© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 Second Quarter 2018 Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. At this time, all participants are in listen-only mode.
I would now turn the conference over to your host, Jim Stark, Vice President of Investor and Media Relations. Mr. Stark, please go ahead.
Thanks, Latif. Welcome to the Green Plains, Inc. and Green Plains Partners second 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 available and you can find the presentation on the Investor page under the Events & Presentations link on both corporate websites.
During this 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 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 information about factors that could cause different outcomes. 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, and thanks to everybody joining the call today. We reported a small net loss of approximately $1 million or $0.02 a share and generated approximately $42 million of EBITDA for the second quarter. The consolidated crush margin was $0.09 a gallon for Q2. The crush was affected by negative expense absorption of approximately $0.02 to $0.03 a gallon related to running our platform slower. We saw a good improvement in our financial performance for the second quarter led by our food and ingredients segment, which reported a record quarter of $90 million of EBITDA. We also recorded a strong year-over-year improvement in our agribusiness and energy services segment.
Green Plains produced 296 million gallons of ethanol in the second quarter versus 275 million gallons for the same period in 2017. That was 80% of our operating capacity for the quarter. Ethanol production ran slower in the second quarter which is now going to be a thing of the past. Our approach going forward will be to run our plant to 90% or higher of our operating capacity. As a reminder, our regularly scheduled maintenance and amount of export products we produce can have an effect on our production rates during any quarter. But going forward, we will not flex our production down, which has had the unintended consequences of benefiting others rather than for the benefit of Green Plains shareholders as of late.
We've increased our production levels for the month of July, which with very little impact to EIA data and margins overall. While on paper the industry can easily produce 1.1 million barrels of ethanol per day, we are seeing an overall trend of higher repair and maintenance costs and inconsistent run rates more broadly, which we believe allows us to ramp production up as we have made the necessary repairs and maintenance as a top priority in any market conditions.
For our company, I have to say we are disappointed by the Federal Trade Commission decision to put us through second request related to the proposed GPP, Delek Logistics joint venture to acquire terminal assets from American Midstream. We along with Delek through the JV have decided to terminate our agreement to acquire the AMID terminal assets because there was no assurance we could overcome the regulatory obstacles from the FTC's review. We believe our resources should be placed on other initiatives such as the dropdown of our 50% ownership of the joint venture into JGP terminal Beaumont, Texas and other growth and acquisition opportunities for the Partnership.
Our company ethanol export volumes for the second quarter were 65.7 million gallons or 22% of our total production, with the majority moving through our terminal Beaumont. We await the outcome of numerous trade disputes which we believe provide great upside to our export volumes. Green Plains Partners reported $16.9 million of adjusted EBITDA and a coverage ratio of 0.97 times for the quarter and 1.03 times for the last four quarters.
As we ramp production volumes higher, we believe the Partnership will be in a position to capitalize on this effort and we expect our quarterly coverage ratio to be over 1 time for the rest of the year. The agribusiness and energy segment turned in a good quarter with $12.8 million of EBITDA. This performance was driven by our ongoing grain storage strategy of capturing the market carries and lifting the piles later in the year. While we have reduced inventories in all of our location, the opportunity to refill these locations is actually coming before harvest as farmers and commercial grain companies are making space for another year of large corn and bean crops.
More importantly, the term structure of the market is allowing those who have space to earn above average return on that space. Food and ingredient segment had its best quarter to-date. We continue to see solid results from both our cattle operation and Fleischmann's Vinegar, but in particular cattle feeding was strong in the second quarter.
Our feeding margins averaged over $100 of EBITDA per head while certainly a very strong quarter we expect the rest of the year to return to normalized feeding margins we have articulated in the past. Fleischmann continue to see performance above our expectations and we are starting to see the benefits from the cattle deployed in our capacity expansions.
Our apple cider vinegar business continue to see growth along with white distilled vinegar both organic and non-GMO. We are starting to see demand from the fast food industry as well in our industrial business, which we believe will help our long term growth of the business. Since we acquired Fleischmann's, we have seen cumulative annual growth of revenue and EBITDA of 8% and 15%, respectively, and expect that to be the case going forward.
Yesterday we announced the acquisition of two cattle feedlots from Bartlett Cattle Company. We are very excited about this purchase as each feedlots are well run and have been well maintained. This purchase adds 97,000 head of capacity, giving us total capacity of 355,000 head. With this acquisition, we are purchasing the existing cattle and inventory, which will provide us the opportunity to ensure the transaction is immediately accretive. We believe the baseline for this business going forward will be marketing between 650,000 and 700,000 head of cattle per year at a $50 to $60 a head base line feeding margin.
As you know we have certainly achieved higher than that in the past, notwithstanding normal volatility margins with our goal of high single-digit returns on invested capital and high teens pretax return on equity. We look to continue growing this segment as we have had good success in cattle feeding over the last four years. Additionally, we still plan to explore taking this business off balance sheet in the future.
For the first half of the year, our non-ethanol segments have generated EBITDA of $89 million. We are on track to achieve our previous guidance of non-ethanol EBITDA between $160 million and $180 million.
Now I'd like to turn the call over to John to review both Green Plains, Inc. and Green Plains Partners financial performance, and I'll come back later on the call to discuss the outlook for the rest of the year and status of our portfolio optimization plan.
