Gevo Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Gevo Incorporated Q4 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to your speaker for today, Doctor. Eric Frey, Vice President of Finance and Strategy. You may go ahead.

Speaker 1

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 Q4 year end results for the period ended December 31, 2023. I'd like to start by introducing today's participants from the company.

Speaker 1

With us today are Doctor. Patrick Gruber, Gevo's Chief Executive Officer and Lynn Small, Gevo's Chief Financial Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.gvo.com. Please be advised that our remarks today, including the answers to your questions, contain forward looking statements within the meaning of the Private Securities Litigation Reform Act.

Speaker 1

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.

Speaker 1

Following the prepared remarks, we'll open the call for questions. I'd 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 turn the call over now to the CEO of Gevo, Doctor. Patrick Gruber.

Speaker 1

Pat?

Speaker 2

Thanks, Eric. Good afternoon, everyone, and thanks for joining us on our call. We are filing our Form 10 ks today, and we ask that you refer to it for more detailed information after this call. We ended the 4th quarter with about 3.76 $1,000,000 in cash, cash equivalents and restricted cash on our balance sheet. The total that Gevo expects to have to spend to achieve FID for our Net01 project is $236,000,000 to $286,000,000 excluding certain internal cost allocations, of which only $125,000,000 to $175,000,000 of cash is left to spend to get that project complete to FID.

Speaker 2

So it's a downhill slope to get there. I'd like to thank the Department of U. S. Energy Loan Programs office for the thorough and diligent work that their team is doing to help us secure a loan guarantee as part of this construction financing. Now we are quite excited about net01, in fact even more excited.

Speaker 2

In the 3rd Q4 of last year, we had McKinsey in here working with us to challenge our assumptions, competitive position, competitive economics and such. The results of their work with us reaffirm that the NC1 plant design to be expected to deliver the lowest cost of carbon abatement compared to other SAF Technologies, including HEFA, other ATJ routes and especially direct air capture routes. The reason the NZ-one design is expected to win economically is because of the mass reduction in the use of natural gas, the efficiency of use of resources, creative integration technology, optimization of unit operations and overall efficiency and selectivity in getting to high yields of SAP or other valuable products that we want to make. More effective carbon abatement means that less carbon value has to be recovered in the marketplace to make economic returns. Think of it as more carbon reduction per gallon.

Speaker 2

That means more carbon abatement per gallon, more bang for the buck, if you will. All of this should result a competitively priced product for customers and less burden on consumers and taxpayers. It's a good result. It reaffirms and makes it more clear why what we are doing matters. Are laser focused on delivering EPC contracts, a set of customer contracts with terms that work for the DOE loan guarantee and a DOE project loan lockdown so that we can begin construction, which we estimate would take 24 months.

Speaker 2

We still work to do in front of us. We're making progress on the DOE and all the rest of it. In addition to the equity that we have built in the Net01 project through that money that we've already spent developing. We have also generated know how and patents that we filed on a reusable asset that is the plant designs. This is critical because to enable the promise of SAF, you need an industrial process that works at large scale that dramatically reduces the fossil energy footprint.

Speaker 2

Well, that's what we've achieved, we believe. This doesn't require vetting new technologies, it requires engineering systems integration and know how. The knowledge, technology and intellectual property we have gained through the work on NZ1, I expect would benefit way beyond NZ1. Why? Because there's 190 operating ethanol plants in the U.

Speaker 2

S, more than that actually. We expect that there will be lots of opportunity to leverage our knowledge, know how capability technology to produce higher value low carbon ethanol and staff over time. So the market dynamics are strongly in our favor to reuse and repeat the knowledge based assets we built up in development of our NZ1 business model. That's something that's an important aspect. It's we are a knowledge business as well.

Speaker 2

And it is we have learned a heck of a lot on how to abate carbon. We have been pleased to see the progress on 40B in the future 45Z and the federal support for carbon abatement in the IRA bill. The interagency working group and the U. S. Department of Treasury have indicated an updated GREET model will be used to quantify carbon reduction and that carbon sequestration would count as well as certain agricultural practices.

