushels depending on what that firsthand margin is and what the carry or return on space you could earn. We've said that we believe kind of firsthand margins are in that 37 bushel range and then plus any additional -- and that includes some of the carry plus any additional other opportunities. So we think when we look at 17 million bushels of space, we have a potential $5 million opportunity for operating income, Jerry is that correct? And then -- and so as we kind of grow that up to 50 million bushels total that will give us an additional 40 million bushels of space to earn our return on and at some margin at $0.30 plus. And what we really like about our platform is that the cost that we’re doing it because we already have a road and scales and rail, people at the cost we’re doing it is significantly less overall and so our operating cost are lower. So most of that margin will be available to us as an operating income after expenses and so we run a very low cost structure. So we think, if you look at the number by the end of ’15, we think with the 50 million total space that we would have which is our goal, we would basically be able almost recreate all of our GPG we're putting out at the end of 2012, is that correct Jerry?

[Jerry Peters:]

And I would just add to that just in terms of kind of the seasonality of how we’ll recognize that, I mean obviously it depends on the shape of the grain curbs, but generally speaking you’d expect to recognize a good portion of that income in the fourth quarter, maybe a little bit less than going into the first quarter of following year, a little bit less or a lot less in the second and third quarters of the following years. So it’s kind of heavily oriented towards harvest and earning the carries while they are there.

[Todd Becker:]

But also depends on, okay, where that corn has been harvested so this year on the west, we’re still filling the space while in the east we're deep into our platforms. So in the west, we’re just starting to fill this space. I would say that the space that we have is not the first place the bushel comes out of the field at this point because we don’t have drying capacity for that. So we are -- we have to be patient to let the crop dry down. We are looking at though adding drying capacity in front some of the space in the future so that we can take wet corn out of the field as well. So this is an evolving process, but I would say that we’re trying to make that 50 million space look much like a commercial grain company return on storage.

[Patrick Jobin:]

Thanks and what was the target for 2014, it was in your remarks?

[Todd Becker:]

We will add another 10 to 15 million bushels in 2014. We will have 17 plus 15 somewhere around 30 million space.

[Patrick Jobin:]

Right thank you much.

[Operator:]

We’ll go next to Matt Farwell with Imperial Capital.

[Matt Farwell:]

Good morning, great quarter. Could you just confirm so exported ethanol is anhydrous, so it doesn’t impact the RIN market, and could you also confirm that what plant margins are right now what you have and kind of the way I’m looking at it is if we do get to that number which is roughly 14.4 billion, your 1 billion gallons of ethanol exports by next year should for the most part offset some of these concerns about the RFS.

[Todd Becker:]

Can you ask the first question? Actually we didn’t hear you on the first question.

[Matt Farwell:]

So in exported ethanol, I think what we discussed in the past is generally anhydrous so that doesn’t generate any RINs and doesn’t impact the RIN market, I believe that there is a dynamic there.

[Todd Becker:]

When the RIN -- when it exports after RIN is retard. We don’t keep the RIN to sell, so that RIN is just the off the market.

[Matt Farwell:]

Right, its off the market. So if you have 14.4 billion produced next year but 1 billion is exported and essentially you’ve used 13.4 billion RINs for the market.

[Todd Becker:]

