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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. And welcome to the Green Plains Incorporated and Green Plains Partners First Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Please note, this event is being recorded for replay purposes.
I would now turn the conference call over to your host, Jim Stark, Vice President of Investor and Media Relations. Mr. Stark, please go ahead.
Thank you, Crystal. Welcome to the Green Plains, Inc. and Green Plains Partners first quarter 2018 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer; John Neppl, our Chief Financial Officer; and Jeff Briggs, our Chief Operating Officer.
There is a slide presentation for you to follow along. You can find the presentation on the Investor page under the Events & Presentations link on both corporate websites.
During the call, we will be making forward-looking statements, which are predictions, projections or other statement about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ because of factors discussed in this morning’s earnings press releases and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q and other reports and filings with the Securities and Exchange Commission. You may also refer to page two of the website presentation for additional information. We do not undertake any duty to update any forward-looking statements.
Now, I'd like to turn the call over to Todd Becker.
Thanks, Jim, and good morning, everyone, and thank you for joining our call today. We reported a net loss of $24.1 million or $0.60 a share for the first quarter. We generated $23.1 million of EBITDA after corporate costs for the first quarter as well. The consolidated cost margin was $0.05 a gallon during the quarter.
Green Plains produced 280.4 million gallons of ethanol in the first quarter versus 326.4 million gallons of ethanol for the same period in 2017. That was 76% of our operating capacity for the quarter.
As we indicated in our year-end call in February, we were slowing our production because of the weak ethanol margin environment. We took down another 5% of our production during the quarter, so we're approximately 60 million gallons lower than our historical operating average of 92%. We also had a major capital improvement project at Madison, Illinois this quarter, which lowered our production levels and I’ll get back to that shortly.
That overall production or reduction in our production levels is equivalent to 1.4 million barrels of inventory, not sitting in our storage tanks somewhere in the United States. So we believe the main reason that stocks grew over the last six weeks were due to our disciplined approach to production run times.
We saw our margins recover in the second quarter because of this. Then a reverse and then it started to strengthen again. To say that we have unprecedented volatility is an understatement. Overall, margins across our platform for the second quarter have finally now gotten back to high-single digits, low-double digits as an average. I will talk more about this overall market later in the quarter.
Finally, to close on this topic, we expect our run rate to get back closer to normal this quarter yet industry run rates are lower overall due to maintenance turnarounds. We will continue to take a disciplined approach to production because we have – we believe that doing so can have a positive impact on the margin structure yet often times the industry doesn’t agree with this view.
We took Madison, Illinois from a continuous to batch production which will have major effect and the overall competitiveness and margin structure for this plant and our platform. The Madison shutdown had approximately $0.015 gallon of negative impact on the consolidated crush due to lower cost absorption.
We did have a minimum volume commitment payment to the Partnership of approximately $747,000 for the first quarter due to this lower production. We did generate incremental income from using the Hopewell asset as a terminal this quarter bringing in gallons from other facilities, unloading those gallons at Hopewell towards Green Plains’ partners benefited. John will cover this in more detail in the call.
Our company ethanol export volumes for the first quarter were 73.1 million gallons or 26% of our total production. 95% of our export gallons moved through our export terminal in Beaumont. The terminal unloaded 25 unit trains during the quarter.
After working through some startup pains in the first few months of operation in Beaumont, we are seeing solid performance metrics at the terminal and we will continue to work with our JV partner on approving the turn times. We expect to offer our interest in this terminal to Green Plains Partners later this year.
Green Plains Partners reported 17.1 million of adjusted EBITDA and a coverage ratio of one times for the quarter. The GPP Board approved an increase in the distribution to $0.0475 for the first quarter equaled to an annual distribution of $1.90 based on the recent unit price of $17 for the Partnership that is yield of 11.2%.
We’ve continued to make progress on the JV with Delek Logistics and barring any regulatory delays. We anticipate the transaction will close in the second half of 2018. The unit train terminal located in the Port of Little Rock which is a joint venture between the Partnership and Delek U.S. did open for business. The first train was offloaded on April 12 and customers have begun utilizing their terminal.
The Food and Ingredients segment had its best quarter to-date with approximately $16 million in EBITDA. We continue to see solid results from both our cattle operation and Fleischmann's Vinegar. For cattle, we sold a record 137,000 head of cattle in the first quarter at an average of $73.5 EBITDA per head. Fleischmann's continue to experience great tailwinds as well. Since we have bought it, we have grown volumes in specialty products along with the core business.
Demand for these products are growing both domestically and internationally, and it’s coming from new segments such as per foots in addition to meet and poultry. Our average selling prices remained strong. The quarter would have been even a bit better if not for the delays in the pepper and cucumber harvest, which pushed canning season back a quarter.
Our Ag and Energy segment had 7.7 million of EBITDA, which is better than the first quarter of last year and we still expect that segment to finish strong in the remaining three quarters. All together, our non-ethanol segments generated $40 million in EBITDA, which is on pace for the expectation we laid out at the beginning of 2018. While our non-ethanol segment keep performing well, our overall financial performance in the first quarter was below our expectations.
Now I am going to turn the call over to John to review both Green Plains, Inc. and Green Plains Partners’ financial performance. I’ll come back later on the call to discuss the current ethanol environment and the portfolio optimization program for Green Plains.
Thank you, Todd. Green Plains, Inc. consolidated revenues were slightly over $1 billion in the first quarter, up 18% from the first quarter a year ago. The increased revenues attributable primarily to the acquisition of three cattle feeding operations in the first half of 2017.
Consolidated volumes of ethanol sold for the quarter, increased approximately 7% to 384 million gallons, but the average price of ethanol was lower by 8% in the first quarter compared to a year ago.
Consolidated net loss for the quarter was $24.1 million versus a net loss of $3.6 million a year ago. Our effective federal tax rate was 23.6% for the first quarter. Earnings before interest, income taxes, depreciation and amortization or EBITDA for the first quarter was $23.1 million, compared to EBITDA of $43.8 million for the first quarter last year.