Speaker 2

The theme is you have to do the work though to actually and have real measurements to get it audited and then report it. So you don't get it it's not going to be a giveaway. You got to do some work for it. Well, that's good. That plays to our Verity business.

Speaker 2

More on that later. We strongly believe that field level measurement and tracking of agricultural practices needs to be part of the GREET protocol because we believe that it is at that level that the strongest data for carbon abatement can be brought forth. We believe that getting the policy guidelines right is important since this will be a precedent for the long run. Paul Blum was with Secretary of Agricultural Bilsack and EPA Administrator Regan when they announced last week that it will take a few weeks longer for the next generation of that guidance to come out. But they are keen on making sure that it's going to work in the long run and we think that's a good outcome.

Speaker 2

So we look forward to seeing the result. We also continue to see strong support for carbon abatement in states with New Mexico becoming the 4th state to sign into law a clean fuel standard just this week. This is a success for the 2nd largest oil and gas producing state in the country as well as other states interested in trading similar programs. We congratulate Mexico on this milestone and look forward to working with other states to develop similar programs. Now I'll switch gears and make a few comments about RNG and Verity.

Speaker 2

Last year, we expanded our dairy manure RNG capacity from about 350,000 to 400,000,000 BTUs per year. I am pleased that we have generated positive standalone non GAAP cash EBITDA from those assets for 2 consecutive quarters now. Last quarter, our production was at 91% of capacity. This year, we estimate that the non GAAP cash EBITDA from our R and G business could add up to about $12,000,000 to $16,000,000 on an annualized basis, assuming we get the LCFS pathway approved with the score of a negative 350. Those papers are filed.

Speaker 2

We're just waiting for the result. There is a lot of embedded upside potential with this asset. We estimate that the number could be as high as $50,000,000 to $60,000,000 per year from this 400,000,000 B2B plant if LCFS prices recover to where they were a couple of years ago and including the biogas production tax credit in 2025 to 2027. Of course, there can be no guarantee that the LCEFS price in California will recover to that level, but even a fraction of that would be meaningful to I like this a lot. There's a lot of upside potential that's embedded in it.

Speaker 2

I'm glad we have the asset. Last year in our Q3, our Verity tracking platform went live with farmers in South Dakota and Minnesota. We tracked ethanol plant customers totaling approximately 2% of the U. S. Ethanol industry by volume and that's the of course we're the world's largest ethanol market.

Speaker 2

Our initial target market for Verity in the U. S. Is estimated to be about $1,500,000,000 to $3,000,000,000 reducing and tracking reduction of carbon intensity through the value chain for a bushel of corn to a seat in a vehicle or aircraft. Verity is a capital light fee based software as a service business, so it's a nice complement to NZ1, Net01, which is more capital intensive. Providing customers regulators with an audit trail so that they know what they are getting in terms of carbon abatement when they're paying and they're paying for that carbon abatement is necessary value added component to everything we do at Gevo as a carbon abatement company.

Speaker 2

Now I'll pass it off to Lynn to talk through the operations and numbers.

Speaker 1

Thanks, Pat. Gevo's Q4 combined revenue and interest income was $9,400,000 with the interest income benefiting from higher interest rates. Our corporate spend that is G and A was $25,500,000 for the year in 2023 excluding non cash stock based compensation of $17,100,000 which is $2,500,000 increase from a 2022 number. Debt related to our RNG project was $68,000,000 consisting of $68,200,000 of face value less unamortized premium and issuance cost of $200,000 As Pat mentioned, we ended the Q4 of 2023 with a strong liquidity position of $375,600,000 in cash, restricted cash and other liquid investments. The restricted cash portion is associated with our RNG bonds and certain collateral related to the development of Net01 and totals $77,200,000 During the Q4 of 2023, we invested and capitalized $13,500,000 in cash and capital projects comprised of $1,800,000 into net 1 $300,000 into the expansion of our RNG project, dollars 7,400,000 into other net 0 projects and $4,000,000 for our fractionation and hydrocarbon skid.

