Q4 2023 Gevo Inc Earnings Call
Participants
Eric Frey; Vice President of Finance; Gevo Inc
Patrick Gruber; Chief Executive Officer, Director; Gevo Inc
L. Lynn Smull; Chief Financial Officer; Gevo Inc
Amit Dayal; Analyst; H.C. Wainwright & Co.
Shawn Severson; Analyst; Water Tower Research LLC
Presentation
Operator
Good day and thank you for standing by, and welcome to the Gevo, Inc. Q4 2023 earnings conference call. (Operator Instructions)
Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Dr. Eric Frey, Vice President of Finance and Strategy. You may go ahead.
Eric Frey
Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. I'm also responsible for Investor Relations here at VIVA. Thanks for joining us to discuss Teva's Fourth Quarter and Year End Results for the period ended December 31st, 2023.
I'd like to start by introducing today's participants from the company. With us today are Dr. Patrick Gruber, Gevo's Chief Executive Officer, and Lynn Smull, Gevo's Chief Financial Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.jacada.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. And 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 products, our recently executed agreements, our renewable natural gas projects 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.cielo.com in the Investor Relations section. 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 CEO 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 K today, and we ask that you refer to it for more detailed information. After this call, we ended the fourth quarter with about $376 million in cash, cash equivalents and restricted cash on our balance sheet. The total that GEO expects to have to spend to achieve FID for our Net-Zero one project is $236 million to $286 million, excluding certain internal cost allocations, of which only $125 million to $175 million of cash is left to spend to get that project complete the FID. source of downhill slope to get there. I'd like to thank the Department of 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 net zero one fact even more excited in the third and fourth quarter of last year. We had Mackenzie in here working with us to challenge our assumptions, competitive position, competitive economics and such results of their work with us reaffirm that the NC. one plant designed to be expected to deliver the lowest cost of carbon abatement compared to other SaaS technologies, including Hafa, other ATJ. routes and especially direct air capture route. The reason the NZ. one design is expected to win economically is because of a massive reduction in the use of natural gas, the efficiency of the use of resources, creative integration, technology optimization Have you had 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 return, think of it as more carbon reduction per gallon. That means more carbon abatement per gallon, more bang for the buck, if you will, all of this should result in a competitively priced product for customers and less burden on consumers. And taxpayers is a good result. It reaffirms and makes it more clear why what we are doing matters we are laser focused on delivering EPC contracts, a set of customer contracts with terms that work for the DOE loan guarantee and a DOE low project loan locked down. So that we can begin construction, we estimate would take 24 months. We have still work to do in front of us. We're making progress on the DOE and all the rest of it in addition to the equity that we have built in the Net-Zero one project through that money that we've already spent developing, we have also generated know-how and patents that we filed and a reusable asset that is the plant designs. This is critical because to enable the promise of SAF, you need an industrial process that works at large scale that dramatically reduces the fossil energy footprint?
Well, that's what we've achieved.
We believe this doesn't require vetting new technologies requires engineering systems, integration and know-how, the knowledge technology, intellectual property we have gained through the work on NZ. one, I expect would benefit way beyond NZ. one y. because there's 190 operating ethanol plants in the US more than that actually we expect that there will be lots of opportunity to leverage our knowledge, know-how, capability technology to produce higher valuable carbon ethanol, SAP over time. So the market dynamics are strong dynamics are strongly in our favor to reuse repeat the knowledge-based assets. We've built up the development of RNZ. one business model. That's something that's an important aspect that we are acknowledged business as well. And it is we have we've learned a heck of a lot and how do will be carbon. We have been pleased to see the progress on 40 b. in the future, 45 Z the federal support for carbon abatement in the air, a 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 this curve and that carbon sequestration would count as well as certain agricultural practices.
