Gevo Inc
NASDAQ:GEVO
Earnings Call Analysis
Q4-2023 Analysis
Gevo Inc
Gevo's financial landscape in Q4 presented a mosaic of growth, potential, and transition. The company's combined revenue and interest income reached $9.4 million, with a boost from favorable interest rates. General and administrative expenses stood at $25.5 million, marking a $2.5 million increase over the prior year, while debt pegged at $68 million was earmarked for the renewable natural gas (RNG) project. A notable financial fortress for Gevo was its liquidity position, boasting $375.6 million, inclusive of cash and liquid investments, which sends a robust signal of stability to investors. Strategic cash injections of $13.5 million in various capital projects signaled a commitment to growth and were accompanied by a promising partnership with the Department of Energy (DOE) for securing a loan guarantee for the Net-Zero 1 project.
Management underscored their belief that Gevo's current market valuation doesn't reflect the inherent financial robustness or the company's prospective growth trajectory. The company is taking a two-pronged approach to rectify this: firstly, by steadfastly executing their strategic plan, and secondly, by amplifying their narrative across the investor community. Their confidence is rooted in what they perceive to be a pivotal moment for the company, with their corporate investor presentation serving as a manifesto of their optimistic outlook.
The roadmap to the company's Final Investment Decision (FID) for the Net-Zero 1 project involves a calculated spend of $125 to $175 million. This is a strategic allocation, not bound by time, but rather by developmental milestones. Crucially, management articulated a reinvestment plan, detailing that the $235 to $236 million expected to be spent leading up to the FID is fully reimbursable. Post-reimbursement, funds are likely to be reinvested back into the project, signifying an aggressive yet thoughtful capital deployment strategy designed to scale up operations and cement Gevo's position in the sustainable fuel sector.
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Good day, and thank you for standing by. Welcome to the Gevo, Incorporated Q4 2024 (sic) [ 2023 ] Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to turn the conference over to your speaker for today, Dr. Eric Frey, Vice President of Finance and Strategy. You may go ahead.
Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. I'm also responsible for Investor Relations here at Gevo. Thanks for joining us to discuss Gevo's fourth quarter and year-end results for the period ended December 31, 2023.I would like to start by introducing today's participants from the company. With us today are Dr. Patrick Gruber, Gevo's Chief Executive Officer, and Lynn Smull, Gevo's Chief Financial Officer. Earlier today we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.gevo.com.Please be advised that our remarks today, including the answers to your questions, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those statements include projections about the timing, development, engineering, financing, and construction of our sustainable aviation fuel projects, our recently executed agreements, our renewable natural gas project, and other activities described in our filings with the Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligation to update these forward-looking statements.In addition, we may provide certain non-GAAP financial information on this call. The relevant definitions and GAAP reconciliations may be found in our earnings release, which can be found on our website at www.gevo.com in the Investor Relations section.Following the prepared remarks, we'll open the call for questions. I would like to remind everyone that this conference call is open to media, and we are providing a simultaneous webcast to the public. A replay will be available via the company's Investor Relations page at www.gevo.com.I'd like to turn the call over now to the CEO of Gevo, Dr. Patrick Gruber. Pat?