For the quarter SG&A increased $2.2 million driven almost entirely by the growth in cattle feeding operations and a prior year favorable adjustment incentive accruals. Interest expense increased $3.6 million, driven primarily by incremental borrowings for cattle inventory, but also due to roughly 60-basis-point increase on a floating rate debt.
For Green Plains, CapEx was just over $6 million in the first quarter, more than half of which was maintenance CapEx across our ethanol cattle business and vinegar operations. We anticipate we will spend about $30 million in CapEx for the remainder of 2018, with about two-thirds of that being maintenance CapEx.
Our total debt at the end of the quarter was just under $1.37 billion. This balance included $534 million on our commodity revolvers, which are secured by working capital collateral, including readily marketable inventory of $596 million. Total debt including our Term Loan B, convertible debt and Partnership credit facility was $839 million.
On slide 12 in the IR presentation, you will note our term debt leverage ratio was 6.3 times at the end of the first quarter versus 5.9 times at 12/31/17, resulting from a lower trailing 12-month EBITDA. Our liquidity remains strong with $265 million in total cash, along with approximately $472 million available on revolvers at the end of the quarter.
For Green Plains Partners as we reported adjusted EBITDA of $70.1 million for the quarter, which was 467,000 less than the first quarter of 2017. The adjusted EBITDA included $747,000 in deficiency payment from Green Plains Trade Group as a result of ethanol production running below the minimum volume commitment of 296.6 million gallons for the quarter. Under the terms of the storage contract, Green Plains is allowed to utilize that payment as a credit against volumes above the NBC level during the next four quarters.
Green Plains Partners had 298.3 million gallons of throughput volume at its ethanol storage assets, of which 17.9 million gallons was incremental trainload volumes and a reduction of inventory in tanks from the bill we had at the end of the year.
Distributable cash of $15.5 million was down 704,000 from $16.2 million reported a year ago. DCF was impacted by lower production gallons from Green Plains and higher interest expense due primarily to an increase in rate on our credit facility. We incurred capital expenditures of $1.2 million for the first quarter, primarily due to expanding our truck and tanker fleet.
The Partnership distribution of $0.47 per unit declared on April 19th resulted in a coverage ratio of 1.0 times for the first quarter. On a 12-month basis, adjusted EBITDA was $69.2 million, distributable cash flow was $63.3 million and declared distributions were $60.3 million resulted in a 1.05 times coverage ratio. Our long-term goal remains at 1.10 times.
Now, I'd like to turn the call back over to Todd.
Thanks John. So we generally continue to remain in this spot market when there are opportunities to lock forward we will attempt to do that and we have done that for some of the remaining gallons in the quarter.
We will not give specific percentages on a go-forward basis anymore as our position in the industry is large enough for others to use this information to make daily market decisions. Margins as indicated earlier remain volatile, yet have shown some improvement over the last week or so. Inventories are 1.1 million barrels less than the same period a year ago, yet we still have three days or four days of oversupply, which weighs on the market, but not enough to justify the weakness in margins as we approach summer driving season with a much better market metric than last year.
Currently, we have no reason to change our fundamental outlook for 2018, a 16.1 billion gallons of ethanol production, 14.4 billion gallons to 14.5 billion gallons of domestic lending and 1.6 billion gallons to 1.8 billion gallons of exports. We saw record exports totaling 512 million gallons in the first quarter, there were a number of new players buying U.S. ethanol including Colombia, Saudi Arabia and Switzerland. Brazil first quarter totaled nearly 240 million gallons.
Despite the recent increase in tariffs in some markets, cheap octane continues to find a home around the world, a few things need to happen to meet and exceed the high end of the export range, such as Japan implementation, a strong Brazil import program over the last half of the year and resolution of the China trade issues around agricultural commodities and ethanol.
On a year-to-date basis, gasoline demand continues to run around 3% better than 2017. Distillers values remain very strong versus a replacement to corn and demand is excellent. While some reports have come out that we are losing global share to high pro soy meal, this is only due to strong domestic demand as dry weather early in the season kept more at home. We are down slightly year-over-year on exports but there is no concern at all on demand and if the relative value adjust the global market will substitute freely.
On RVP, we remain hopeful we get the waiver for E15 very soon. We will wait and see what comes out of the White House meeting later this week. We remain optimistic on E15’s expansion in the U.S., when we look at sales for 2017 with the stores that were selling the higher blend last year. We see the ethanol blend at our retailers that offer this product to increase to a 12% average across their gasoline sales.
From verified retailer data of those who participate in the Prime the Pump initiative approximately 68 million gallons of incremental ethanol was blended into the fuel supply last year. These incremental ethanol sales were from approximately 950 stores at the end of last year. Today we have 500 more stores selling E15 with another 300 to 400 more to start selling E15 by the end of the year.
Our expectation is that when all the stations are implemented, the go-forward run rate of sale of new ethanol will exceed 175 million gallons from the E15 initiative. We have heard much lower volumes from outside sources but this is data from the source.
Let me clear up by one point, often time a retailer who configures an old station or build a new one at not only E15 pumps, but also E85 as well. When I give you these numbers, it includes new incremental total sales from ethanol from both grades which is an important distinction.
We don't care how we sell it as long as we are selling additional volumes through ethanol in total, getting the RVP waiver for year around sales could double the amount of incremental gallons of ethanol blended from these stations as a result, adding more locations will obviously grow our penetration of E15 into the marketplace.
Now let's talk about the portfolio optimization program we announced. As you read in the press release this morning we have undertaken a portfolio optimization program. Our first 10 years will focused on building a business that will grow long-term shareholder value. Today, we operate 1.5 billion gallons of ethanol production. We are the largest industrial vinegar producer in the world and the fourth largest cattle feeder in the United States and having MLP with not only assets from the Green Plains ethanol plants, but other terminals with great locations and strong earnings consistency.
While we believe that more than the $2 billion invested in this platform would drive value for our shareholders, the reality is that we are not getting total credit for the total value of the assets in the portfolio today.
