Yahoo Finance Gevo, Inc. (NASDAQ:GEVO) Q1 2024 Earnings Call Transcript
Gevo, Inc. (NASDAQ:GEVO) Q1 2024 Earnings Call Transcript May 2, 2024
Gevo, Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.06. Gevo, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Gevo First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Eric Frey, Vice President of Finance and Strategy. Please go ahead.
Eric Frey: Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. I'm also responsible for Investor Relations here at Gevo. Thanks for joining us to discuss Gevo's first quarter results for the period ended March 31, 2024. I would like to start by introducing today's participants from the company. With us today are Dr. Patrick Gruber, Chief Executive Officer; and Lynn Smull, Chief Financial Officer. We also have Dr. Chris Ryan, President and Chief Operating Officer; and Dr. Paul Bloom, Chief Carbon Officer and Chief Innovation Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.gevo.com. Please be advised that our remarks today, including answers to your questions, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those statements include projections about the timing, development, engineering, financing, and construction of our sustainable aviation fuel projects, our recently executed agreements, our renewable natural gas project, and other activities described in our filings with the Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligation to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information on this call. The relevant definitions and GAAP reconciliations may be found in our earnings release, which can be found on our website at www.gevo.com in the Investor Relations section.
Following the prepared remarks, we'll open the call for questions. I would like to remind everyone that this conference call is open to the media, and we are providing a simultaneous webcast to the public. A replay will be available via the company's Investor Relations page at www.gevo.com. I'd like to now turn the call over to CEO of Gevo, Dr. Patrick Gruber. Pat?
Patrick Gruber: Thanks, Eric. Good afternoon everyone, and thanks for joining us on our call. We are filing our form 10-Q today and we ask that you refer to it for more detailed information after this call. Today, I would like to highlight a couple of key items from our filing and also talk about the recent IRA Section 40-B SAF tax credit guidance that came out, which I have to say is very encouraging. Number one, we began utilizing our previously announced stock repurchase program. Lynn Smull, our Chief Financial Officer, will say more about this when he's on deck here to give comments. Now, my comment on this is that if you look at our cash, cash equivalents, restricted cash, divide that by our number of common shares outstanding, you will see that alone is worth approximately $1 for your share.
That is about double where the share price was at various times in the first quarter. Obviously, we think the market has undervalued our shares since in addition to our cash we have a renewable natural gas business with positive standalone adjusted EBITDA, a wholly-owned carbon accounting tech startup that we call Verity, a robust intellectual property portfolio and significant progress toward a well-positioned greenfield alcohol-to-jet project called NZ1 along with a portfolio of other sites that can be developed. We also have our next-generation ethanol to fuel chemical technology called ETO that has made it through the next scale up milestone with LG Chem, which triggers yet another royalty payment. Number two, we have revised our expected spend on Net-Zero 1, our Greenfield alcohol-to-jet project.
We now expect that we'll have to spend about $90 million to $125 million from January 1 of 2024, that's this year, until we reach the fully financed construction phase of the project, or financial close. That is a reduction from our previous range of $125 million to $175 million. Chris Ryan, our President and Chief Operating Officer will say more about the Net-Zero 1 project a little bit later in this call. Number three, I'm glad the guidance finally came out on Section 40-B sustainable aviation fuel tax credit under the Inflation Reduction Act. Now, the 40-B rule itself is mostly not germane to our plans since it expires at the end of 2024. But it does set guidance and precedent for the section we do care about 45-Z, which comes into play later in 2025 and beyond.
I can say this. The 40-B looks to have been a clear step in the right direction since it recognizes the many carbon intensity reductions we've been talking about. It uses the Argonne GREET model, enshrines it. We've been advocating that for years. It includes CCS and it's moving properly towards taking into account agricultural practices. In the comments from members of the administration, there -- it's clear that there's going to be more work to include more of climate smart ag in 45-Z. Now, it's interesting to note that under the 40-B rule, it looks like that our proprietary NZ1 plant design, which really is different than anyone else in the world, that even without CCS or ag practices, we'd be well into the money, potentially achieving $1.50 to $1.75 a gallon.