Thanks, Eric. Good afternoon, everyone, and thanks for joining us on our call. We are filing our Form 10-K today and we ask that you refer to it for more detailed information after this call.We ended the fourth quarter with about $376 million in cash, cash equivalents and restricted cash on our balance sheet. The total that Gevo expects to have to spend to achieve FID for our Net-Zero 1 project is $236 million to $286 million, excluding certain internal cost allocations. Of which, only $125 million to $175 million of cash is left to spend to get that project complete to FID. So it's a downhill slope to get there.I would like to thank the Department of U.S. Energy's Loan Programs Office for the thorough and diligent work that their team is doing to help us secure a loan guarantee as part of this construction financing.Now, we are quite excited about Net-Zero 1, in fact, even more excited. In the third and fourth quarter of last year, we had McKinsey in here working with us to challenge our assumptions, competitive position, competitive economics and such. The results of their work with us reaffirms that the N-Z 1 plant design to be expected to deliver the lowest cost of carbon abatement compared to other SAF technologies, including HEFA, other ATJ routes and especially direct air capture routes.The reason the N-Z 1 design is expected to win economically is because of the mass reduction in the use of natural gas, the efficiency of the use of resources, creative integration technology, optimization of unit operations and overall efficiency and selectivity in getting to high yields of SAF or other valuable products that we want to make.More effective carbon abatement means that less carbon value has to be recovered in the marketplace to make economic returns. Think of it as more carbon reduction per gallon. That means more carbon abatement per gallon, more bang for the buck, if you will. All of this should result in a competitively priced product for customers and less burden on consumers and taxpayers. It's a good result. It reaffirms and makes it more clear why what we are doing matters.We are laser-focused on delivering EPC contracts, a set of customer contracts with terms that work for the DOE loan guarantee and a DOE project loan lockdown so that we can begin construction, which we estimate would take 24 months. We have still work to do in front of us. We're making progress on the DOE and all the rest of it.In addition to the equity that we have built in the Net-Zero 1 project through that money that we've already spent developing, we have also generated know-how and patents that we filed on a reusable asset, that is the plant designs. This is critical because to enable the promise of SAF, you need an industrial process that works at large scale that dramatically reduces the fossil energy footprint. Well, that's what we've achieved we believe.This doesn't require vetting new technologies. It requires engineering, systems integration and know-how. The knowledge technology intellectual property we have gained through the work on N-Z 1 I expect would benefit way beyond N-Z 1. Why? Because there's 190 operating ethanol plants in the U.S., more than that actually. We expect that there will be lots of opportunity to leverage our knowledge, know-how, capability, technology to produce higher value of low-carbon ethanol and SAF over time.So the market dynamics are strongly in our favor to reuse and repeat the knowledge-based assets we've built up in development of our N-Z 1 business model. That's something that's an important aspect, is that we are a knowledge business as well and we've learned a heck of a lot on how to abate carbon.We have been pleased to see the progress on 40B and the future 45Z and the federal support for carbon abatement in the IRA bill. The Interagency Working Group and the U.S. Department of Treasury have indicated an updated GREET model will be used to quantify carbon reduction and in that, carbon sequestration would count as well as certain agricultural practices. The theme is you have to do the work, though, to actually -- and have real measurements to get it audited and then report it. So you don't get it -- it's not going to be a giveaway. You got to do some work for it. Well, that's good. That plays to our Verity business. More on that later.We strongly believe that field level measurement and tracking of agricultural practices needs to be part of the GREET protocol because we believe that it is at that level that the strongest data for carbon abatement can be brought forth. We believe that getting the policy guidelines right is important since this will be a precedent for the long run.Paul Bloom was with Secretary of Agriculture, Vilsack, and EPA Administrator, Regan, when they announced last week that it will take a few weeks longer for the next generation of that guidance to come out. But they are keen on making sure that it's going to work in the long run. And we think that's a good outcome. So we look forward to seeing the result.We also continue to see strong support for carbon abatement in the states, with New Mexico becoming the fourth state to sign into law a clean fuel standard just this week. This is a success for the second largest oil and gas producing state in the country as well as other states interested in trading similar programs. We congratulate Mexico on this milestone and look forward to working with other states to develop similar programs.Now, I'll switch gears and make a few comments about RNG and Verity. Last year, we expanded our dairy manure RNG capacity from about 350,000 to 400,000 million BTUs per year. I'm pleased that we have generated positive stand-alone non-GAAP cash EBITDA from those assets for 2 consecutive quarters now. Last quarter, our production was at 91% of capacity. This year, we estimate that the non-GAAP cash EBITDA from our RNG business could add up to about $12 million to $16 million on an annualized basis assuming we get the LCFS pathway approved with the score of a negative 350. Those papers are filed. We're just waiting for the result.There is a lot of embedded upside potential with this asset. We estimate that the number could be as high as $50 million to $60 million per year from this 400,000 million BTU plant if LCFS prices recover to where they were a couple of years ago, and including the biogas production tax credit in 2025 to 2027.Of course, there can be no guarantee that the LCFS prices in California will recover to that level, but even a fraction of that will be meaningful to us. I like this a lot. There's a lot of upside potential that's embedded in it, and I'm glad we have the asset.Last year, in our third quarter, our Verity Tracking platform went live with farmers in South Dakota and Minnesota. We tracked ethanol plant customers totaling approximately 2% of the U.S. ethanol industry by volume. Of course, we're the world's largest ethanol market. Our initial target market for Verity in the U.S. is estimated to be about $1.5 billion to $3 billion reducing and tracking the reduction of carbon intensity through the value chain, for a bushel of corn to a seat in a vehicle or an aircraft.Verity is a capital-light fee-based software-as-a-service business, so it's a nice complement to N-Z 1, Net-Zero 1, which is more capital intensive, providing customers and regulators with an audit trial so that they know what they are getting in terms of carbon abatement when they're paying -- and they're paying for that carbon abatement, is a necessary and value-added component to everything we do at Gevo as a carbon abatement company.Now, I'll pass it off to Lynn to talk through the operations and numbers.