Speaker 1

We also advanced $1,100,000 of reimbursable expenditures to our partner developer for the purchase of wind and hydrogen equipment to support NET01. On NET01, the BOE and its suite of independent experts are working with us in due diligence and loan guarantee structuring. Once the debt component is pinned down with a formal term sheet, we will formally ramp up the 3rd party equity capital raise and work towards the close of funding necessary to finance the project construction budget and all the project finance elements such as interest bearing construction, various reserves and transaction costs. Equity investors are standing by for a clear line of sight to the debt terms, which is underway and will be announced when the DOE term sheet is agreed. During Q4 2023, our dairy RNG assets in Northwest Dallas sold 90,666 MMBtu of RNG.

Speaker 1

Revenue of $4,400,000 for the quarter included RNG sales of $200,000 $4,200,000 net proceeds from the sales of environmental benefit. Between RNG and Verity Growth, we continue to close in on positive cash flow for the company. As Pat mentioned, we see a lot of embedded growth in RNG just by continuing to operate that asset. We also look forward to announcing the first revenues at Verity this year, which is a capital light fee based business. Now I'll turn the call back to Pat.

Speaker 2

Thanks, Glenn. Let me wrap up our prepared remarks by saying we believe Gevo is undervalued given our balance sheet and growth potential. We plan to address that first through execution and second by getting our message out. I hope everyone will take a look at the corporate investor presentation on our website, which lays out the enormous upside potential that we see and why now is such an exciting and pivotal time. Let's open it up for

Operator

questions. Our first question will come from the line of Amit Dayal with H. C. Wainwright.

Speaker 3

Hi, everyone. Good afternoon. Thank you for taking my questions. Pat, just to clarify on the 125 to 175 to be spent on NZ1, is that for 2024 that spend coming into play or is that going to be over the next few years as you build everything up?

Speaker 2

No, that's to get to FID from where we stand today. So it's a budget that will be measured out over time. If FID is in 2024, that's what it will be it could be it's going to be that's the money it takes to get to FID. It's not a time based thing. It's what we have to spend to get to FID.

Speaker 3

And just to follow-up on that, some of this you will get back, I guess, right, as you are spending upfront? Yes.

Speaker 2

Okay. Do

Speaker 3

you know what the amount is potentially that you

Speaker 2

Yes. So it is, I think it adds up to be like $235,000,000 Eric, you can help me here, dollars 235,000,000 $236,000,000 or something like that. And all of that would be reimbursable upon FID, at which time we'll probably reinvest it into the project to take a big chunk of the equity of the project. Or it may be that we have a better opportunities, which I can't see right now, but that could happen out in the future. So it's a reimbursable in its full amount.

Speaker 3

Understood. And then in parallel to that, I think in the January update, you said you may be spending some funds on future MZ projects. Is that still on the table as well?

Speaker 2

We are, but and we're doing it's a low level of spending, but one of the things that we're seeing is a lot of the customers want to know how to get to way beyond 65,000,000 gallons. And so it's about developing some other sites and making sure that we have good ones locked down. We aren't announcing where they are. It just that's not to our benefit because there's so much work of development work that needs to be done, but we have spent some. So we're doing it in moderation, but yes, it's for locking down additional sites.

Speaker 3

Okay. Thank you. Just last one for me. With respect to Verity, it looks like it's starting to get into the hands of customers, etcetera. And you are leveraging blockchain for this.

Speaker 3

Any scope of bringing AI related offerings or capabilities for this? Is there a need for that type of feature in this or use for this in the Verity offering?