That means when you have 60 million gallons of jet fuel coming out of a plant, that's $90 million to $105 million of revenue. I like the precedent. I want to see it sit. I want to improve it further. It's going to be very interesting and it's pretty exciting. It's good progress. I like what we're seeing. We expect that this guidance will be the launch pad for the sustainable aviation fuel 45-Z tax credit. USDA Secretary Vilsack has noted that he expects 45-Z will expand recognition of climate smart ag practices, our verity carbon solutions, of course is well-positioned to aid that. The 40-B guidance is a good foreshadowing of 45-Z guidance. The administration agencies have indicated there's more work to be done to refine the rules of 45-Z. But it looks like a good, good starting point.
In 45-Z, it would also represent up to $1.75 value per gallon of SAF production. Or that's again potential of $105 million a year, if the carbon intensity is counted as zero using all the tools at our disposal, we have lots of them. Now, this guidance, as even as it stands, should give confidence to project investors that the government's on the right track. Yes, there's more work to be done. But you know what? We’ve been bringing additional clarity to the direction of the 45-Z rules. They've indicated it's going to include the climate smart ag. This includes CCS and GREET all very constructive. This should help incentivize investment. It could help bring our projected cost of carbon abatement for this first plant down when we include those credits to potentially be as low as $0 per ton, depending upon a number of factors, that's a big deal.
That is, we believe, one of the lowest cost -- if not the lowest cost route of abating carbon. If you haven't already done so, please take a look at the deep dive presentation on Net-Zero 1and the competitive economics of alcohol to jet that we posted on our Investor Relations website, which goes into more detail. By carefully reviewing those economics, you can see why we have a deep conviction about our proprietary Net-Zero integrated plant designs and their economic impact. Finally, we will have Paul Bloom, our Chief Carbon Officer, Chief Innovation Officer, to give us an update on Verity, our wholly-owned carbon accounting tech startup. Now I'll pass it off to Lynn to talk through item number one that I mentioned, the share repurchases and the operations and the rest of the numbers.
Lynn?
Lynn Smull: Thank you, Pat. During Q1 2024, our Northwest Iowa RNG project sold 88,967 MMBtu of RNG. Revenue of $4 million for the quarter included RNG sales of $0.2 million and $3.8 million net proceeds from the sale of the environmental attributes. Gevo's Q1 interest income was $4.6 million. Our corporate spend that is G&A was $7.9 million for the quarter, excluding non-cash stock-based compensation of $4.2 million, which is a $1.8 million increase from the first quarter of 2023, mainly due to increased personnel costs. Debt related to our RNG project remained unchanged at quarter end at $68.2 million after we successfully remarketed the RNG green bonds on April 1 of this year. The remarketed bonds bear interest of 3.875% and are backed by a new letter of credit of $69.9 million, a $0.3 million reduction from the previous bonds letter of credit.
We ended Q1 with a liquidity position of $340.6 million in cash, restricted cash and other liquid investments. The restricted cash portion is $69.9 million and collateralizes our RNG bond letter of credit. During Q1, we invested and capitalized $17.5 million cash in capital projects comprised of approximately $16.5 million into Net-Zero 1, $0.5 million into our RNG business, and $0.5 million for our fractionation and hydrocarbon skid. In addition to the $16.5 million invested into Net-Zero 1, we advanced $0.6 million into our wind and hydrogen partner for development costs in support of the project, which we expect is reimbursable upon financial close. We see enormous value in advancing our business thesis, which requires prudent capital deployment to maximize long-term value for our shareholders.
For example, we continue to invest in advancing Net-Zero 1 towards financial close when the project would be fully funded for construction and commissioning. But through our work and learnings in the project development process, we saw the opportunity to save on development capital required to reach close and we, as Pat mentioned, and Chris will further discuss, revised the project spend guidance from January 1, 2024, through close downwards to $90 million to $125 million from the previous guidance of $125 million to $175 million, of which I noted that $17.1 million was spent in Q1 this year, inclusive of wind and hydrogen advances. We will continue to identify activities and costs that can be deferred until after financial close whenever we can.
We believe this is prudent capital deployment, minimizing Net-Zero 1 development spend, while advancing a groundbreaking ATJ plant to put Gevo on the path to meeting market demands for staff. Another use of capital involved repurchases of our common stock under the previously disclosed stock repurchase program. Since the beginning of the year, we repurchased approximately 5.5 million shares of common stock for approximately $3.7 million. Now, Chris Ryan, our President and Chief Operating Officer, will talk more about Net-Zero 1. Chris?