As we evaluate our business, we believe that the collective sum of the parts of our platform is undervalued. While the sum of the parts analysis is a nice exercise, it doesn't mean anything if you don't monetize it. Well, that's what we are planning and willing to do, monetize it like we did back in 2012.
Our portfolio optimization program is focused on driving our share price higher. To achieve this, we're going to first significantly reduce our overall debt level and eliminate our term debt as we believe going forward refining and processing assets like our plants should have little or no leverage to deal with the volatility of today's markets. We are still very positive the future of ethanol, yet we have to reduce our leverage to achieve maximum flexibility with the remaining platform.
In addition, the second aspect of the program is to align our assets around producing high protein animal feed and maximizing the opportunity of an end-to-end export supply chain with plants that cannot only make export grade, but help maximize return and opportunity we have with our new export terminal in Beaumont, Texas.
As we divest certain assets that don't align with our strategy, we will use the proceeds to pay down our term debt. We are targeting an elimination of our Term loan B and three and quarter convertible notes with only our four and eight convertible notes remaining outstanding by the year end or early Q1 2019. XMS Capital Partners has been retained as a lead advisor for our portfolio optimization program and Ocean Park Advisors have been hired to manage the sales process of certain assets.
Another part of the program is to reduce controllable expenses by $10 million to $15 million on an annual run rate basis starting in the third quarter of this year and into 2019. Any savings from this portfolio optimization program will be added to this number.
The new tax plan enacted at the end of 2017 proved favorable to our last year’s results. But commodity processing companies like ours carry significant debt balances have a negative tax implication. As we reduce our overall debt level as part of the portfolio optimization program, we believe we are taking steps to take advantage of tax law change that will be very beneficial in the long run to our shareholders. In addition and even maybe more important, the reduction of the corporate tax rates makes it an opportune time to sell assets and pay less in taxes versus even last year.
Now let’s move and discuss our Fluid-Quip announcement as well, never before in the industry’s history have we seen technology improvements moving so fast. We have been evaluating three to five bolt-on technologies that all have interesting characteristics and possibility for the industry to enhance and stabilize margin structures going forward.
Just because we made a choice for one, today doesn't mean we would not implement others in the future. As you know, we have already indicated we will be a fast follower when the time has come.
We are pleased to announce we have selected Fluid-Quip’s process technology called Maximized Stillage Co-Products or MSC for our high protein feed technology. We will have the first install at our Shenandoah, Iowa facility and will work to have completed in mid-2019. Our plan will be then to install this technology at several of our ethanol plants over the next three years.
MSC produces high protein animal and fish feed ingredients and we expect it to provide a consistent uplift of at least $0.10 a gallon to the ethanol margin structure at the plants where we install it.
MSC leverages proven technology that has been deployed in three locations with the fourth one starting production later this year. We believe that high protein feed production will better diversify our ethanol revenue stream and take advantage of the growing demand for protein worldwide. The high protein feed produced using MSC improves the amino acid profile when compared to competing proteins while driving high-protein concentration in the distilled range product.
We feel confident that this technology will produce 50% protein with opportunities to even go higher in the future making an excellent ingredient for aquaculture, pet food, swine and the poultry industry among others.
It will impact about 20% of distillers production at our plant, while leaving the other 80% unchanged. The product being produced today is a direct substitute for high protein soy meal and in some cases even higher value fish meals around the world. I believe that is the best investment to make is to go and after the higher protein that we can get out of our plants.
We will also use the additional proceeds from selling assets in addition to free cash flow generation to fund this organic growth of high protein feed production after we pay down our debt levels as indicated earlier.
We also plan these proceeds from the portfolio optimization program and free cash flow to buy back shares when the market dictates, we have not lost focus on the value of our ethanol production assets and if our share price is below book value, we know that the best investment we can make is buying back our stock. This way the interest and principal payment reductions can also go back to our shareholders as well.
As it relates to Green Plains Partners, if we do sell ethanol production assets, we believe that the independent directors of Partnership and Green Plains will negotiate in good faith to buyback of storage assets now owned by the Partnership. The goal with the Partnership would be to maintain the distribution and long-term coverage ratio of 1.1 times.
We believe the proceeds from the repurchase of the storage assets and related super contracts provides the Partnership with the flexibility to pay down its existing debt and potentially buyback units as well so the program will not be dilutive to current unitholders.
While we would like to provide you with more information on our portfolio optimization program, it is premature for us disclose any other details at this point. Our actions are to improve our market capitalization, delever our balance sheet and improve our financial flexibility as we focus on the next year 10 years at Green Plains.
As a reminder, the program's five objectives included in the earnings release this morning are, divest assets to improve the company’s share price by significantly reducing or eliminating term debt by the end of 2018 with the sales proceeds. Invest in high protein process technology at Shenandoah, Iowa facility, with other locations to follow. Repurchase shares with the remaining proceeds and free cash flow. And finally, reduce controllable expenses by $10 million to $15 million per year starting in the third quarter of 2018. As we reach success along the way on this program, you will certainly see the appropriate announcements on those milestones. We are kicking off the program today.
Thanks for coming on the call today. Now I’ll ask Crystal to start the Q&A session.
Thank you. [Operator Instructions] And our first question comes from Adam Samuelson from Goldman Sachs. Your line is open.
Yes. Thank you. Good morning, everyone.
Hi, Adam.
Hi, Adam.
Hi. So, I guess, the first question, Todd, I wanted to dig a little bit deeper on the portfolio optimization if we could and really just to be clear that, what is and what is not on the table. I know you don’t want to give all the details today with respect to sales process, but just, I mean, are we in a position where there are certain ethanol plants that could be for sale and the comments on the Partnership would allude to that? But also with reduction in term debt, I mean, you took a lot of term debt on when you bought Fleischmann’s that’s not a high protein business, is that something that you'd be looking at. Just anymore color about -- what the Green Plains portfolio looks like it just smaller ethanol company with feedlots and the Partnership stakes. Just help us think about what the future of Green Plains looks like if you could?