The theme is you have to do the work though, to actually inhibit real measurements to get it audited and then reported. So you don't get it. It's not a given that can be given what you've got is an workforce, less good that plays to our Verity business. More on that later, we strongly believe that fuel level measurement and tracking of agricultural practices needs to be part of the agreed 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, this will be a precedent for the long run. Paul Bloom was with Secretary of agricultural bill SEC and EPA administrator Regan when they announced last week that it will take a few weeks longer for the next generation of that guidance to come out. But they are keen on making sure that it's going to work in the long run and we think that's a good outcome.
So we look forward to seeing the results.
We also continue to see strong support for carbon abatement states with New Mexico becoming the first state to sign into law a clean fuel standard just this week. As I said, this is a success for the second largest oil and gas producing state in the country as well as other states interested in trading similar programs. We congratulate Mexico on this milestone and look forward to working with those states to develop similar programs.
Now I'll switch gears and make a few comments about RMG and Verity. Last year we expanded our dairymen newer RNG capacity from about 350,000 million to 400,000 million BTUs per year. I am pleased that we have generated positive stand-alone non-GAAP cash EBITDA from those assets for two 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 & G business could add up to about $12 million to $16 million on an annualized basis, assuming we get the LCFS pathway approved with the score of a negative three 50, were those that those papers are filed, we're just waiting for the result. There is a lot of embedded upside potential with this asset. We estimate that the number could be as high as $50 million to $60 million per year from this 4,000 million BTU plant, if LCFS prices recovered 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 LC and as price in California will recover to that level. But even a fraction of that would be meaningful to us like this a lot. There's a lot of upside potential that's embedded in it. And I'm glad we have the assets last year in our third quarter.
Our Verity tracking platform went live with farmers in South Dakota, Minnesota we tracked ethanol plant customers totaling approximately 2% of the US ethanol industry by volume. And that's of course, we're the world's largest ethanol market. Our initial target market for Verity in the US is estimated to be about $1.5 billion to $3 billion, reducing and tracking the reduction of carbon intensity through the value chain for a bushel of corn to a seat in a vehicle or or aircraft various a capital-light fee-based software as a service business. So it's a nice complement to NZ one Net-Zero one, which is more capital-intensive, providing customers, regulators with an audit trail so that they know what they're getting in terms of carbon abatement when they're paying and paying for that carbon abatement is necessary value-added component, everything we do at Chiba as a carbon abatement company.
Now I'll pass it off to Lynn to talk through the operations of numbers.
L. Lynn Smull
Thanks that Gevo Q4 combined revenue and interest income was $9.4 million with the interest income benefiting from higher interest rates. Our corporate spend that is G&A was $25.5 million for the year in 2023, excluding non-cash stock-based compensation of $17.1 million, which is $2.5 million increase from a 2022 number.
Debt related to our RNG project was $68 million, consisting of $68.2 million of face value less on amortized premium and issuance costs of $0.2 million. As Pat mentioned, we ended the fourth quarter of 2023 with a strong liquidity position of $375.6 million in cash, restricted cash, and other liquid investments. The restricted cash portion is associated with RN. bonds and certain collateral related to the development of net zero one and totaled $77.2 million.
During the fourth quarter of 2023, we invested and capitalized $13.5 million in cash, in capital projects comprised of $1.8 million into [net zero 1, $0.3 million] into the expansion of our energy project, $7.4 million into other net zero projects, and $4 million for our fractionation and hydrocarbon skid. We also advanced $1.1 million of reimbursable expenditures to our partner developer for the purchase of wind and hydrogen equipment to support net zero one. One zero one, the DOE and its suite of independent experts are working with us in due diligence and loan guarantee structure once the debt component is pinned down with a formal term sheet will formally ramp up the third party equity capital raised and work towards the close of funding necessary to finance the project construction budget and all the project finance elements such as interest during construction, various reserves and transaction costs, equity investors are standing by for a clear line of sight to the debt terms, which is underway and will be announced when the DOE term sheet during Q4 2023. Our dairy RNG assets in northwest Iowa sold 90,666 MMBTU of RMG ,revenue of $4.4 million for the quarter included RNG sales of $0.2 million and $4.2 million net proceeds from the sales of environmental benefits. Between R&D and Verity growth, we continue to close it 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. And 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.