Speaker 2

There is. So what's fascinating about Verity is that we're a little bit different than all the other companies out there and we're doing it end to end. So think of it as carbon capture at a farm all the way through to the seat of an airplane or a seat of a car and how you map everything seat of an airplane or

Speaker 3

a seat of a car and how you

Speaker 2

map everything straight through that measuring the sustainability and carbon scores, hitting all the regulatory marks that are required for reporting and all of that. It's all of it integrated. And what's interesting about it as the database builds, I think there'll be opportunities for AI, particularly with farmers so that they can see how to improve their fields. We've already seen improvements from farmers and they're excited by it. And there's I think we even posted a video on our website talking about it, but it's pretty darn interesting where they can see differences of field to field using the tool that we developed.

Speaker 2

And that's pretty interesting because that allows them to plan differently for the next year and reduce their CI score. We fully believe that we will that agricultural benefits will be part of the Argonne CREET model as it gets enshrined into the 45 Z and public policy. There's a question of how it will be done, but it's all related to climate smart ag. And Secretary Vilsack and the rest of the team in the administration seems to be pretty committed to make sure that those improvements are measured and reported and get credit where it's due. So that's an exciting thing.

Speaker 2

Of course, that is something that's a pure upside. Our NZ1 needs good corn, but it's also remember we're getting our low CI scores from wind power, from how we've done reduction of natural gas and of course the CCS pipeline, we anticipate.

Speaker 3

Understood, Brad. Thank you. That's all I have. I'll step back in queue.

Operator

Our next question will come from the line of Sean Severson with Water Tower Research.

Speaker 4

Thank you. Good afternoon. Pat, I was wondering, could you address any real or perceived political risk, I guess, to the economics of NZ1? I mean, is there anything that we need to be watching for as far as plant economics and any changes in the political environment?

Speaker 2

Well, that's what the carbon value is political, right? So, just as to get real grounded, our cash cost reduction is right now it pencils out to be something around $3.80 a gallon. That's very competitive cash cost basis. But we need another $3.80 to pay for all the capital or something. It's something like that, okay.

Speaker 2

What we need then is carbon value from the marketplace that covers that cost. Well, it looks like there's more than enough carbon value to cover that cost. That's what creates the opportunity. And that comes from a combination of the RINs, the state level programs like in Illinois or in Oregon or now New Mexico or in California or we expect 1 in Minnesota, etcetera, that adds value. And then there's the 45 Z potential as well at the federal level.

Speaker 2

And then there's something else called Scope 3s. We know that Scope 3s are being sold in dollars per metric ton and substantial in some cases, but you got to be able to prove in fact that you really got a carbon reduction for your money. So when you add all of that up, it looks like there's a lot of headroom here for something to give way over time on carbon value. In terms of the sentiments that we're seeing around 45z, it's we're hearing the sentiment of extended. It makes sense.

Speaker 2

However, I think having the ability to prove that taxpayers got some of their money for their money is crucial. That's why we're so keen on Verity. That seems to play on both sides of the aisle so far. So I think we're in a good spot overall. So it looks like there's more than enough carbon value in the marketplace to accommodate variations of things that might change to some degree.

Speaker 2

And then it looks like it's headed in the right direction. That's my take.

Speaker 4

Thanks for that. That was helpful. And my next question is, I understand you were at a SAP conference last week, I believe in London. What's the takeaway from the user environment? And I don't know if it's more on the investment side there, on the user side, but just what are you hearing in the SaaS markets?

Speaker 4

I mean, obviously, you guys have already had several great offtake agreements, but what's the latest in the demand picture and what some of the key points are from the potential consumers?

Speaker 2

Well, I think that the airlines know that they have to do something. And so it's a question of how do they do it, what do they do it and what are the real terms and that is what are the real terms contracts that lead to financeable debt deals. That's going to be the critical issue that has to get resolved. And we're working through partners on the customer side and the DOE on that issue. And everybody's cooperative.

Speaker 2

I think that everybody recognizes that we've run into, they've all seen this McKinsey work, they've seen the competitive analysis. We're very transparent about the stuff and they see that the ATJ is the most cost competitive route to make SAF and to do carbon abatement. And an important point is this, I keep saying carbon abatement with the systems about the actual cost to reduce the carbon, right? And so we're at about $4.50 per ton or so is what we would pencil out to be today. And the next best alternative half, I would be about dollars to $700 a ton.