Thank you, Todd. Green Plains, Inc. consolidated revenues were $987 million in the second quarter, up 11% from the second quarter a year ago. The increased revenue was attributable primarily to the growth in our cattle feeding operations from the acquisitions we made in 2017. Revenue in our ethanol production segment declined 4%, driven by an 8% decline in ethanol gallon sold partially offset by higher DDG sales.
Consolidated net loss for the quarter was $1 million versus a net loss of $16.4 million a year ago. During the quarter, the Company recognized a net tax benefit of $8.3 million for federal and state R&D credits related to current and prior periods. Excluding the impact of R&D credits, our net tax benefit was $2.5 million resulting in a consolidated effective tax rate of 34%. EBITDA for the second quarter was $41.8 million compared with $24.1 million for the second quarter last year.
For the quarter, SG&A increased $4.1 million driven almost entirely by timing of incentive related compensation year-over-year as well as the growth from our cattle feeding operations. Interest expense increased $2.6 million driven in part by higher average borrowings primarily for cattle inventor and roughly 90 basis point increase in our variable interest rates. For Green Plains, CapEx was about $7 million in the second quarter, most of which was maintenance capital across our ethanol production assets, the cattle feedlots and vinegar plants.
We anticipate we will spend about $11 million in capital for the remainder of 2018 with the majority of that being maintenance capital. These numbers exclude any capital related to our high protein DDG project, which is still in the engineering and contracting phase. Our total debt at the end of the second quarter was just under $1.3 billion. This balance includes $457 million on our commodity revolvers, which is secured by working capital collateral including readily marketable inventory of $548 million. Total term debt including our term loan B and convertible debt was $838 million.
Because of our agreement to acquire the Bartlett Cattle feedlots, we have amended the Green Plains Cattle senior secured revolving credit facility, increasing the maximum commitment from $425 million to $500 million to fund the additional working capital requirements. The amended credit facility includes an accordion feature that enables the credit facility to be increased by up to $100 million with age and approval.
On Slide 10 of the IR presentation, you will note that our term debt leverage ratio was 5.5 times at the end of the second quarter versus 3.7 times a year ago. This is primarily the results of the decline of $49 million in trailing 12 months EBITDA and an increase in our term loan debt balance year-over-year. Our term debt leverage ratio did improve versus last quarter. Our liquidity remained solid with $251 million in cash along with approximately $510 million available on revolvers at the end of the quarter.
For Green Plains Partners we reported EBITDA of $16.9 million for the quarter, which was slightly better than the second quarter of 2017. Green Plains Partners had 314 million gallons of throughput volume at its ethanol storage assets which included an incremental 18 million gallons related to inventory liquidation and transload volumes.
Distributable cash flow of $15 million was down just over $300,000 from $15.3 million reported a year ago. Distributable cash flow was affected by higher interest expense due primarily to an increase in the rate of our LIBOR based credit facility.
We had a negligible amount of CapEx during the quarter. The Partnership's distribution of $0.475 per unit declared on July 19, resulted in coverage ratio of 0.97 times for the second quarter. On a 12-month basis, adjusted EBITDA was $69.3 million, distributable cash flow was $63 million and declared distributions were $61.2 million resulting in a 1.03 times coverage ratio.
Now, I'd like to turn call back over to Todd.
Thanks John. As we indicated in the release this morning, our portfolio optimization plan is on track with the strategic objectives we communicated in May. We are in the middle of a robust process which we believe will allow us to significantly reduce or eliminate term debt by the end of the year. I'm not at liberty to comment on specific information related to the process or values or the number of plants, or which plants or even how many gallons, other than to say we are encouraged by the interest level across the Board and reverse inquires on assets as well.
Once again, we believe there is a significant discount between public and private valuations of plant assets, and we proof of that in our process. We certainly understand the need to communicate developments of this plan, as they occur, and we will do so when we are ready for both our Green Plains shareholders and our Partnership unit holders.
As I said earlier, we will remain focused on improving value for our shareholders. We have also made good progress in our plan to reduce controllable expenses starting with this quarter. I'd like to point out that some of these expense reductions will come through some of our segment and are not all in our corporate activities line, although we have made some work for workforce reductions as we start to plan for the future. Our high protein initiative is in full swing. We continue to work through permitting, engineering and site preparation for the installation of this technology at our Shenandoah location.
As we made progress on deploying this process technology, we will – the more we believe in – excuse me, as we make progress in deploying this process technology, the more we believe in the reevaluation of this industry through a technology revolution. Global demand and processing margins remain very strong for all-things proteins and the ethanol industry should participate in that going forward, as we raise the protein level for the product we produce through various technologies.
We are determining, next several locations where we would deploy technology to increase the value of our product. Our view is the ethanol industry remains two to three days in an oversupply position. Margins have shown some improvement, but still lagged behind mid-cycle levels and the last – and this time last year with same margins.
Gasoline demand is approximately 1.5% ahead of last year and on a year to-date basis, but domestic ethanol blending is flat from a gallons perspective, as 2018 ethanol blend percentage in the fuel supply has averaged 9.7% in 2018 from 10% in 2017. The lower ethanol blend percentage in 2018 overall can be attributed to the overreach of the EPA granting the large number of smaller refinery exemptions. This issue will be litigated however as the Tenth Circuit Court of Appeals agreed on Friday, July 27, to hear the ethanol group's lawsuit challenging EPA's action on the granting of exemptions.