Chris Ryan: Thanks, Lynn. For those of you who don't know me, I'm the Senior Executive at Gevo, directly overseen and responsible for our Net-Zero projects and their deployment. As Pat mentioned earlier, we reduced our expected spend requirement on Net-Zero 1 to reach financial close. As the time horizon to financial close of Net-Zero 1 gets closer, we expect to continually reassess our spend and refine our expectations along the way as appropriate. We're pleased to be able to bring that number down. We don't see ourselves needing to spend more than that. Of the Net-Zero 1 spend so far about half is for engineering and about a third is for wind and hydrogen equipment. We expect that spend will be recoverable to us at financial close.
This investment in engineering puts us in the position of having detailed designs and intellectual property around the production of low carbon hydrocarbons and sustainable aviation fuel specifically that can be leveraged to save time, money and reduce risk for future projects for Gevo's and anyone who works with us to produce low carbon SAF. We want to see the CO2 pipeline in South Dakota move forward to keep Lake Preston as our most attractive site for producing sustainable aviation fuel. But we've developed a slate of potential sites that we've prequalified for future Net-Zero projects. But we still hope and expect to see Lake Preston as the home of Net-Zero 1. Our work on the Department of Energy loan guarantee is going well, but as anyone who has worked on one of these knows, there's a lot of engineering and upfront risk mitigation required much more than a typical balance sheet finance project.
Our EPC partners are busy working with us to mitigate execution risk and ensure our contracts fit the DOE's loan guarantee requirements. Likewise, our off-take partners are working with us to ensure that the contracted demand fits with the requirements of a DOE loan guarantee to finance the construction phase. Lake Preston, the site we own is more than twice the size of the plant's footprint, which leaves plenty of room for future bolt-on projects. It's in a location where many of the surrounding farms in the region already use climate smart agricultural practices, which reduces carbon footprint of the corn feedstock we plan to use there. That in turn increases our carbon abatement. Our location is also not far from our wholly-owned renewable natural gas business in Northwest Iowa, which gives us the optionality to trim our carbon intensity in our SAF by utilizing that manure-based RNG at our SAF plant.
The location has rail access for product distribution. That's not far from the Minneapolis and Chicago airports, and both of those airports are in states with a sustainable aviation fuel tax credit of $1.50 a gallon. We can also get to the West Coast where there are low carbon fuel markets like in California; we can get into Canada, which also has incentives for low carbon fuels. One of the things we know that's required from our past experience is to have an audit trail of sustainability to prove to customers and policymakers the value of what they're getting from start from the field to finish through the manufacturing chain. That's why we launched Verity a few years ago. So I'll hand it over to Paul Bloom, our Chief Carbon Officer and Chief Innovation Officer, to share the latest on Verity.
Maybe he can start by telling people what a Chief Carbon Officer does. Paul?
Paul Bloom: Thanks, Chris. So briefly, because I get asked this question sometimes, let me address it. What is the Chief Carbon Officer? I did a fireside chat last year to answer that. For those of you who haven't seen it, I can sum it up that my job is all about maximizing the value in carbon abatement for Gevo and our shareholders throughout the entire supply chain. To that end, one of my primary responsibilities is leading our wholly-owned carbon accounting tech startup called Verity. In every aspect of our business, from the field to the seat on the aircraft, it is critical that we can accurately measure, report, verify and value carbon abatement with a high level of trust and transparency. Verity intends to provide Gevo and our customers with the digital tools to make sure that we can count all of the carbon abatement across the entire supply chain, while fully capturing value from voluntary and compliance carbon markets and tax credits, while avoiding double counting.
As policies like the Section 40-B SAF tax credit and in the future Section 45-Z credit are developed, we plan to use Verity to help simplify tracking, accounting and auditing in an ever-changing policy landscape. We expect the requirements for the data in support of climate claims will gain importance to give confidence to consumers and other stakeholders. By definition, Verity means truth. In the first quarter of 2024, we continued increasing our Verity customer base at the farm and field level. We initiated the first privately sponsored grow program in the Midwest for a biofuel client. In addition, we signed a letter of intent with the provider of heavy-duty engine technology to develop carbon-counting solutions to demonstrate and drive decarbonization of freight transportation in the United States.