That’s correct unless obviously -- yes, so you’re actually correct on that. You just have to look at kind of the different ways you get to that 13.4 billion gallons, but that depends really what the mandate would ultimately be. But, you’re correct when you think about it but we said is that first of all we’re not in 940 yet, I think that’s still going to be hard left push to get there and I don’t know if that's sustainable or not. So, if you do get there, the exports we believe will take up most of that excess capacity and we’re trying to see that as we speak and that’s you’re starting to -- at least this week we think some of that data was driven by the fact that exports are starting to ramp up a little bit. So, and then from the standpoint of very spot margins, obviously if you are in today’s market could be in the -- depending -- it really all depends geographically. I mean some of our plans could be $0.20 some could be $0.14, some could be -- one plan might be $0.30. But in general we’re not operating right into that environment. These right now is kind of shown mid to low teens and the forward curve is showing high single digits. So, I think what’s important is that it’s not -- there is not this huge incentive based on the curve to say let’s bring a bunch of capacity back on, but there is -- not a huge incentive to take a bunch of capacity out. So, if you can fund your plant believing that the spot market will roll forward, that’s where you’re going to operate in and which is why some spot market players have had a pretty good third quarter. We focus on further out in the curve. So, as we said, we’re starting to lock in some -- from Q1 of some of our plants let’s just say in the high teens again is kind of what our focus is. But when you get there you don’t know if you’re going to be in the mid-20s or the low single digits. So, we don’t actually take a view, we basically do what we’ve always done which we reach a point where we’re servicing our debt, generating a good return for our shareholders and again, when the spot markets blow out, it’s not the place that we outperform but if you go back and look at the third quarter of last year everybody was very happy we hedged out the forward book. So, I can’t give you -- I mean the reference point right now is when you kind of look at the reminder of the year, I would say that if you’re going to lock something in today you would be mid-teens to low 20s depending on the location but that doesn’t take into consideration the fact that we’ve watched all the way up as the margins have expanded. So, again, we think fourth quarter will be better than the third quarter but I wouldn’t get too exuberant about your thought process that we’re going to get spot margins of $0.35 a gallon and that's going to fall through, it’s just not how -- we’re not going to take the risk of always being in the spot market. Are we holding a little extra back? Yes, I would say in these market probably more so than usual, we'll probably hold a little bit extra back but that’s based on the fact that the underlying fundaments are now start to tell us to do a little of that and the markets remain strong from the standpoint of rolling forward. That moves very quickly. We’ve seen that move in 10 to 15 increments in a week the other direction. So, that’s where we are today.

[Matt Farwell:]

And then one last question on the RFS, just big picture. Let's say the EPA does consider the blend wall to be an insurmountable by the industry in the short term than its in doing adjustments for 2014 shouldn’t the EPA broadcast an intent to grow ethanol consumption in market share in the automotive fuel supply for future years and to maintain the speed of the original law.

[Todd Becker:]

Yes, I think if you talk to and you hear what the EPA administer are doing and the secretary of agriculture is saying, I think they’re saying that. I think they are very supportive of making sure that the program and the spirit of the program doesn’t get dismantled here because I think it’s the single fuel that's ever made impact to the fuel tank in the history of the United States except for oil. So, I think these growths of LNG and trucking is probably going to be next one and so look at what’s happening, I mean you’ve got big oil defending share and its defending share and losing share market right now. And so, ethanol is a place that we believe for every 1% share that they lose a gas of tank its $4 billion of marginal income that is going to go away and so they’re going to protect that at all cost and trying to spend the money to protect it at all cost and if you look at it we believe that at least the administrator, Secretary of Agriculture and the current administration is cognizant of the fact that if you do away with the only program that's ever made any impact into the fuel tank, good luck in the future and I think that -- I think the most interesting thing and now as you -- even you see the methanol guys talking about that they need a mandate, they need some program to get into the fuel tank. So I don’t think that -- I don't think that they're going to be so short sighted to not expect that they need to have at least some runway for growth in the future.

[Matt Farwell:]

Great, thanks a lot for the color.

[Operator:]

This does conclude today's question and answer session, I'd like to turn the conference back to Todd Becker for any additional or closing remarks.

[Todd Becker:]

Yes, thank you everybody for coming on the call today, obviously a lot of interesting questions, you know from our standpoint we think the fundamentals are very good as we've discussed we’re going to certainly see some things coming out of EPA in the next couple of weeks or couple of months but from our standpoint we are continuing to build our business, we think that the most important thing is you have to be competitive and we're competitive right now into the gas tank and we think that will drive the fundamentals much more than absolute policy and absolute numbers. So thanks for coming on, we’ll keep you updated and we'll talk to you next quarter.

[Operator:]

This does conclude today's conference; we thank you for your participation.