Through Prime the Pump, we continue to work with retailers on expanding their store footprint, selling E15 and potential new retailers looking to begin selling this product. Some of the biggest independent retailers are implementing aggressive strategies to roll out E15 across their locations at a discount to gasoline remains very wide and they still get the benefit from RIN prices for blending ethanol.
Spot blend margins for the additional 5% blend can be as high as $0.90 in some areas of the country. Green Plains and the ethanol industry are focused on pushing through the RVP waiver for E15 and getting prior refinery exemptions reallocated in future periods. We saw a strong support from the White House on E15 as evidenced by the recent comments from the President.
The industry production of ethanol is running 2% higher than 2017's run rate, supporting our previous assertions that the next phase of debottlenecking is more costly. Exports have remained strong totaling 776 million gallons through the end of May 2018. That is 31% higher than the same period of 2017. Our expectation for 2018 exports is closer to lower end of the range of 1.6 to 1.8 billion gallons, but we do have hope that ongoing tariffs discussions could increase export volumes toward the end of the year.
We are focused on four main growth areas for global trade in a low or no tariff environment. China, Japan, Mexico and EU, which along with the RVP waiver could really change the balance of the industry very quickly. The corn crop is in good shape and we believe there could be an upward revision to the yield per acre in the coming weeks.
Currently the replacement value of distillers to corn is averaging 95% to 100% which is down from Q1 of 110%, but much better than the second quarter of 2017, which was averaging around 80%.
As it relates to Green Plains Partners, I'm pleased to welcome Martin Salinas to the General Partner Board. He brings a wealth of MLP experience to the partnership and I look forward to working with.
With the AMID terminal acquisition terminated, we have refocused our attention on dropping the Beaumont terminal and we'll work to have that completed in the next 60 to 75 days. We have again refocused our efforts to look for acquisitions as GPP is well capitalized and it has the capacity needed for a transaction to happen.
I want to reiterate what I communicated on the last earnings call. Our goal with the Partnership concerning our portfolio optimization plan is to maintain the distribution and long-term coverage ratio of 1.1 times. We plan to use any cash proceeds in the appropriate manner to achieve this and we'll take the necessary steps to execute this strategy.
We also believe that the reduction of term debt for Green Plains improves its credit quality which should have a positive impact on the Partnership. Overall, our goal remains to improve the market capitalization, delver our balance sheet and improve our financial flexibility as we focus on the future.
I want to thank everyone listening on the call today for their support as we recreate Green Plains. I'd like to ask Latif to start the Q&A session.
[Operator Instructions]. Our first question comes from the line of Adam Samuelson of Goldman Sachs. Your line is open.
First a question, just on the ethanol market, and Todd, I mean there is a bit more subdued comments in the near term given some of the oversupply. A fair characterization in your mind that you really need some sort of change on the tariff structure on the export market in the back half of the year to get this market tightened up or is there anything else that you could see that would change that sooner?
I don't think the market is going to tighten up much from here to the end of the year. I also don't think it's necessarily going to grow a lot of stocks out here. I think where we're at right now, we're basically using what we've produced, gas demand, that's even reported today was excellent. And so, I think continuing with a strong gasoline demand numbers, at least keeps the market from growing a bunch of stock, but I do believe we are going to need some impetus to start to draw 2 to 3 million barrels which is what's needed and we thought that impetus would come from a strong Chinese program. Obviously, that's being put a bit on hold. We'll wait and see what happens through these recent discussion or potential discussions.
Brazil, we're expecting a strong finish as well. We'll have to wait and see where that comes in. So, we're counting on them to be in last half as well. From a domestic standpoint, we are kind of – we are where we're at from what's kind of being – what's being reported. So, in general we'll probably stay at these levels and margins will just – depending on how shut down go throughout the industry, and with some heat coming into next week as well, and then obviously execution of some of the export programs at least in this quarter, you know potentially we saw some strength coming into the quarter and right now we're just steady.
Okay, and then switching gears on the portfolio optimization plan, I know you characterized the process as robust, but it's still ongoing. I mean can you just provide any kind of timeline or guidepost for when you think you could be in a position to make announcements, and I mean is it something where only ethanol plants really on the table to – beyond the ethanol businesses themselves? What else that you could speak to, any additional color that would be helpful?
Our goal is to have some of the sales process completed in early fourth quarter, if not a significant piece of that. And then from there, anything left that has to close should close in the fourth quarter. We haven't announced specifically other than, you know the people involved in the process on their MDA what is – what we're looking at as well as like I said, we've had a reverse inquiries, but in general we had basically talked about in the past call that we're focused on improving value on the – some of the assets that we have to improve value for the rest of the assets, and so we are certainly looking across the portfolio. We've had interest across the portfolio in every business that we operate. But at this point we are mainly focused on our ethanol segment as we believe there is a lot of a value to be proven there and then we'll see how this whole thing ends up. We believe we are on track for late third quarter or early fourth quarter announcements and potential closes.
Thank you. Our next question comes from Farha Aslam of Stephens Incorporated. Your question please.
Todd, when you say Green Plains up to full capacity, does that mean kind of 355 million gallon run rate. What did you decide as full capacity for you at this time?