Thanks, Pat. Gevo's Q4 combined revenue and interest income was $9.4 million, with the interest income benefiting from higher interest rates. Our corporate spend, that is G&A, was $25.5 million for the year in 2023, excluding noncash and stock-based compensation of $17.1 million, which is $2.5 million increase from the 2022 number. Debt related to our RNG project was $68 million, consisting of $68.2 million of face value, less unamortized premium and issuance cost of $0.2 million.As Pat mentioned, we ended the fourth quarter of 2023 with a strong liquidity position of $375.6 million in cash, restricted cash and other liquid investments. The restricted cash portion is associated with our RNG bonds and certain collateral related to the development of Net-Zero 1 and totals $77.2 million.During the fourth quarter of 2023, we invested and capitalized $13.5 million in cash in capital projects comprised of $1.8 million into Net-Zero 1, $0.3 million into the expansion of our RNG project, $7.4 million into other net zero projects and $4 million for our fractionation and hydrocarbon skid. We also advanced $1.1 million of reimbursable expenditures to our partner-developer for the purchase of wind and hydrogen equipment to support Net-Zero 1.On Net-Zero 1, the DOE and its suite of independent experts are working with us in due diligence and loan guarantee structuring. Once the debt component is pinned down with a formal term sheet, we will formally ramp up the third-party equity capital raise and work towards the close of funding necessary to finance the project construction budget and all the project finance elements such as interest during construction, various reserves and transaction costs.Equity investors are standing by for a clear line of sight to the debt terms, which is underway and will be announced when the DOE term sheet is agreed.During Q4 2023, our dairy RNG assets in Northwest Iowa sold 90,666 MMBtu of RNG. Revenue of $4.4 million for the quarter included RNG sales of $0.2 million and $4.2 million net proceeds from the sale of environmental benefits.Between RNG and Verity growth, we continue to close in on positive cash flow for the company. As Pat mentioned, we see a lot of embedded growth in RNG just by continuing to operate that asset. We also look forward to announcing the first revenues at Verity this year, which is a capital-light, fee-based business.Now, I'll turn the call back to Pat.
Thanks, Lynn. Let me wrap up our prepared remarks by saying we believe Gevo is undervalued given our balance sheet and growth potential. We plan to address that first through execution, and second, by getting our message out. I hope everyone will take a look at the corporate investor presentation on our website, which lays out the enormous upside potential that we see and why now is such an exciting and pivotal time.Let's open it up for questions.
[Operator Instructions] Our first question will come from the line of Amit Dayal with H.C. Wainwright.
Pat, just to clarify on the $125 million to $175 million to be spent on N-Z 1, is that for 2024 that spend coming into play? Or is that going to be over the next few years as you build everything out?
No, that's to get to FID from where we stand today. So it's a budget that will be measured out over time. If FID is in 2024, that's what it will -- it will be -- it could be -- it's going to be -- that's the money it takes to get to FID. It's not a time thing. It's what we have to spend to get the FID.
And just to follow-up on that. Some of this you will get back, I guess, right, as you are spending upfront?
Yes.
Okay. Do you know what the amount is potentially that you --
Yes. So it is -- I think it adds up to be like $235 million. Eric, you can help me here -- $235 million, $236 million or something like that. And all of that would be reimbursable upon FID. At which time we'll probably reinvest it into the project to take a big chunk of the equity of the project. Or it may be that we have better opportunities, which I can't see right now, but that could happen out in the future. So it's reimbursable in its full amount.