Yeah. I think when we talk about what will be on the table and off table. I mean, there are going to be certain things that most likely won't make it to the process. But, in general, I would say, across the portfolio we wouldn’t rule out looking at all the different businesses to see what would be available including the ones that you mentioned.
So, when we look at go-forward strategy of the company, obviously our debt levels don’t match the volatility industry and we’re going to fix that because what we've seen lately. So we want to be term debt free, we want to reduce our debt -- we are going to get rid of one of the converts. We’ll have one remaining convert open and we want to continue to reduce our working capital uses as well and increase our free cash flows. And so, while we’re not going to get specific right at this point, we are kicking off the program and I would say we are looking at the whole portfolio.
Okay. And then on the Fluid-Quip investment at Shenandoah, can you talk about the capital costs associated with that and how -- I mean I know you said you’d look at all alternative options. But across the balance of the portfolio, how much -- how many of the plants do you think would make sense for similar investments over time?
Yeah. So our view is the investment will be in the range from $30 million to $40 million depending on the ethanol plant, smaller plants could end up being a little bit lower. We believe that the minimum that we will earn from that is about $0.10 a gallon per plant. So we’re looking at basically two-year to three-year pay back depending on the asset. But really when we look at it when we start up an ethanol plant that has this technology and it also has corn oil as well, which is part of it also increases our corn oil yield.
When we look at starting up with $0.10 minimum rate that we’re going to earn on the protein along with the three and half cents or so we’ll be earning on our corn oil, before we even get into ethanol margins we should be generating about $0.13 a gallon to $0.14 a gallon off these plants, so you could see that the protein initiative is extremely important.
So while certainly we’re going to do one today and through this process as we are evaluating how we’re going in our portfolio optimization process, we will start to look at what our the next plants we will deploy this technology.
I would say though that, as I said in the remarks, at this point I've never seen so many opportunities and different technologies that are appearing today that are truly have capabilities to fully scale within the industry.
So some people will choose high protein technologies. I think there are other technologies with lower protein, but possibly the generation of some cellulosic ethanol and among everything else there are other homemade technologies that people are deploying, and this just tells you overall optionality of the long-term value of the asset base.
For us, we are truly focused first on reducing our debt levels and getting to a point where that matches the industry and the volatility that we’re in, and so that’s the main reason why we want to do this. But secondly we also want to fund our growth in the protein initiative and we think over time potentially there is even more technologies that will improve the protein even more that are coming to the table.
Okay. And then just one quick one on the second quarter outlook, last year you took big downtime in May, in June that impacted your second quarter ‘17 production. You’re going to be lapping that and this one to be clear kind of is the expectation that your production in the second quarter ramps backup to that more typical low 90s utilization rate or do you still have made the decision on where how the second quarter production will look?
No. I think with the overall industry downtimes and the increase in demand overall, the five weeks of draw or five weeks out of last six weeks or so of draws and coming to summer driving season. Besides maybe one or two locations we are pretty well returning to more normal operational levels at this point.
Okay. That’s it. I appreciate the color. I’ll pass it on. Thanks.
Thank you
Thank you. And our next question comes from Farha Aslam from Stephens Incorporated. Your line is open.
Hi. Good morning.
Good morning, Farha.
Your comments regarding your cost reduction program that $10 plus million of cost is pretty significant for a company your size. Could you tell us the sources of those cost savings and the timing?
Yeah. I mean, basically, when we -- we’re not going to give you complete specifics on it, but some of it will be over our corporate SG&A and some cost that we’ve incurred over time. There are things like investment in the some of E15 initiatives, things like we have been ramped up to be an acquisition company for a long time, and probably, have some excess resources around that we’ll look at as well outside services, inside services, we’ve changed things like how we are executing our future contract.
I mean it’s going to be a combination of just about everything. Most of it will be come out of that, a lot of it will come out of the corporate SG&A line, but a lot of it will be at plants as well and that’s just our initial target. But when you look after 10 years and $4 billion or close to $4 billion in revenues and $40 million to $50 million of expenses just to run the business and we become more efficient.
And also when we look at that, I think, there are just things that we can do better and spend less on certain things whether it's subscription or other fees that are out there, it just a lot of things that we ramped up and over time, I think, we have now the chance to consolidate some of those expenses.
And just timing of the cost savings?
Yeah. We will start this program. The run rate we’ll start in the third quarter of 2018 and start to ramp up for the next 12 months.
That’s helpful. And then just a market view could we always have a great read on the export markets, you in particular highlighted Japan and Brazil as potential sources of demand. Could you share with us the dynamics you are seeing and what could push U.S. exports to your higher end of expectations?
Yeah. So when we look at the export market for 2018 and going forward, obviously, Brazil is still big piece of that and we believe while -- maybe a little bit soft in the second quarter, they still need a lot of volume to make up the shortfalls down there and that's what the market down there has been telling us.
Obviously, renewable bio program for the long-term is very good for our exports to Brazil. But in general, we still think during the last step once we get through the harvest season and these lower ethanol prices they’re going to ramp right back up and continue to take our product as we continue to be a very good low cost replacement for them.
Other countries that have been buying ethanol that we have countries, we have seen places like Saudi Arabia and Columbia and even Puerto Rico has bought some ethanol, just because the relationship to gasoline and even with Saudi announcement of $80 as their oil target, I think, that’s all still very bullish the spread between and the inclusion rate and ethanol around the world.
When we get specifically into Japan, I mean, obviously, the announcement of Japan is favorable to us. We think that’s worth $60 million gallons a year to $80 million gallons a year that goes in as a blended with other products, but in general we think that will switch backup to United States and happen quite fast.
And obviously, what we saw with China in the first quarter, we like to see that continuing to the rest of the year, but we are going to have to work on that as well, but they are times when we believe China will also step into the market during the rest of the year albeit.