Our view is – so, we'll bring it up now as we speak, but our view is our platform will run in the low 90% on a day-in and day-out basis because of shutdowns and repairs and maintenance and things like that. So, we believe it's a long-term run rate at 90% to 92% and it could be higher as well. It would be somewhat between 340 million and 355 million gallons just depending on. There are certain things that happened during the quarter that just – shutdown of the plant for a couple of days, which could impact it, but other than those things happening normal repair and maintenance schedules. Some quarters will be higher, some quarters will be lower, but we are going to start to push pull out and most of our assets. I'd only say Hopewell is the one that has more of a seasonal asset. It will start to come back up harder with harvest happening in the East Coast and being able to buy corn cheaper and then there is other opportunities to bring that plant up and down, but that plants will probably beat the swing volume more than anything else, everything else at this point other than normal fixes, normal turnarounds will run in that 92% to 93% of capacity.
That's helpful. And then when you look at the ethanol market, in your release you highlighted that spot basis is robust or better. But on this call you said that margins are pretty lackluster because of the oversupply down from last year. Should we think of it sort of in line with the June quarter or how should we think about what you're realizing on the gallons you're producing?
From where we started out the quarter now that we're a month through it, so far we've been averaging in line or a little bit better than last quarter. And we saw some low double-digit margins to start of the first 30 to 45 days. Plus to see where we finish out, it was still highly inverted in the market. So, it's hard to predict where August and September will ultimately end out. But what we did see last quarter and really starting towards the first of the years is, there has been a disconnect between the Chicago market of what gets priced every day and the tightness in other markets around the United States. So, we have sold significantly or not significantly but higher basis levels and index value that we did all of last year, which was very weak. So, there seem to be a disconnect between tightness in certain markets and the overall margin structure and we'll have to see how that plays out and that's really driven by this really good gas demand number. On any given day when the market is trying to get the benefit of the $0.90 ethanol blend in certain markets there is a lot of tightness that has been around, but the Chicago market still has remained one of the weaker spot, while everything else has been a very firm.
Thank you. Our next question comes from the line of Ken Zaslow of Bank of Montreal. Your line is open.
So my first question is. I must be, not understanding fully the strategy. I thought this strategy was to exit businesses. And I think in the last couple of days you actually decided to actually acquire a cattle feeding business. What is the intention and why the disparate strategy?
Well, what we had said is we are going to reduce exposure to the volatile ethanol across that we've had where we believe that our ethanol assets are disconnected from a valuation standpoint between the private and public valuations. We saw this opportunity is a small capital investment, but it's from a return on invested capital and an opportunity to continue to diversify away from a much more volatile ethanol business than what we see in our ability to manage risk in cattle. We think for our shareholders it was a good opportunity to increase the non-ethanol operating income going forward and more predictable on non-ethanol operating income.
We are three-four years into this strategy. Over those last four years we've averaged over $60 a head on margins for all the cattle that we've fed and brought to market and we've consistently been able to achieve those type of numbers, some quarters are 25 and some quarters are 100, but in general we've always been able to achieve a return on our capital better than we see in the ethanol business. I would say the growth that we announced yesterday by acquiring the Bartlett Cattle Company which we're very excited about. That puts us in a good spot price for the time being and that I don't anticipate any significant growth in that area at this point. But we still believe that the all-things protein initiatives that we have gave us a good reason to acquire that, while we are divesting a certain assets that are not as predictable from an income and earnings standpoint.
So, it's safe to say that you're not going to be divesting your cattle feeding business? Is that a fair conclusion? You would be buying itself, right.
Well we have said is the thing that we are focused on cattle is because it does skew some of our numbers on our balance sheet is that we are looking at a potential off balance sheet transaction to see if there is a way to get it off balance sheet and talking with partners on that. That's our focus there so that it does help a lot of our ratios to take that debt off balance sheet.
I also thought that there were other non-ethanol assets that were up for sales, well that could be if there was the right price for it, that is the case?
That is the case.
Okay. Then my next question is. I think you mentioned that cattle margins were a little weak, but you expect to recovery. What is the fundamental basis on that?
No, what we said is we have such a strong $100 head margin in the second quarter that returning back to normalize where we would say is that $50 to $60 a head margin structure overall. It's kind of what we focus on when we buy a head of cattle. And again some will be lower, some will be higher. It's a little harder to buy cattle in the beginning of the year, so that they're going to get marketed in the last half of the year just because of some of the tightness. But now we are starting to see that change as well with new cattle placements as more feeders are coming to market. Our basis levels have continued to remain firm. Demand for – cattle demand has still been robust and I think overall from our standpoint we are just a conduit for that and we want to earn a minimum margin on our capital and we just won't buy cattle under a certain level.
And so, the fixed investment is still very low relative to the opportunity. And so if we make the decision that we don't want to feed cattle at a certain margin level, it reduces our overall debt levels, but not necessarily it's not negative for the business. And I think what you're seeing Ken, one last comment on that. The cattle feeding industry has consolidated. You saw the acquisition earlier in the year, the big one of the largest cattle feeder. You are always seeing number two and number three make acquisitions of smaller lots and ourselves at number four, making acquisitions of smaller companies as well. And what you see in the daily market is much more disciplined coming around that need to buy feeder cattle.