Patrick Gruber
Thanks, Lynn. Let me wrap up our prepared remarks by saying we believe GO. undervalued. Given our balance sheet and growth potential, we plan to address that first through execution. And second, by getting our message out, I hope everyone will take a look at the corporate investor presentation on our website, which lays out the enormous upside potential that we see and why now is such an exciting and pivotal time, let's open it up for questions.
Question and Answer Session
Operator
(Operator Instructions) Amit Dayal, H.C. Wainwright.
Amit Dayal
Hi, everyone. Good afternoon. Thanks for taking the questions. Pat, just to clarify on the $125 million to $175 million 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 out?
Patrick Gruber
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 the FIT is a 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? That's not a timing thing if that's what we have to spend to get to FID.
Amit Dayal
And just a follow-up on some of this, you will get back, I guess, right, because you are spending out front --
Patrick Gruber
Yeah, yeah.
Amit Dayal
Do you know what the have is potentially taht you --.
Patrick Gruber
Yes, so it is I think it adds up to be like $235 million. Eric, you can help me here. $235 million, $236 million or something like that. And all of that would be reimbursable upon FID at which time we'll probably reinvested into the project to take a big chunk of the equity of the project or, you know, 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 and it's full amount.
Amit Dayal
Understood. And then in parallel to that, I think in the January update, you said you may be spending some funds on future NZ projects. Is that still on the table as well?
Patrick Gruber
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 customers want to know how to get to way beyond 65 million gallons or so you it's about developing some other sites and making sure that we have good ones lockdown, we aren't announcing where they are at. Can you just that's not to our benefit because there's so much work of development work that is to be done, but we have spent some so we're doing moderation. But yes, it's for locking down additional sites.
Amit Dayal
Okay, thank you. And just last one from me. Um, with respect to Verigy, it looks like it's starting to get into the hands of customers, et cetera. And you are leveraging blockchain for this. Do you have any scope of UNO bringing AI related offerings or capabilities for this? Is there a need for it that type of feature in this are used for this in the Verigy offering.
Patrick Gruber
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 he knows, carbon capture at a farm all the way through to the seat of an airplane or a seat of a car and how you map everything straight through that measuring the sustainability and carbon score is 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've posted a video on our website talking about it, but it's pretty darn interesting where they can see differences of field the field using the tools that we developed. And that's pretty interesting because it 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 our gone green model as it gets trained 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 edge and Secretary Vilsack and the rest of the US, our 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 it. That's an exciting thing. Of course, that is something that's a pure upside. Our NZ. one needs good corn, but it's also remember, we're getting our low CI scores from wind power from how we've done the reduction of natural gas. And of course, the CCS pipeline. We anticipate.
Amit Dayal
Yes, understood. But thank you. That's all I will step back in queue.
Operator
Shawn Severson, Water Tower Research.
Shawn Severson
Thank you. Good afternoon. Wondering could you address or any real or perceived political risk, I guess, to the economics of NZ. one? I mean, is there anything that we need to be watching for as far as plant economics and any changes in the political environment?
Patrick Gruber
Well, that's what the carbon value is political, right? So it just has 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. What we need then is carbon value from the marketplace that covers that part. While 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 wins, the state level programs like in Illinois or in Oregon or New Mexico or in California, or we expect one in Minnesota, et cetera, that adds value. And then there's the 45 Z potential as well at the federal level. And this is something else called scope threes. We know that Scope three is being sold in dollars per metric ton is substantial in some cases, which you've got to be able to prove in fact that you really got to cover 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 a lot over time and carbon in terms of the sentiments that we're seeing around 45 Z, it's for hearing the sentiment of extended it makes sense. However, I think having the ability to prove that taxpayers got some of their money for their money is crucial. And 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 some degree and then it looks like it's headed in the right direction. That's my take.