We are going to count on that as much as we had originally planned, but our numbers were never really that high anyways for China. It was a nice to have and the way to see. So overall right now its 1:6 to 1:8 number, I think, we will surpass that this year and I think couple of things have to happen to be on the high side of that number.
But China is only a piece of that equation. There is a lot of other demand that showing up right now and even India was pretty weak in the first quarter and we think they could continue to ramp up as well for the rest of the year. So we are at $1.6 billion gallon to $1.8 billion gallon export number, as we have been pretty well for the last couple of months or last kind of quarter or two and we will wait and see what transpires.
Thanks to the added color. I appreciated.
Thank you. And our next question comes from Heather Jones from Vertical Group. Your line is open.
Hi. Good morning.
Good morning.
So I’d like hearing about the portfolio optimization, but I was curious as to the timing, I mean, is it the changes and the revamp of the tax code and how that disadvantages companies with high debt. I was just wondering what triggered this decision?
Well, that was part of it. I mean, what also triggers is we strongly believe that because of the volatility in this industry -- continued volatility it doesn’t match that level that what we have and we want to fix that, and we think we have – we know we have levers to pull to do that. We know the value of our assets are not fairly reflected in the overall market capital of this company.
So that was the first thing we looked at. Secondly, when the tax code did change, when a high debt company with a narrow margin structure like commodity businesses have, potentially you have to make a sig amount of net income to offset some of the negatives of the tax code and so with the volatility that we have we feel like we are at a bit of disadvantage carrying this much debt relative to the tax code.
Second thing though that in our favor was it’s never been a better time to sell asset because of the tax code because we don’t pay as much in taxes overall, plus we have get carry forwards where that would even reduce our taxable obligation as well. So we are in a very good position to take advantage of this tax code at this point.
But really the bigger thing for us is that we are going to take the view overtime that once we significantly reduce or eliminate our term debt, over time we feel like that will give us significant financial flexibility to do things that we have maybe even been looking in the past that we haven’t been able to do.
Even the buyback shares by having a term debt today. We are limited on the amount of shares we can buy back in the market as well and we don’t want to have that limitation on us, especially when we had opportunities last quarter when the stock was very weak and so, although, we were limited because of the way that the term loan is structured.
So there are bunch of different reasons. But we also as really truly come down to when you look at some of the parts, we want to bridge that gap somehow and close that gap of some of the parts that we believe our company is worth versus what credit we are getting in the public markets.
There is a significant difference between a private valuation of ethanol plants and the public valuation of ethanol plants. And we have seen that for years and ultimately overtime we have to figure out the way to close that window and we believe by paying off our debt and starting to repurchase shares and go after the protein initiative we can bridge the gap between the private and public valuations that are out there.
Okay. So that would -- I would infer from that, that the ethanol plants turn on the table. My question with that is in the past part of your strategy has been consolidating ethanol spacing, getting to a point where GPRE controls us enough of the gallons to be able to influence things and so if you sell from your plants doesn’t that actually reverse that process increase fragmentation and so just help -- if you could help me understand that?
Okay. I think the industry remains completely fragmented at this point, yeah. And so while we have done things to reduce production overtime to help reduce inventories across the industry we are not getting paid for that and I think it would take a significant consolidation to actually get to a point where you have enough critical math. And so from our standpoint that the cost of doing that versus investing in high protein soy meal or high protein DGGs and the upgrade of our margin structure overall over the next couple of years we would rather be more fragmented but with a more stable margin structure than less fragmented with a volatile margin structure.
So at this point size scope scale at 1.5 billion gallons or even 2 billion gallons does not have a big enough impact in a 15 billion gallon to 16 billion gallon industry and I think the industry will remain fragment for quite a long time.
So while certainly we made on less ethanol gallons, but potentially within those gallons there are couple of things. Number one we will have a more study margin structure probably a better margin structure because of the implementation of the high protein technology.
But overall we do have some ethanol plans that could probably increase in size over time. We are not going to do anything today, but we have some investments we will also put on hold waiting for demand to catch up, but we still have some major potential expansions that we could do as well to some of our highest value plants and we probably look to do that as well down the road but nothing today we would expand or look to do that. But, in general, I think, the industry will remain fragmented for quite a long time.
Okay. Thank you so much. That’s helpful.
Thank you. And our next question comes from Eric Stine from Craig-Hallum. Your line is open.
Good morning, I just wanted to ask two marker questions. I know you talked about that you are optimistic about the E15 waiver, just as part of that and the meeting up coming, negotiations going back and forward. What is your confidence level that the RIN caps are not on the table that there can be an end to some of the exemptions given for small refiners, how do you think that plays out?
I think the White House is very geared towards trying to come up with a plan here. And so the refinery exemptions without a doubt I would say put us into potential the driver seat on the RVP waiver. Those are being given out as the say in the market like Candy and I think that we have got to do some things to take that challenge on.
And so, but I would say interestingly enough, while the refiner waivers have certainly -- will certainly impact a large amount of potential ethanol demand, E15 implementation I think will offset some of that. But we are still going to challenge potentially those waivers at some point in the future.
But I think more importantly this White House understands the importance of the electorate that help put them there and that’s the farm states. And these farm states are definitively have some potential problems facing them and we believe that an RVP waver overall they understand the importance of it. We will come with other things attached to like a RIN cap or some think like that.
It’s always a possibility, but I would say our champions that have been fighting for us in DC have been pretty clear about they wanted RVP waiver with no attached or anything attached to it. So, again, we will wait and see, I think, it’s an important meeting at the White House coming up and we will probably all know more in the next 48 hours.
Okay. And may be sticking with that topic what’s going on the regulatory front. Just the CAFÉ standards, I mean, is there an opportunity that potentially as opposed to just the auto OEMs and things that they need to do on their end that the octane value of the fuel is also part of some sort of negotiation for what this could like going forward?
Yeah. I am not sure anybody want to get into values and how it’s going to like more than we are saying. I think there is somewhat of a consent that the higher octane fuels as a standard is a good thing and I would say there is probably some consents between refiners, automakers and the ethanol industry that higher octane is a good thing.