And so while in the past, a lot of cattle feeders were directly focused on taking care of the packing demand that was owned by those companies. There is not a lot of packers anymore that own cattle feeding operation. And so the cattle feeding operations are much more disciplined in their approach to buy feeder cattle. It can become a little bit more predictable than they have been in the past on returns.
And my final question is. How does the small refinery exemption get resolved? When will that stop? How does that work? That seems like last year the issue was debottlenecking, this year it seems to be the small refiners in China. It's like you're always on the cusp of actually getting a good – everything setting up well and all of a sudden everything – somebody pulls the rug out from underneath you guys. What's the story with the small refiner exemptions?
Well it's certainly disappointing from our perspective and it is driving the reason why we are not blending at a full 10% right now. We think that on a go-forward, you know what has happened in the past and the number of small refinery exemptions especially with the money that refiners are making, there is not a lot of hardship anymore and RIN prices have come down to $0.20. So at this point we don't see how the EPA can issue many small refinery exemptions going forward nor do we see how they could issue them in the past. The industries are going to fight very hard to get those reallocated as under the law, they should be. I think that we are making sure that our contact in D.C. and our Champions in D.C. are continuing to fight the battle.
But we are having to deal with – we are having to deal with the fact that D.C. administrator granted small refineries exemption to what we believe are companies that should not have gotten them and that has really taken the market a bit out of whack this year in our balance. And so, you know going forward, I don't think it will be as robust, so I don't think it will be as big of the issue, till it's more of – we believe is more of a parting gift to the refining industry and we continue to fight every day to try to get those reversed and or relocated. But on a go forward, we don't think there will be as much of an impact as there was in the past as Brent prices are hovering are $0.20. So, we should get that out of our at least that factor out of the mix going forward.
Our next question comes from Craig Irwin of ROTH Capital Partners. Your question please
So, Todd, I did want to ask about the small refinery waivers. With this case moving forward in the Tenth Circuit, can you maybe discuss the litigation opportunities that are being pursued there? You know what do you think the industry should ask for? Would you expect the precedent of you know small refinery exemptions in the past being reallocated to prove a pathway the way this plays out, you know what are the other scenarios that you look at, you know if we assume that giving waivers to some of the largest refineries in the country was illegal and inconsistent with the law, and that that's the finding of the courts, what do you see as the potential outcome – a range of outcomes for remediation here?
It's not a short term outcome. It's a long-term outcome. I mean ultimately this thing will – probably will make its way through the courts depending on the rulings. And it's a multiple year process. So, we don't see the EPA's at this point reallocating unless the White House pushes for that, and that's not necessarily something that we believe that even understand what happened necessarily to even go to a point where reallocation is a short-term issue.
So, I think we're living the refinery waivers this year that were given out and I don't see a lot of remediation for the immediate term. over the long-term potentially, it could be either through more – a reallocation down the road, reset down the road, it's really kind of hard to say what will happen, but I think what has happened is now something we have to deal from a market perspective, and it's very hard to say when and if and how the court's will rule down the road and then what that impact would be. We were asking at least the court case is asking for the reallocation of those small – of the small refinery waivers which is by the way, that's how it's written in the statute. So, that's something that we want to continue to fight for.
Then, I think everybody in this call would agree with sort of cautious comments you made about Chinese demand in the second half, but can you maybe update us on the industry outreach to China. The macro of them having 10% of the world's available land, 20% of the world's population, mean they are a big customer for ag going forward, the U.S. if they want to improve their quality of living, and obviously their 10% blend mandate that they've put in, if they are ever going to reach that, they're going to have to buy a lot of U.S. ethanol, U.S. corn to get there. Can you maybe describe the conversations that are going forward today inspire of the trade issues going back and forth?
Yeah. You said most of it. I mean basically there is a 10% mandate by 2020 and we don't think internally they can meet that and they will need to import U.S. gallons to do that. We were expecting 200 to 400 million potential gallons which would change the whole economics of this industry and we continue to tell the trade reps and the administration of what the impact of this trade war is on the ethanol industry not just agriculture. If we had that, it would be a very different market today. And we would be in a very different situation and discussion today. So, we need one of these markets to hit, you know whether it's japan opening up in 2019, we believe it's 100 to 200 million gallon market in 2019, whether it's Mexico starting small, it's a longer-term gain, but Mexico potentially could start to open up.
If you look at EU tariffs situation, we're $0.20 closed right now because of their tariff, but if they took their tariff off, we'd actually be $0.40 positive to import – import margin into the EU and obviously Brazil, hoping we get some strength out of the end of the year, but the long-term renewable bio is really the thing that we're focused on over the next several years and really it's things like around the world, decarbonizaiton – much looking – much more like the LCFS market that we see in California that could be a benefit to U.S. ethanol as we continued to take our carbon density numbers lower as well, so we can hit a lot of these markets.
And then the big ones are things like the work we're doing in the Philippines and India and Indonesia, in particular, we think there is an opening there. So, there is a lot of growth, it's just not hitting right now, and so at this point we're in that three to four day oversupply position. If any of those markets opened up in a big way, we could take care of it pretty quick if Japan take another 100 next year, that's 2.5 million barrels all of sudden off 2.5 days almost off the pending stock. So, it's really just a function of time and as we – as one of the earlier president came, it's always on the cost, but it's always on the verge and we just have to have a few things happen, but I think it's starting to shape up. If we can get to this trade war issue, I think at that point the world opens up for our fuel.
