Gevo, Inc. (GEVO) Earnings Call Transcript

Good day, and welcome to this Special Call to announce an important proposed acquisition. I'm Eric Frey, Vice President of Finance and Strategy at Gevo. And with me today are Gevo's CEO, Dr. Patrick Gruber; our CFO, Lynn Smull; and our President and Chief Operating Officer, Dr. Chris Ryan. Before we get started, please be advised that our remarks today contained 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 and closing of the transaction, the synergies from the transaction and any effects on Gevo's financials from the transaction and any other statements that are not of historical facts. 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 are included in the slides being presented. And now I'll turn it over to Gevo's CFO, Lynn. Lynn?

Thanks, Eric. We are excited to announce that Gevo has entered into a definitive asset purchase agreement to acquire the low-carbon ethanol production assets, operating carbon capture and sequestration assets and associated net working capital of Red Trail Energy, a North Dakota low-carbon ethanol and CCS company for an all-cash purchase price of $210 million. The assets will be acquired by a newly formed, wholly owned special purpose vehicle. The transaction will be funded with a combination of new SPV level nonrecourse debt that will be obtained prior to closing and cash from Gevo's balance sheet. There really are 2 businesses that we are acquiring. One is a well-operating 65 million gallon per year ethanol plant and the other is a carbon capture and sequestration business. Net-Zero North is the SPV that will hold both businesses. We expect the transaction to close by first quarter of next year, subject to Red Trail Energy's shareholder and regulatory approvals. The procurement of SPV debt financing on satisfactory terms and other closing conditions. I'll now hand it over to Gevo's CEO, Pat Gruber.

Thank you, Lynn. As you know, we've looked at a wide variety of sites around the country for our second Net-Zero site. I'm glad that we could finally talk about this one. We're very pleased with Red Trail. The combination of low carbon ethanol in a well-run plant that makes money with CCS fits us really well. So let's go to Slide 4. We have previously said that between RNG, Verity and our other business activities that we see a path to become profitable in the near term prior to the commercial operations of a Net-Zero project -- your Net-Zero 1 project. This acquisition changed it from seeing a path to profitability to expecting a positive adjusted EBITDA for Gevo in the year 2025 through the combination of the ethanol, the carbon sequestration, RNG, Verity and other activities. We like that a lot. The markets we serve are all about carbon abatement. We are busy developing the markets for fuels that carry carbon abatement, that's the reduction of carbon emissions. We believe that the assets we are acquiring play directly to this core focus of Gevo. Having a carbon sequestration and capture site under our own control simplifies that part of the overall carbon reduction equation. It also provides an ideal site for us to deploy more of our sustainable aviation fuel. Our alcohol-to-jet solutions, Net-Zero North, our second project. The folks at Red Trail have been pioneers in CCS in the state of North Dakota is a pioneer providing a great environment for CCS. The poor space rights provide plenty of room to expand and bring in additional CO2 volumes for sequestration. So we like the CCS operation because it can be synergistic with our greenfield Net-Zero 1 site in South Dakota. That project is already in advanced stage of development, and we're looking forward to getting it financed. Finally, this acquisition because we're acquiring a good team of people, a good site, good operations, it helps to build our capabilities and skills needed for success in the long run. These capabilities are expected to benefit Net-Zero 1 and other future SAF projects. Capabilities such as feedstock procurement, plant operations, carbon captures and the details that go with it and the thinking that we need and the practicality that we need to make things real and at large scale. This acquisition, of course, expands our footprint in a region with abundant carbohydrate feedstocks as well as renewable energy sources such as wind and biogas. Those things all work synergistically. This ties rate into our other assets and capabilities, which focus on the fermentation of carbohydrate to alcohol as a nexus for producing Net-Zero SAF. We like the carbohydrate approach because it is not limited with feedstock supply. With this acquisition, we have an expanded platform of greenfield and brownfield operating sites where we can deploy our proprietary patented solutions and plant designs. It also allows us to expand our footprint of Verity Carbon Solutions connecting this to more farmers and people who use low-carbon ethanol product. Let me now turn it over to Gevo's President and Chief Operating Officer, Dr. Chris Ryan. Chris?

Thanks, Pat. We like these assets and the team that has built and operated them for 2 basic reasons: First, their performance today and then where can Gevo take them tomorrow by working together. Let me talk about where they are today. These assets and their operating team have a strong track record of safe and reliable operations and financial performance. Zero lost time accidents in about the last 6 years. Their ethanol is 70% lower carbon intensity compared to the industry average, and the food and feed coal products are also low carbon. They have plenty of room for expansion, and they have room to expand their carbon capture operations as we implement processes like decarbonized energy that requires carbon capture. We plan to immediately begin optimizing the asset with partners, which will further lower the carbon intensity. This not only decarbonizes the current ethanol production further, but it also enables the site for Net-Zero SAF and chemicals production. This is 1 of the few operating CCS sites in the U.S. today. It's been operating since 2022, making it a true pioneer and so is the state of North Dakota when it comes to CCS. It's important to keep in mind from a sustainability perspective that the ethanol fermentation process generates a nearly pure biogenic stream of carbon dioxide. That carbon dioxide was captured from the atmosphere by plants through photosynthesis, and it produces food and feed. The site sits in the core of the Broom Creek formation, which is attractive for carbon sequestration, a fully permitted classic well on-site injects the CO2 about a mile underground into this formation permanently storing it and thus reducing greenhouse gas emissions. Back to you, Pat.