Now the question really is what is that standard going to look like potentially. There are a lot of people talking about the 95 standard and I would argue it’s probably not high enough at this point for us to get very excited about as an industry. But, in general, if we can push that potentially higher and so we don’t have to come back later on then it becomes interesting.
The autos, the refiners and the ethanol industry, I think, can find common ground at some point as the – everybody is talking about the electrification of the fleet, but we still had record gas demand in the United States over the last couple of weeks. So, well that’s certainly an important initiative, even more important initiative is they have high octane fuels available in the marketplace.
Okay. Thanks.
Thank you. And our next question comes from Craig Irwin from ROTH Capital Partners. Your line is open.
Thank you and thanks for taking my questions. So, Todd, if we could fast forward to when your portfolio optimization is complete and sort of look out to the future from there, obviously, that's where you want to get to strategically. Can you maybe describe for us how this would change things from a portfolio diversification standpoint, maybe opportunistic consolidation or de-consolidation of adjacent businesses and can you maybe talk about other opportunities that you see adjacent to the platform that you imagine out beyond this optimization strategy.
Yeah. I mean, we're done with this. Obviously, having a reduced debt level and no term debt for a company like ours will give us great flexibility in the future and it had in the past as well that we've been able make acquisitions when we reach net term debt zero. And yeah, this is going to go – this is hopefully going to even beyond that.
And so when we look out in the future, we're still going to be a major ethanol producer in the United States. Although, we are going to be a major high protein producer in the world, if we look at our total platform today, not borrowing any divesture, we produce about 4 million tons of animal feed of which 800,000 tons of those will probably could get converted into high protein animal feed at about $0.10 a gallon increase, which is worth about $140 million to $150 million minimum a year. And put that on top of the $70 million or $80 million we earned from our corn oil program just walking and turning on a ethanol plant would be well over $200 million a year before you can get into the ethanol margin.
I think that's a very important distinction. So whether we're 1.2 billion gallons or 1.4 billion gallons or 1.1 billion gallons, we're not sure where this will end up yet, but what we do know is under remaining gallons we will have a margin structure that it’s consistent, predictable and not volatile for everybody looking at our company.
Along with that depending on what we look at the asset base outside of our ethanol production. We believe that by reducing our debt levels, what something we would sell today would not necessarily be something we wouldn't bought, look at in the future again to continue to diversify our income.
I think though that while we haven't certainly announced anything, we're going to look at the total portfolio and have been looking to total portfolio for opportunities to extract value and bridge the gap between some of the part analysis that we have and the analysis in the market today, and the valuation in the market today.
So fast forward we could have a couple of different things happen albeit where we want to have in a year or two is the start to get to a very stable and predictable margin structure. As soon as we turned on the lights every morning and then from there have big opportunities and generate more free cash flow.
One thing that’s really important to us is that, we have been wanting to look at our shares and our buyback program but have been limited by the restrictions that we have in a low margin environment when you carry the term debt that you have and so we can't return capital to shareholders before we take care of that and we believe that by doing all of these things in general we should be able to drive the share price higher for our investors.
Great. And then my second question is about Green Plains Partners. So, you haven't been super precise in which assets will be divested, but I think it's fairly obvious that your optimization will impact the future growth profile like Green Plains Partners. Many of those – many of us following the company were optimistic that GPP would facilitate further consolidation, maybe more attractive consolidation at the industry and then story seems to change quite dramatically. How do we think about the future for Green Plains Partners in this portfolio optimization strategy? Is this still a growth platform for the company or would you expect the growth to come more from external asset consolidations on the platform and external development opportunities going forward?
No. It doesn't change our view on Green Plains Partners. We still think it is a great creator of value for the Green Plains, Inc. shareholders and that's going to be through a couple of things. Obviously, initially, you would see potential development of some of those assets but then the cash would be returned to Green Plains Partners, which gives them more flexibility as they pay down their debt and buy back their shares and make sure it's not dilutive to the current -- make sure it’s not dilutive to the current unitholders.
The long-term strategy for Green Plains Partners remains the same. We want to continue to look at that portfolio and diversify into non-Green Plains revenues. We still want to use that as a great growth tool. We want to have flexibility to continue to drop down things like Beaumont, but we -- there's always -- you don't want to have the restriction of not being able to drop Beaumont while we might be doing a JV or things like that or the acquisition.
So, in general, our view on partners remained the same. We want to continue to grow that asset base and continue to drive value for those unitholders as well, because we own a lot of that as well, and we want to make sure that, that maintains significant value and significant value opportunity.
So while initially it might look like what we're doing is reducing, but we believe after we divest certain assets and Green Plains Partners gets a cash infusion, they can then use that cash infusion to make sure that it's not dilutive to current unitholders, but we still want to use it as a growth vehicle.
I think what's important is that when you look at certain things that we have, when you can potentially look at high multiple sales and invest in low multiple opportunities that is very accretive to our shareholders, and that's the things that we may be looking at whether it would be an ethanol plant or something else at this point.
Great. Thanks again for taking my questions.
Thank you.
Thank you. And our next question comes from Laurence Alexander from Jefferies. Your line is open.
Good morning. Let me just see do, see if I can do some fairly quick ones. The cost cuts that you're aiming to do. Can you size them against the total buckets that you see is controllable costs?
Yeah. So we think controllable costs are somewhere between non-operating $60 million to $80 million a year
Okay.
And so some of those costs, and I think, this is not naturally a people issue, because we don't always carry a lot of people around to run the business. It’s just other costs that we have incurred over time, that we have invested in over time, that we have paid over time. It's just all of those. And when you look at 10 years, a company like ours, I mean, it’s not like I'm announcing a $250 million program to cut expenses.
It's just we think there's somewhere between kind of $10 million and $15 million that over time a company like ours gets a little bloated and we want to make sure that we go after those expenses and control our expenses better, nothing more and nothing less. I mean, I think, that's kind of how we're looking at it.