Great. And then last question if I may, Trump's come up fairly strong in support of the blend waiver for ethanol. Can you talk about how this can take place whether or not it would have an impact this year or more likely next year. And what you are hearing from your representatives there.
We're trying to get there. I mean the President has come out. He know the importance of the E15 waiver, the RVP waiver too has farm state coalition and but obviously he's trying to win Pennsylvania as well, and I think that's – so we have to deal with that. Their ordeal is on the table which I think we're doable and that was on – range was significantly higher, now range of $0.20 and if you're in the refinery business, you have no real motivation to come up with a – come back to the table to negotiate. Now, it's really just a function of the administration realizing that the effort is gone from the refinery industry, yet the ethanol industry didn't get much in return, except the lower RIN and no RVP. And that's why I think we are very focused on continuing to get the President to support it. Obviously these walk in the fine line between farm states and oil states and we have to always respect that. But, at a $0.20 – at a $0.20 RIN that the market is today, any RIN cap in the past would have been irrelevant, because as we said, the more ethanol you blend in E15, the lower RIN are going to go anyways, but E15 is the price and so I think there is a path. I think this administrator and EPA have to walk the fine line. Obviously, I think he's more open than the last administrator was and we are continuing to push. They can do it and we're continuing to put all the – all our resources into getting RVP waiver. It is the single most important event that this industry could have for its long-term growth in both ethanol and agriculture.
Thank you, our next question comes from Eric Stine of Craig-Hallum.
I just want to stick with that question a little bit, just on the waiver, I mean obviously under Pruitt it was pretty clear that nothing was going to happen unless it included a number of other thing as part of kind of a grand compromise. I mean do you think that under new leadership here that there is potential for the waiver to move forward standalone, or do you still think that, I mean it's got to be part of something larger.
This should go both ways. I mean I think this administration can make the call right now to give us an E15 waiver while the benefit of the small refinery exemption and low RIN prices have already given the refineries everything they needed. And we're getting the low end of the stick on that one. And so, they could do it right now, we're pressing them to do it. The new administrator understands the importance of it. He understands the ethanol industry very well from some of the past things, similar his past work. So, in general they can make the call tomorrow and that's what we're asking them to do. Obviously it's on the President's mind as soon as he lands in Iowa, he says we're very close on E15. We'd like to get some clarity on that. I think our Senators, our Champions from the farm states between Nebraska, South Dakota, Iowa and other states that are very important to this admiration are pushing very hard and trying to get clarity and I think we're on a path. I think we've given up everything so far from the side of what the refineries have gotten and we really have gotten nothing in return, and that's a – that's is really where the rubber is going to meet the road, as the administration realizing that, if you really want to make a big pitch to agriculture during this trade war, RVP is the answer and it's not necessarily the need to spend $12 billion on subsidies.
Okay, maybe last one from me, just on the Cattle acquisition, I mean just remind me how we should think about that transitioning to Green Plains own cattle. Should we think about similar to the Cargill acquisition there were four quarters, or has it changed just given the size of this operation versus that?
This one is a little bit different. With the Cargill acquisition, we fed their cattle and got paid a fee to do that. With the Bartlett acquisition, as of right now we own all the cattle in the lots and we'll earn a margin on that which is why we said we believe it will be accretive immediately and going forward. So, it's a little bit different transaction, so they should circulate our number starting in Q3 and Q4 from an EBITDA per head standpoint instead of just a small feeding margin standpoint.
Our next question comes from the line of Selman Akyol of Stifel. Your line is open.
Couple of points on clarification if could. Just to start off with, since we're not pursing the terminals from American midstream, did you dissolve the JV with Delek, or is that JV still inforce, but looking for other assets?
Yeah, no the JV is still in place. I mean it was just a JV we had put in place for that and you know going forward we'll have to figure out what to do with that. we pursue assets together or separately. We have a great relationship with them and we believe we worked together well in every situations. So, that's how we left that at this point.
And we do have the other JV with them anyways, so I mean we are in a JV in general with those guys in Oklahoma.
Then, previously you had mentioned, look at some off balance sheet items and maybe pushing it to Partners. Can you just give some further color along that, what you were referring to?
Our off balance sheet that we're looking at is getting cattle-off balance sheet, because the size of the working capital financing that takes and that's throws off our numbers in terms of when we – it just gets bundled in straight debt and it's really working capital backed by ready marketable inventories. And so, from a standpoint of that, that's where we focus most of our off balance sheet transaction.
Yeah, we do have – you know we are still working on getting the Beaumont terminal push down to the Partnership and that was – you know had been scheduled for earlier in the year and we announced last quarter, we moved that deadline to the middle of October and so, we're still on target to get that done yet this year.
Then, also just with Martin Salinas being on board, at the board level, are you guys broadening your search for what kind of assets you would have partners invest in or can you give any color on where else you may go here, or should we just thing it as being all terminal related?
At this point obviously our strong sense of what we're looking for based on the things that we do is to look for terminal that we can enhance profitability by owning the supply that goes into at least piece of that terminal and then using our supply chain see if we can enhance those volume instead of paying others to go through their terminals.