So now, in addition to field to seat tracking for SAF, start thinking about field to fleet tracking for heavy-duty vehicles in hard to abate market sectors. Finally, we continue to make great progress working with farmers of all sizes and from underserved groups through our Gevo farm to flight USDA climate smart commodities grant to implement, track and incentivize a wide variety of agricultural practices at the field level that are intended to reduce emissions and sequester carbon in the soil. Using the best science, we are meeting farmers where they are with workable solutions that are additive, account for emissions reduction and don't exclude certain practices or require bundling. We've also started making incentive payments to farmers who are adopting and implementing climate smart practices under the program.
By using the best tracking and accounting, we want farmers to be rewarded for reducing their carbon footprint and helping foster rural economic development with agriculture done right. After all, while we are focused on biofuels today, everything has a carbon footprint. We anticipate the great work we are doing with farmers today will benefit all agricultural supply chains with carbon accounting solutions from field to final use for food, feed, fuels, industrial products in the future. We want consumers, taxpayers and policymakers to know that they got something for their money. Verity is all about delivering that transparency and trust. I'd like to reiterate our previously announced expectation of achieving first revenue at Verity this year.
More details will be forthcoming as that happens and as we go-forward. I'm going to leave it there for now, but we can discuss this further if there are any questions in the Q&A. Now, I'll hand it back over to Pat.
Patrick Gruber: Thanks, Paul. So you heard Paul just now talk about Verity. It's a pretty exciting opportunity. We're way out ahead in the curve here, having thought about this stuff for years. Chris talked about our Net-Zero 1 project and Lynn discussed our numbers. I want to close with this. Fundamentally, we see that there's an enormous supply of cost effective carbohydrates and alcohols in the U.S. and globally. We also see enormous demand for drop in low carbon fuels and chemicals that can be derived from alcohols. We therefore see compelling value in connecting the dots between that supply and demand using existing technologies plus our team's innovative cost effective low carbon implementations, which become available to us when we use photosynthesis and fermentation make alcohols and we combine with great catalytic techniques and then we wrap the whole thing with renewable energy.
It's powerful. There are about 190 operating ethanol plants in the U.S. alone. We see that fleet being modified or converted over time to provide carbon abatement, lowering the CI scores and changing what they do or repowering themselves. We're going to help them be at the forefront of that. In the long-term, the vehicle to provide that carbon abatement may be low carbon ethanol alcohol-to-jet. It could be diesel because we can make that as well or it might be gasoline, or it might be chemicals. All of those things are fair game. Once we establish the commercial business system, we would expect to see that Net-Zero chemicals are enabled. It shouldn't be lost on anyone that any of these products are fair game for us. We'll focus on SAF first.
But all of them are fair game. We have proprietary designs, technologies and business systems that can take us in whatever direction the world of carbon abatement heads in the future. We believe the business system of Net-Zero 1 sets us up to be at the forefront. It's our integrated plant designs that drive the carbon abatement and the CI numbers so low. Ours is a business system that begins with carbon dioxide being pulled out of the atmosphere. Let's nature do a lot of the work through the photosynthesis of fermentation. It's capturing the carbon and the hydrogen and the electrons to hold those atoms together. They're all needed for making the fuels and chemicals. The NZ1 system produces food chain ingredients and catalyzes change the climate smart ag while mitigating land use issues.
It converts the CO2 to carbohydrates via photosynthesis and the carbohydrates the alcohols via fermentation and then crossing over from the ag and bio world into chemical processing where we convert the alcohol into olefins. Where the olefins are converted into fuels and chemicals in a chemical plant, it's not refining, it's a chemical plant. It's cost effective. Gevo knows the ag and fermentation side as well as the chemical processing side that puts us in a pretty unique position. Alcohols provide a scalable link between two historically separate industries. We're crossover people. The ag industry and the fossil fuels industry and chemical industry don't normally talk to each other. Well, we bridge that gap and that's what's needed in the world of energy transition to establish new links between previously separate industries.
If we're going to solve these problems, it's got to be a business system approach throughout. And then we have to layer in a Verity to track and trace across the whole business system so no games are played. We like and we focus on these business system solutions that work, that they have potentially low cost, competitive long run against fossil-based products, deliver value for customers, financeable and deliver the growth. And you know what? We're making progress. All right. Let's open up for questions.
See also
25 Most Profitable Companies in the US and
Top 25 Stocks in the S&P 500 by Index Weight Right Now.
To continue reading the Q&A session, please click here.