Thanks, Chris. We see substantial near-term and long-term value by combining Gevo's ownership and existing capabilities with operational assets and working to get the Net-Zero North ATJ project underway. It's a great site with CCS access issues off the table. It also provides an opportunity, if needed to capture carbon from NZ1 should the pipeline in South Dakota be delayed. Here's what I really like about our situation at Gevo. We only have to spend less than $70 million more to get the financial close of our Net-Zero 1 project. We continue to believe that will get that deal done and that we will have significant ownership. This acquisition of Red Trail puts us on a path to profitability, we believe, in advance of our Net-Zero 1 project's commercial operations. That's a big deal. We are seeing that Gevo can be EBITDA positive in 2025. Because we are financing this acquisition with mix of project level debt and equity, post deal, the cash on our balance sheet should be in good shape. We will be stronger as a company. Having a second site for ATJ's lock down and clear also helps. We could apply the learning and a lot of the engineering from N-Z 1 to N-Z North. We are all about abating carbon emissions, getting paid the most we can from that abatement and delivering liquid fuels. ATJ is an emerging growth market. We intend to make it real. We expect that all of this will deliver superior value to our shareholders. It accelerates our mission to create that value, provide -- we can deploy innovative solutions and address the big challenges, climate change, domestic energy security, rural community development, it's exciting, and this is only the beginning. Finally, I'm pleased to welcome the management team and employees of Red Trail to the Gevo family when we close the deal. We've done a great job. We look forward to working with them, learning from them, learning with them going forward into the future. We also look forward to working with the farmers in the area, figuring how to add value collectively with them to their crops and to maintain that pioneering spirit, that business that they've built and to grow that business by leveraging Gevo's innovative solutions. Back to you, Eric.

Thanks, Pat. This concludes our prepared remarks. A transcript of this call and a copy of the slide presentation will be made available on our website at www.gevo.com. Stay tuned for more information in the days to come, including virtual and in-person investor events, which we will also post on our website. Thanks.

[Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright.

Congratulations. This was unexpected, but it looks like there are a lot of synergies that you can leverage off of this deal. Just to begin with, outside of the initial $210 million, like would this plant need any additional upgrades or any other capital needs to just get the most out of the setup?

Well, there's always incremental improvements and things that we can do to make it better, but it's a good -- it's a really good ethanol plant. And so it's operating well. The team is strong. It's been making money. We like that a lot. But yes, there's a bunch of things we can do of how to add value. And we're -- and think about it in terms of what we're focused on, the carbon abatement, how to market it, how to turn it into a certified market value. That's not something that the world knows at large, but it is what we're set up to do with our Verity and our other businesses.

Understood. Is this -- can we view this as maybe a stealth way that you are already at Net-Zero 2?

Say again. I missed the first part.

Like this is maybe a backdoor way to get Net-Zero 2 going before Net-Zero 1 has even started.

Yes. What's interesting about that is, this site is extremely well set up. It has the CCS already baked and it works. It's operating. It's 1 of the 3 sites in the whole country that have ethanol CO2 capture, it's really good. So that is -- it's a great site that we can go ahead and start working on this as a project. Now remember, our approach is to do the modularization. We've done already the development work, the learnings that we have from Net-Zero 1 apply in large part to what we would do over here in Net-Zero 2. And so we'll be working on it. And it's going to be pretty fun, I think, as to what can be done. And also, there's many options for decarbonizing that plant and driving the CI score down further, even as it is for ethanol. So those are all things that we're gained for and we have -- it should be a lot of fun.

Okay. I guess for investors clarity in terms of your future balance sheet needs, et cetera, you said this deal will potentially be positive EBITDA -- adjusted EBITDA for you in 2025. Beyond that, sort of -- does this put you on a path for just sustainable cash flows and no need to really tap the capital markets in the future going forward?

Yes. Well, I draw this distinction of needing capital. We actually needed to survive versus wanting to raise capital because you're deploying against the project. So for us, yes, I think so. It looks like as we do the projections, it looks like the combination of businesses that we have with this as ethanol -- low-carbon ethanol, along with our RNG business, which is doing quite well and growing along with Verity, which is starting to get revenue, along with some of the other things we're doing like with the Shell business that we've done for the racing fuels and some of the other things, and we have -- those are all -- just those alone take us on a path, I believe, to profitability straight up. So that alleviates the need -- the actual absolute need that we're going to have to raise money to survive. So I think we're in pretty good shape. Now, the main focus for us is to get the Net-Zero 1 project done. That's going to -- we still got work to do there and get it done. We were going to go on and get going on Net-Zero 2. so we'll still be deploying capital for capital projects, but I don't see us -- if we -- it's a -- you never want to say you'll never raise money again. But you can see that we don't have a demand that we must raise money.

Understood. That makes sense. With respect to your plans, I know this is so early, but do you have a sense of how you may ramp up utilization of the carbon capture capacity from 160,000, you have 1 million metric tons, I guess, available for that site. What would be that path to sort of ramp up the utilization of the carbon sequestration capacity?

Chris, do you want to comment on this?

Sure. So we've got a number of ideas that we're working through. And once we close on this facility, we'll sit down with the folks that are operating this plant and work through those options. But just to give you a sense, we can do things like combined heat and power with CO2 capture, which would provide the facility near 0 carbon electricity and steam and really reduce the CI score and boost the profitability that way, that's a very realistic thing to go do. And the thing that's interesting about some of these options is we have partners that are prepared to deploy their capital on some of these projects to help that make real. And then we would partner with them to basically buy the low-carbon electricity and steam. So that's one example of several that we're looking at.

Okay. Understood. Just last one for me guys. The DOE loan, Pat, any color on whether that can be closed this year or get approval for it this year? Like where are we with that process now?

There's nothing more to add that we haven't already said. So no clue. They got to get it done, and we're going for the ride with them.

Our next question comes from Peter Gastreich with Water Tower Research.