And the size of your annual carry forward?
Right now it's probably in the $40 million to 5$0 million range.
And how much is it going to cost to roll out Fluid-Quip to the point where you capture that $140 million, $150 million potential revenue stream -- profit stream you’ve talked about?
If you look at, say, 35 -- and again, I am -- this is not a final price or it's not a -- I want to say, it's the price that you should necessarily go with permanently, but let’s use on average, any of this technologies seem to be, I'll just say any of them that we're seeing seem to be in the $30 million to $40 million range per 100 million gallons equivalent, plus or minus, potentially a little bit higher on the bigger plants. But per the $100 million, let's just use $40 million per 100 million gallons on average and take that times 15 times, so you could have a potentially $600 million to go after $150 million or so of EBITDA.
So it's kind of a three-year to four-year payback depending on size of the plant, what plants are configured. Some plants already have dryers configured correctly. So it's not single point that you can actually point to on specifics. But, in general, we have always figured a three-year to four-year payback and could be faster.
And so, what should we think our CapEx should be for 2018, ‘19, ‘20 given that you've got that cycle going through?
We haven’t put that out yet, I mean, CapEx this year will be a little bit lower just because overall our spend is down. But as we start to ramp up into ‘19 and ‘20, we can get back to you on what we think those are going to be.
And then just last one and thank you for your patience on all of this is, you made a comment about how we should be back at more normal levels this summer. Does more normal levels translate into EPS profitability or is there something about the mix that has changed that makes that maybe questionable?
No. I would say we're pushing right now in this high single-digit, low-digit, double-digit numbers to start to get closer to EPS profitability. But, in general, that's what we're focused on. We don't want to not focus on the bottomline as well. Well, it’s nice to talk about EBITDA. Our focus is on the bottomline, which is why we think reducing interest and expenses along with that is extremely important to go after more EPS as well.
Perfect. Thank you.
Thank you.
Thank you. And our next question comes from Ken Zaslow from Bank of Montreal. Your line is open.
Hey. Good morning, everyone.
Hi, Ken.
Good morning.
So, a couple of questions. Would you be willing to sell assets below the price that you bought them for or everything has to be above where you kind of paid for them?
I don't think there is an asset in our portfolio that is worth less than what we paid for other than maybe one small asset that we bought. Other than that I don't think we have to worry about any of that.
Okay. And then, in terms of the market, you made a point that there's a big difference between the public markets and the private markets. So you believe that the value of your ethanol assets can be sold at a higher value than what they're being priced at in recent transactions that we've seen or what do you mean by that, just trying to figure that out.
We showed you some of the parts slide before and either we're getting very little value for ethanol assets and full value for our other assets that we own in the other segments or we’re getting value for ethanol assets and no value for the other assets in the segment and so none of those still translate into even the most recent transactions of what we bought.
But even more so, there were other transactions in the market within the last couple of years whether it be the one ethanol plant in Nebraska that traded for over $1.20 a gallon or even looking back at the ICM plant in Illinois that traded for over $1.40 a gallon or $1.50 a gallon.
And by the way, Ken, there are no real assets on the market today that I think, other than a few that the market has seen, but an easily ring-fenced at single plant operation at 60 million gallons to 120 million gallons today, there is nothing that we see on the market that is actionable.
And so when those come on the market, we do believe that we will get back into those levels of a single asset, very easy transaction because the market still believes in the future of ethanol as we do. But this is solely focused on making sure that, first, we reduce our debt levels and once we get that down, we're still going to be producing a lot of ethanol.
Okay. And just two other final questions just on actual ethanol is can you tell me about the China E10 policy, how is that going to affect you longer term particularly on the corn side as well?
Yeah. E10 policy is very favorable longer term. We have to get through, obviously, some of these trade issues that we're dealing with. But we know ethanol and distillers grains continue to get talked about in these discussions between the two governments. So they know we're focused on it along with the other things like soybeans and everything else.
But, in general, we believe that that is structurally friendly over the medium-term. Look over the long term, I think, China ethanol policy, they'll try to internalize as much as they can. And overall, the corn outlook doesn't remain significantly bullish over the long-term, because we will continue to be able to increase yield per acre both domestically and globally.
So, in general, while ethanol policy is certainly interesting for China, I don't think it's necessarily structurally bullish for corn more than it is bullish the margin for ethanol, and, in general, I think that's certainly favorable.
But, overall, look, I think there's a lot of implementation to take place, E10 by 2020. We think that will add 3 billion gallons to 5 billion gallons of demand globally for ethanol. But they're going try to go after some of that on their own and then we'll see how long it takes for compliance with that as well. But I think structurally, if we can get through the trade -- some of the trade issues, it's structurally long-term -- medium-term bullish for the ethanol margin.
And then, finally, the small refiner waivers, I think, it was 1 billion a gallon last year. What are going to be at this year and how does that affect your outlook?
I think, look, there's 50 small refineries or so that would qualify for this. I don't, perhaps, somewhere in the mid-20s have these exemptions taken place. You have to show the hardship on and on and on, and so while certainly we've seen these, we also know that after a small refinery gets an exemption, it doesn't actually mean they're not blending ethanol, because they get the exemption but then they actually, we've seen small refineries turn around and actually blend ethanol.
So there's this big fallacy to this program of what is hardship or not, and so, that's why we haven't seen that type of dramatic drop in ethanol demand overall as the market thinks it’s coming from these. But it also -- it does impact us.
Over the long-term it is a back door way to help the refiners out while pushing our RVP down the road, and we're pretty confident the White House understands that that's happening. Our champions in the Senate and House understand that's happening, and we're definitely going to try and close that window.
Do you think the waivers are going to go lower in 2018 or higher than last year?
It's hard to say. It's hard to say what the EPA will do or not do. When you look at the earnings out of refinery margins today, pretty well no matter where you're at, except for maybe a few locations, it's pretty hard to show hardship from their obligation and so we’ll wait -- we'll just have to wait and see where that comes in it.