That's really been the goal of acquisitions, that was the goal of the American Midstream acquisition in Little Rock and down in Texas that we both believe in the JV we can enhance the profitability through pushing our own volumes through as well as keeping third party volumes flowing as well. And we just didn't get there with the FTC at this point. So, Martin's strength and ability and what he achieved in his carrier is nothing but helpful from a standpoint of looking at acquisitions and we still believe that using Green Plains partners as a growth vehicle in downstream, is what it was meant for and what we will still use it for in the future. And so that hasn't changed much. Obviously not getting this deal through is a bit of set back and so but we do have extra capacity now to get a transaction done. We will continue to search for transaction as we do every day.
Our next question comes from Pavel Molchanov of Raymond James. Your question please.
Thanks for taking the questions guys. Throughout the past decade, we've obviously seen a lot of upside growth and down cycles for ethanol. But it feels like you response to kind of the print headwinds let say has changed from years passed where you were actually looking to be a net seller of ethanol plants rather than an accumulator. And I'm curious what prompted that shift as in the past, when prices were low, you were looking to take advantage of that by buying up assets?
Yeah, I mean basically, what we're looking at now is we want to be start out debt free – term debt free obviously we'll start and convert the outstanding to working capital financing. But we want to start out again term debt free, while we look at the next 10 years in ethanol. We think the next 10 years in ethanol while certainly is really interesting potential between some of these things that we talked about of RVP and global exports demand for the cheapest product in the world today, and there is nothing cheaper from molecule standpoint than ethanol today sitting at 60 to 70 to 80 under gas in certain locations.
And so, you know obviously that's going to be a key factor going forward, but the bigger factor really is and what we have said and I know you have some work in the past which is what else can an ethanol plant do and so, while we look across multiple agricultural processing industries and we see that if you can make high protein, you are getting paid for it in the world, there are now technologies that exist that an ethanol plan can increase the value of the co-products of distillers grains through multiple different opportunities and so we've chose the first one which was the fluid push technology to raise our DDG protein about 50% or 50% or above and that will get us first step and that's going to take our capital to do that, so we want to start out the next 10 years of refocusing ourselves on the high protein distillers markets globally and use that capital and excess capability to really start to expand those margins.
Why is that important? Because we believe that by making 50 proteins distillers grains, we will walk in every day with an additional stable 10 to 12 ton gallon margin plus $0.03 to $0.04 a gallon on or $0.03 to $0.04 a gallon on corn oil before even make a gallon of ethanol margin. And so, while we'll have to contract the start to get that done, but over the long-term we still believe that we're still committed to the industry, but we want to make sure we have full financial flexibility in our balance sheet. We also believe there is a mismatch between the private and public valuations, and that's why we want to improve value to our shareholders as well and we think we'll be able to do that by the end of the year.
RINs are obviously pretty depressed right now for corn ethanol, but they are still exceptionally strong for cellulosic. And as a company that has historically stayed away from any kind of exposure to the cellulosic part of the value chain, I wanted to ask if, you know anything is changing in your thinking in that regard, whether it's the cellunators or getting into potentially some full scale plant development in that regard?
Yeah. I will say full scale plant development is not the table for our company in terms of, we don't believe necessarily there is a full scale technology that exist today that we wouldn't – that we would want to spend capital on. Now there is some technology that's out there today where you can increase you protein in the 30s, high 30s and 40s, that you can generate an advanced RIN because you can make some advanced gallon through cellulosic some cellulosic bolt-on as they would call it to increase some of your volumes. So, there is a bit of that out there, but that's not going to achieve the goal what we want to achieve which is the absolute highest protein that we can make out of our commodity out of our distillers grains. And so, that's why we're focused on 50 protein plus. We think if you are going to increase the value of distiller's proteins, you should increase it to the soybean high protein soybean meal levels and not below it. And so, that's why we're fully focused on that and not at all focused on cellulosic or advanced RIN generation.
Our next question comes from Patrick Wang of Baird. Your line is open.
My first question is just clarifying on an earlier point. Can you talk about your appetite for dropping non-ethanol related assets to GPP? It sounds like there has been no change in strategy there where GPP would generally focus on the terminaling type of business rather than possibly going into cattle?
Well, cattle is really not anything you can drop into an MLP under the law. So if we have anything in our asset base that can be dropped, I would say we would do that much like we are doing with our terminal development. But there is nothing beyond that that can actually be dropped if anything else that we owned into MLP. There has to be external acquisitions of qualifying assets.
Okay. I understood. And then how if that all does the portfolio optimization process at Green Plains, Inc. score up with the initiatives that we previously discussed around growing non-affiliate revenues at the partnership? Or should we just think about those as two separate work streams.
No. I think what you have to assume is that if we divest an ethanol plant, there is a contract that we would have to then monetize back to partnership. The partnership with then get cash back that they can do one of several things. One is to invest in assets to maintain distribution levels and grow them. And that's one thing that we can do. The other thing to do is to then if there is no opportunity to do that, we can pay off our debt at the MLP. And thirdly the other thing we can do then is tender for share to keep the distribution coverage ratio steady and not be dilutive. So, we are fully focused on the plan that if we divest in ethanol plant, there will be cash going down to the MLP and the MLP could do one of those three things. And then obviously it will be well financed and ready to make acquisitions as we continue to search for them.
Thank you. And our last question comes from the line of Heather Jones of Vertical Group. Your line is open.
So I had a quick question on E15. I know that if given the current infrastructure that's in place and if you were able to get a RVP waiver. What is your current estimate of how much that would increase domestic demand?