Understood. And then in parallel to that, I think in the January update you said you may be spending some funds on future MV projects. Is that still on the table as well?
We are. And we're doing -- it's a low level of spending. But one of the things that we're seeing is that a lot of the customers want to know how to get to way beyond 65 million gallons. So you -- it's about developing some other sites and making sure that we have good ones locked down. We aren't announcing where they are. We just -- that's not to our benefit because there's so much work of development work that needs to be done. But we have spent some. So we do it in moderation. But yes, it's for locking down additional sites.
Okay. And just a last one for me. With respect to Verity, it looks like it's starting to get into the hands of customers, et cetera. And you are leveraging blockchain for this.
Yes.
Any scope of bringing AI-related offerings or capabilities for this? Is there a need for that type of feature in this or use for this in the Verity offering?
There is. So what's fascinating about Verity is that we're a little bit different than all the other companies out there and we're doing it end-to-end. So think of it as carbon capture at a farm all the way through to the seat of an airplane or a seat of a car and how you map everything straight through that, measuring the sustainability and carbon scores, hitting all the regulatory marks that are required for reporting and all of that. It's all of it integrated.And what's interesting about it, as the database builds, I think there will be opportunities for AI, particularly with farmers so that they can see how to improve their fields. We've already seen improvements from farmers, and they're excited by it. And there's -- I think we even posted a video on our website talking about it. But it's pretty darn interesting, where they can see differences of field to field using the tools that we developed. And that's pretty interesting because that allows them to plan differently for the next year and reduce their CI score.We fully believe that we will -- that agricultural benefits will be part of the Argonne GREET model as it gets enshrined into the 45Z and public policy. There's a question of how it will be done. But it's all related to climate smart ag. And Secretary Vilsack and the rest of the team in the administration seems to be pretty committed to make sure that those improvements are measured and reported and get credit where it's due.So that's an exciting thing. Of course, that is something that's a pure upside. Our N-Z 1 needs good corn. But it's also -- remember we're getting our low CI scores from wind power, from how we've done reduction of natural gas and, of course, the CCS pipeline we anticipate.
Our next question will come from the line of Shawn Severson with Water Tower Research.
Pat, I was wondering could you address any real or perceived political risk, I guess, to the economics of N-Z 1? I mean is there anything that we need to be watching for as far as plant economics and any changes in the political environment?
Well, that's -- carbon value is political, right? So this is -- to get real grounded, our cash cost reduction is -- if you read now, it pencils out to be something around $3.80 a gallon. That's very competitive cash cost basis. But we need another $3.80 to pay for all the capital or something. It's something like that, okay?What we need then is carbon value from the marketplace that covers that cost. Well, it looks like there's more than enough carbon value to cover that cost. That's what creates the opportunity. And that comes from a combination of the RINs, the state level programs like in Illinois or in Oregon or, now, in New Mexico or in California or -- we expect one in Minnesota, et cetera. That adds value. And then there's the 45Z potential as well at the federal level. And then there's something else called Scope 3.We know that Scope 3 is being sold in dollars per metric ton, and it's substantial in some cases. But you got to be able to prove, in fact, that you really got a carbon reduction for your money. So when you add all of that up, it looks like there's a lot of headroom here for something to give way over time and carbon-wise.In terms of the sentiments that we're seeing around 45Z, it's -- we're hearing the sentiment of extend it, it makes sense. However, I think having the ability to prove that taxpayers got something for their money is crucial. That's why we're so keen on Verity. That seems to play on both sides of the aisle so far. So I think we're in a good spot overall.So it looks like there's more than enough carbon value in the marketplace through variations of things that might change to some degree. And then it looks like it's heading in the right direction. That's my take.
That was helpful. And my next question is, I understand you were at a SAF conference that was last week, I believe, in London. What's the takeaway from the user environment? And I don't know if it was more on the investment side there, on the user side. But just what are you hearing in the SAF markets? I mean, obviously, you guys have already had several great offtake agreements. But what's the latest in the demand picture and what some of the key points are from the potential consumers?