Shawn Severson
Thanks for that. That's helpful. And my and my next question is I understand you're at a SAP conference. So last week, I believe in London, what's the 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 SAP market? I mean, obviously, you guys have already had several great offtake agreements, but what's the latest in the demand, the demand picture and what some of the key points are from the from the potential consumers?
Patrick Gruber
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, whether they do it and what are the what are the real terms and that is that the 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. We're working through partners on the customer side and the deal we on that issue and everybody's cooperative. The I think that everybody recognizes that we've run into. They've all seen this McKenzie work. They've seen the competitive analysis. We're very transparent about this stuff and they see that the ATJ. is the most cost-competitive route to make SIS and to do carbon abatement and an important point is that I keep saying carbon abatement if the system is about the actual cost to reduce the carbon, right? And so we're at about $450 per ton or so is what we would pencil out to be today. And you know, the next best alternative half would be about $600 to $700 a ton power to liquids, which everyone is so enamored with it seems for capturing CO2 and making liquids that might be, you know, $1,100 to $1,500 a ton. So we're a fraction of the cost of some of those technologies that data is sinking into people. And so ETJ. is a fundamentally flawed run competitive product and technology. So it's about sorting that out. So at that SAP conference, a lot of discussion was about the various technologies and the cost of carbon abatement, what's real and what isn't. And and then there is a question of financiers where they say we hear so much noise about all these different technologies. It's confusing for them. They have no idea what the new answer, and it's the greatest thing will be free and things like that. I we can use 3 pounds of hydrogen to make a gallon of jet fuel that you would have power liquids on when it will be free stuff like that we are in. So it doesn't isn't that isn't real. So I think the reality of things are setting in for people and of course, we come along and we're like, hey, this is the real deal. Let's go. So we've got good partners there being cooperative.
Shawn Severson
Thanks. And my last question, I wanted 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 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, you pushed out our timing dependent. So have a long way of asking what do you really have to spend in 2024 and your flexibility in spending cash?
Patrick Gruber
So has the main mission of Gevo is to get the NZ one 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 from day, so not project money, then I think we're left with maybe $12 million to $15 million or so a basic for what most companies have called basic burn. Now we have a bunch of activities. We have a big we have we're spending a lot of effort and resources people on government affairs and all the things related to make NZ. one successful and profitable the engineering, and we're developing some other sites. So we bundle that all together. It's in there range that we're talking about already and we'll moderate the spend throughout the year, depending upon how fast the DOE. goes or how fast all the pieces and parts come together or if there's some kind of a turmoil in the marketplace or whatever. So it isn't like it's we're just saying shoot the whole wide 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 R & D plus accounting and stuff like that. It's a pretty small number.
Shawn Severson
Thank you. That's very helpful. Thanks, Pat.
Operator
Kumar Raja, BBG.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Glauber for Gruber remarks.
Patrick Gruber
Thank you all for joining the call today and appreciate you listening in and thank you for the questions to I'm glad to clarify some of these to clarify some of these things that have been confusing and we really feel pretty good about where we are. And I like what I see on the argon grid. I'm thankful that they're taking a serious approach at getting it right. That's good for all of us in terms of the 45 G. and what comments on that just to be clear, the rule that is going to come out is a 45 40 b. rule, right? That's that expires at the end of 2024 what we expect to see is going to be talking about. Here's the key components are going to be included in 45 Z as a guidance. So I expect that people will be a little bit confused about that 45 Z is the thing that actually matters. So whatever they say about 40 b. serves as some reference and precedent. So I expect them the two things to be differed, whatever they say about 40 b. and how they implement that. I expect that it will be different than 45 Z, but I expect them to give guidance to what 45 Z will be. But that Thank you all. Thanks for following us and being part of Gevo.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