Jim, you have those numbers. You want to kind of run those through where we think 2018, 2019 and 2020 are in different situations?
Right. I think based on our comments from first quarter, we should be doing somewhere around 170 million gallons this year off of about 70 million run rate last year, if that is based on not having the RVP for this summer. So, remember we switched over to winter blends come September 15, so E15 will be back for 2001 and newer model cars. The hope, certainly with our push to get RVP to E15 now is we'll have the deck cleared to have it not be interrupted as we are going to summer driving next June 1st. I believe what we also has put out there is the amount of gallons going into 19 with the waiver in place would be to double the amount of gallon. So we could be looking somewhere around 350 million gallons. That does assume we continue to expand the station locations. We are currently about 1450 stations going to 1800 to 2000. As Todd mentioned earlier, we do have a number of existing retailers that are looking expanding the footprints. We have potential new retailers that are still going through the process and want to be a part of the plan. And that's in the face of everything we continue to push through for the E15 waiver where rents are really a lot of it being driven economically by the spread. So I hope that answered your question, Heather.
It does. Thank you. So when you're committing Todd, to running 90% to 92%, is it basically implicitly you are saying that the inefficiency that was cautioning you on your plant. You basically don't think you're running lower can influence the plot demand enough to get the prices up, enough to offset the inefficient cost and efficiency. Is that fair?
I think where we're at today with gas demand where the industry really runs at below 11 a day where turnarounds always happen and pushing your old plant harder for some in the industry has been a hard thing to do and more costly. I think what we are seeing is capacity creep this year, which is what we expect there was 1% to 2% versus what was in the past several years of 5% to 6% or 7%. And so now that we are at a steady state, it's not just going to be Green Plains' jobs to regulate the industry and the industry volume. And so we put money into our plant over the several years to make sure that when we run harder, we can do it because we made a necessary repairs and maintenance that our cost structure is not going to increase. And so we think that by running over the last several three to five quarters is a negative $0.02 to $0.03 absorption of our cost structure. While certainly last year at this time when we did it, we made it all up or starting to see now is that as we ramped our volumes back up, we're really not going to see a big growth in stocks or growth in production which means others are rather not able to ramp up quite as much as they thought or others are making decision to run full race under their our margin structure. So it's not just the new job of Green Plains to be to regulate volumes in the industry and we feel like we are just going to push as hard as we can for our shareholders. And obviously we could change that idea going forward, but at this point we think we've done the job that we need to do and we are set up right now to benefit from some of the things that we've done in the last couple of years. Like we said, we're upgrading plants. We were changing some of the low plants from continues to batch and that put us down. We were doing other things as well. And so we are at the point now where we are fully ready to run as full hard as we can and let the chips fall as they may.
Okay. And just two quick questions. One, you did $100 roughly ahead in Q2 for cattle. You're targeting $50 to $60. So, does that imply that we should see a pretty significant deterioration in Q3 margin versus Q2? And secondly, with Trump's Farm bill, have you seen any slowdown or do you anticipate any slowdown in farmer marketing while they await those payments?
So obviously, if we made $100 in Q2 and we certainly not going to be making in Q3, there will be a drop in our earnings just quarter-over-quarter. But consistently throughout the year we still maintain our view that we learn $50 to $60 ahead on our cattle. And again some quarters maybe $30 and some quarters maybe $70, but in general over a trailing 12 we believe that could still happen. So yeah, it's obviously you can see that in Q3 cattle margins will be off because we did so well in Q2. And it's probably not, we can replicate that necessarily every single quarter and sometime is it just high volumes and sometimes is how they close out, sometime is just the strong basis. So yeah, I think you can anticipate that the last half of the year probably not as strong as the first half because the first half was exceptionally strong, but still within the range of what we had indicated to you earlier. In terms of farmer marketing, this is very interesting because as we said, we lifted our gain storage and solar grain storage and lifted our piles that we have. You know that we have made a significant investment on storage in the last couple of years. And we earned our return which is why the reason we had a strong Q2 on grain handling margins. Expecting that come September, October, November we'll rebuild those storage. Well actually what we are seeing right now is we are refilling now because there is basis weakness in the west that farmer has a significant amount of corn still to market that commercial needs to make space for a big harvest coming in corn and beans. And without a Chinese program we are going to have – what you're going to do with 200 million to 300 million bushels of extra beans every single month except the push out storage of something else in your tanks. And so that is a positive for the ethanol industry in fact that we are starting to see robust farmer and commercial marketing of corn, lower basis levels. We could actually come into harvest more full than we've ever come into harvest before because we are filling piles that we will not even start to fill until October, we are filling them now and you can carry that grain all the way through next year at this point. So this will be a year potentially if the Chinese program doesn't get worked out that the grain handler will earn a better than historical return on this space.
Thank you. At this time I'd like to turn the call back over to Todd Becker for any closing remarks, sir.
Thank you everybody for coming on the call today. Obviously we have a lot going on the Green Plains. Our portfolio program, optimization program is fully on track as outlined to you. We expect in the next 90 days to be able to make announcements and discuss some of the things to achieve the goal that we outlined on May 7th to you and it all remains on track. And we continue to thank you for your patience and hopefully we'll get some of these things done with some better markets ahead of us. And we'll talk to you guys next quarter. Thank a lot.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.