Speaker 2

Power to liquids, which everyone is so enamored with it seems, for capturing CO2 and making liquids that might be $1100 to $1500 a ton. So we're a fraction of the cost of some of those technologies. That data is sinking into people. And so ATJ is a fundamentally long run competitive product and technology. So it's about sorting that out.

Speaker 2

So at that SAF conference, a lot of discussion was about the various technologies and the cost of carbon abatement, what's real and what isn't. And then there is a question of financiers where they say, they hear so much noise about all these different technologies. It's confusing for them. They have no idea because they're going to survive the new answer. And it's the greatest thing and it'll be free and things like that.

Speaker 2

Hi, we can use £3 of hydrogen to make a gallon of jet fuel, like you would with power liquids. Oh, and it'll be free, it's stuff like that. And so it doesn't it isn't that isn't real. So I think the reality of things are setting in for people. And of course, we come along and we're like, hey, this is the real deal, let's go.

Speaker 2

So we've got good partners, they're being

Speaker 4

cooperative. Thanks. And my last question, I want to follow-up a little bit on what Amit had asked, and that was about the expenditures. I think when you start to peel back the layers, the company is in a substantially very strong financial position and balance sheet. But I wanted to walk through and I think you did a little bit in the new deck, which was very helpful, but walk through kind of what's operating expenses in the plan for 2024 and what is, let's say, spend that could be done pushed out or timing dependent.

Speaker 4

So it's a long way of asking what do you really have to spend in 2024 and your flexibility in spending cash?

Speaker 2

Because the main mission of Gevo is to get the NZ 1 operating, the number that I threw out there of that range, in the beginning is the chunk of the money, the bulk of the money that we're going to spend. If we strip everything away and say, money that's not recoverable someday, so not project money, then I think we're left with maybe $12,000,000 to $15,000,000 or so of basic burn or what most companies would call basic burn. Now, we have a bunch of activities. We have a big we're spending a lot of effort and resources, people on government affairs and all the things we made to make NZ1 successful and profitable, the engineering and we're developing some other sites. And so we bundle that all together to net range that we're talking about already.

Speaker 2

And we'll moderate the spend throughout the year depending upon how fast the DOE goes or how fast all the pieces turmoil in the marketplace or whatever. So it isn't like it's we're just saying, shoot the whole lot and it's all gone. We do careful moderation along the way. So it's that's a long way of saying that, when you get us down to the really basics, if you just looked at our management plus our R and D plus accounting and stuff like that, it's a pretty small number.

Speaker 4

Okay. Thanks. That's very helpful. Thanks, Pat.

Operator

Our next question will come from the line of Kumar Raju with BBG. Kumar, your line is now open.

Speaker 2

Kumar, are you there? Okay, let's move on.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to Doctor. Gruber for closing remarks.

Speaker 2

Thank you all for joining the call today and appreciate listening to me and I thank you for the questions too. I'm glad to clarify some of these things that have been confusing. And we really I feel pretty good about where we are and I like what I see on the Argonne grid. I'm thankful that they're taking a serious approach at getting it right. That's good for all of us.

Speaker 2

In terms of the 45 Z and what comments on that, just to be clear? Rule that was going to come out is a 40b rule, right? That expires at the end of 2024. What we expect to see is going to be talking about here's the key components that are going to be included in 45z as guidance. So I expect that people will be a little bit confused about that.

Speaker 2

45z is the thing that actually matters. So whatever they say about 40b serves as some reference and precedent. So I expect them the two things to be different. Whatever they say about 40B and how they implement that, I expect that it will be different than 45Z, but I expect them to give guidance to what 45Z will be.

Operator

With that, thank you all. Thanks for following us and being part of Gevo. Bye bye. This concludes today's conference call. Thank you for participating.

Operator

You may now disconnect.

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