Great. Appreciate it. Thank you.
Thank you.
Thank you. And our next question comes from Patrick Wang from Baird. Your line is open.
Hey. Good morning, everyone. Just a couple of quick ones from me, with the Beaumont terminal now having been operational for a few months, how should we think about the decision to extend that potential dropdown date Partnership, was it primarily to accommodate this portfolio review process or more just needed to get through some of those startup hurdle?
No. We also looked at we've got -- we want to wait, obviously, we've got the Delek joint venture that we're waiting on the regulatory front on, as well as we had the portfolio optimization review. There is no question that sometime in late -- early or later this year, maybe it pushes to ‘19 just until we get the financial flexibility of through this program where their balance sheet opens up for us, we'll drop the asset down.
So, it's not a function of if, it's just be a function of when. But the asset is performing well. We're seeing obviously the strong first quarter in exports was helpful and we’re just -- it's just more of a waiting game to make sure that we have the capability to do all the transactions that we want to do.
Okay. Understood. That makes sense. And then just moving quickly back to the portfolio process. So as you identify potential candidates for divestment here, should we think about those assets as potentially being a fair game for drop downs to the Partnership in thinking about both monetizing for the short and longer term or are you primarily looking to monetize outside of the family?
Well, from our standpoint, from the Partnership standpoint, if we monetize an asset and let's just use an example of an ethanol plant and then we'll negotiate with the Partnership to exit the contract and buyback those terminal – those tanks, the Partnership will then get a cash infusion to either pay down debt or buyback shares or do an acquisition or any of all of the above. So that’s how we’re thinking about it from the Partnership.
One thing for us as an owner of the Partnership is we don't want to do anything that would be dilutive to unitholders as well. So if it’s relative to an acquisition that’s offsetting some of the income that potentially they're losing, we think that would be accretive. If it's paying down debt, obviously, we'd have to look at that and figure while that’s the most accretive thing to do or whether it's buying back shares and so any and all of the above to make sure that the unitholders don't get diluted in this process.
Okay. I think I got it. Thanks a lot. That’s it for me.
Okay. Thanks.
Thank you. And our next question comes from Elvira Scotto from RBC Capital Markets. Your line is open.
Hey. Thanks. So with respect to the Partnership, is the Partnership actively looking at third-party M&A opportunities now? And if so, how does the market look, what are the financing plans and then just remind us what other types of assets the MLP may be looking at?
Yeah. We continue to look at third party acquisitions, M&A outside of our platform. We said one of the things we wanted to do is diversify the revenues and income streams of the Partnership outside of just Green Plains, tanks and storage facilities.
And so whether that would be looking at the acquisition that we announced that we're waiting on regulatory approvals or other acquisitions, there is -- there are definitely assets out there and opportunities out there. Although, at this point, we're just waiting to get through what we have on the books today get the export terminal dropped at some point here and then refocus on looking outside M&A opportunities within the Partnership.
Okay .Great. That's helpful. So the point though is to keep that Partnership outstanding. So let's say you gave the example before that if you sold some ethanol plants that have contracts with GPP and then the storage facilities, you would negotiate with GPP to buy out the contract and the storage, but you would still keep GPP sort of a publicly-traded entity or would you even consider rolling that back into GPRE?
At this point, we're going to keep that as a publicly traded entity on its own. We still want to use that as lower cost to capital opportunities to look at acquisitions in downstream terminalling assets.
Great. Thank you very much.
Thank you.
Thank you. And our next question comes from Selman Akyol from Stifel. Your line is open.
Thank you. A couple of quick ones. First of all, do you see any more MVC occurring in the second quarter?
At this point, no, we don't see an MVC in the second quarter based on the current run rates and current margin structures.
Okay. And then how long do you think it takes to work off the MVC that’s there for the 700?
We had the same issue in the second quarter of last year. We worked it off in a couple of quarters and that's probably all it will take at this point.
Okay. And then as you reduce your footprint at Green Plains, does that diminish in any way, shape or form why people would look to be doing JVs with you or wanting to be involved as you become sort of a smaller player in the market?
No. We don't think so. I mean, small is relative to size. I mean, we still have 1.1 -- whether it's 1.1 billion gallons or 1.3 billion gallons yet to be determined, but I think relatively speaking, you're still a major player in the market and I think everybody knows that we also have the export terminal and a major amount of gallon that run through there. And we’ll just wait to see what the portfolio will be when our program is over, but I would say no, not at all, when we see a reduction and people wanting to do business with the company.
Okay. And then the last one, given that in part the restructuring, repositioning of assets is due to leverage up top, how do you leverage at to Partnership?
Leverage Partnership is still very manageable. I mean, we're going to look at that as well if that's what you should do with some of the funds that return back to the Partnership, whether it's a combination of both equity and debt in terms of repaying the debt or buying back the equity.
But in terms of -- the Partnership does not have -- their leverage ratios are all very good. Their returns are all very good. They're all -- we're not a highly levered company at the Partnership relative to the asset base and the cash flows.
And so at this point, obviously, we're going to focus on total debt levels and we’ll just make those decisions if that's the best thing to do when we return capital, if that's the most accretive strategy. But at this point they're really not -- we're not focusing on that just yet.
Okay. Thank you very much.
Thank you. And that does conclude our question-and-answer session for today’s conference. I would like to turn the conference back over to Todd Becker for any closing remarks.
So thanks everybody for coming on the call today, obviously, a lot to talk about. We are very excited about the plan that we've laid out for you. We're very optimistic about the future of the company. Obviously, we discussed, we wanted to bridge the gap between some of the parts analysis what we see versus the valuation in the market today and we plan to execute on all of the initiatives that we laid out for you. And obviously, it'd be a busy time for the company, but in general, we've still remained very optimistic about the future. We have great liquidity position, significant amount of cash on the balance sheet and we're going to try and get the overall valuations up for our shareholders over the long-term. So thanks for coming on the call today. Appreciate it.
Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.