Well, I think that the airlines know that they have to do something. And so it's a question of how do they do it, what do they do it, and what are the real terms. And that is -- that's the -- what are the real terms of contract that lead to financeable debt deals, that's going to be the critical issue that has to get resolved. And we're working through partners on the customer side and the DOE on that issue. And everybody is cooperative.I think that everybody recognizes [ what ] we've run into. They've all seen this McKinsey work. They've seen the competitive analysis. We're very transparent about this stuff. And they see that the ATJ is the most cost competitive route to make SAF and to do carbon abatement.And an important point is this. I keep saying carbon abatement. What this is about, the actual cost to reduce the carbon, right? And so, we're at about $450 per ton or so is what we would pencil out to be today. And the next best alternative HEFA would be about $600 to $700 a ton. Power-to-liquids, which everyone is so enamored with it seems for capturing CO2 and making liquids, that might be $1,100 to $1,500 a ton.So we're a fraction of the cost of some of those technologies. That data is sinking into people. And so ATJ is a fundamentally long-run competitive product and technology. So it's about sorting that out. So at that SAF conference, a lot of the discussion was about the various technologies and the cost of carbon abatement, what's real and what isn't.And then there is a question of financiers, where they say -- they hear so much noise about all these different technologies, it's confusing for them. They have no idea, because when they go to the lab, they'll have a new answer. "And it's the greatest thing and it'll be free," and things like that. "Hi. We can use 3 pounds of hydrogen to make a gallon of jet fuel like you would with power-to-liquids. Oh, it will be free." It's stuff like that. And so it doesn't -- it isn't -- that isn't real.So I think the reality of things are setting in for people. And of course, we come along and we're like, "Hey, this is the real deal. Let's go." So we've got good partners that are being cooperative.
So my last question, I want to follow up a little bit on what Amit had asked. And that was about the expenditures. I think when you start to peel back the layers, the company is in a substantially very strong financial position and balance sheet.But I wanted to walk through -- and I think you did a little of this in the new deck, which was very helpful. But walk through kind of what's operating expenses in the plan for 2024. And what is, let's say, spend that could be done -- pushed out or timing dependent. So it's a long way of asking, what do you really have to spend in 2024 and your flexibility in spending cash?
Because the main mission of Gevo is to get the N-Z 1 operating -- the number that I threw out there of that range in the beginning is the chunk of the money, the bulk of the money that we're going to spend. If we stripped everything away and say money that's not recoverable someday, so not project money, then I think we're left with maybe $12 million to $15 million or so of basic burn, or what most companies call basic burn.Now, we have a bunch of activities. We have a big -- we're spending a lot of effort and resources, people, on government affairs and all the things related to make N-Z 1 successful and profitable, the engineering. And we're developing some other sites.And so when we bundle that all together, it's in that range that we're talking about already. And we'll moderate the spend throughout the year depending upon how fast the DOE goes or how fast all the pieces and parts come together, or if there's some kind of a turmoil in the marketplace or whatever. So it isn't like it's -- we're just saying shoot the whole lot and it's all gone.We do careful moderation along the way. So that's a long way of saying that when you get us down to the really basics, if you just looked at our management plus R&D, plus accounting and stuff like that, it's a pretty small number.
Our next question will come from the line of [ Kumar Raju ] with BBG.
Kumar, are you there? Yes, let's move on.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Gruber for closing remarks.
Thank you all for joining the call today, and I appreciate you listening in. And thank you for the questions, too. I'm glad to clarify some of these -- to clarify some of these things that have been confusing. And we really feel pretty good about where we are. And I like what I see on the Argonne GREET. I'm thankful that they're taking a serious approach of getting it right. That's good for all of us.In terms of the 45Z -- and one comment on that, just to be clear. The rule that was going to come out is a 40B rule, right, that expires at the end of 2024. What we expect to see is going to be talking about, "Here is the key components that are going to be included in 45Z as guidance." So I expect people will be a little bit confused about that.45Z is a thing that actually matters. So whatever they say about 40B serves as some reference and precedent. So I expect them -- the 2 things to be different. Whatever they say about 40B and how they implement that, I expect that it will be different than 40Z. But I expect them to give guidance to what 45Z will be.With that, thank you all. Thanks for following us and being part of Gevo. Bye-bye.
This concludes today's conference call. Thank you for participating. You may now disconnect.