Jim Stark - IR Todd Becker - President and CEO Jerry Peters - CFO Steve Bleyl - EVP of Ethanol Marketing.

Heather Jones - Vertical Group Adam Samuelson - Goldman Sachs Sandy Klugman - Vertical Research Partners Brett Wong - Piper Jaffray Farha Aslam - Stephens Incorporated Omar Mejias - BMO Capital Markets Laurence Alexander - Jefferies Craig Irwin - Roth Capital Partners Selman Akyol - Stifel Pavel Molchanov - Raymond James Ethan Bellamy - Robert W.

Baird.

Good day, everyone and welcome to the Green Plains Inc. and Green Plains Partners Second Quarter 2017 Results Conference Call. Today's event is being recorded. At this time, I would like to turn the call over to Mr. Jim Stark. Please go ahead, sir..

Thank you, Savanna. Welcome to the Green Plains Inc. and Green Plains Partners second quarter 2017 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer; Jerry Peters, Chief Financial Officer; Jeff Briggs, our Chief Operating Officer and Steve Bleyl, Executive Vice President of Ethanol Marketing.

There is a slide presentation for you to follow along. You can find this presentation on the investor page under the Events and Presentations link on both corporate websites. During this call, we will be making forward-looking statements, which are predictions, projections or other statements 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 yesterday's earnings press releases and the comments made during this conference call and in the risk factor section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission.

You may also refer to Page 2 of the website presentations for information about factors that could cause different outcomes. We do not undertake any duty to update any forward-looking statements. Now, I would like to turn the call over to Todd Becker..

Thanks everyone for joining the call this morning. We reported a loss of $16.4 million or $0.41 a share for the second quarter.

After the last conference call, the ethanol margin turned negative to breakeven across our platform as industry stocks did not draw as compared to previous years during this time period even as we're heading into summer driving season.

We generated a consolidated crush margin of $0.07 a gallon that was $0.08 less than we generated the second quarter of 2016. The ultimate weakness in the ethanol margin during the quarter was a result of too much ethanol being produced by the industry, compounded by ethanol inventories carried into the quarter because of weak gasoline in Q1.

In addition, the price of corn was starting to be affected by a less than ideal weather situation, which is finally tempering itself. Based on what we're experiencing, we took our production levels down by idling approximately 50 million gallons of production capacity during the quarter.

So the following facts drove our decision-making process, first, during the first five months, the industry drew 1 million barrels this year as compared to 2.3 million barrels in 2016, with a higher starting point because of gasoline demand.

In the past, margins have historically shown consistent improvement as we enter the summer driving season, yet in early May, nearby margins turned negative for the first time in five years. Between April 24 to May 8, margins dropped in our model $0.15 a gallon and never fully recovered.

And right after the drop, the corn market began its march up $0.25 a bushel or $0.09 a gallon, which again did not allow for a recovery. Stocks were not drawing from the mid-23 million barrel level either. Compounded with all of this, the unwinded Q1 ethanol carry trade.

So with all this information we decided to idle nine of our plants and reduce production for the quarter by approximately 50 million gallons between May 25 and July 5. We believe our actions had a positive effect in bringing industry ethanol stocks into a more stable supply and demand balance.

In fact for Q2 through June, Q2 stocks grew 9% which is a greater draw during that same time period a year ago. Between these dates mentioned, stocks went from 23.5 to 21.8 million barrels, of which 1.2 million was our reduction alone. Peak to trough during our slowdown, we saw margins improve over $0.10 a gallon in the spot market.

While too late to rescue weak Q2 margins, margins in Q3 and Q4 improved as well. And would it not have been for the corn rally over the last month or two, the impact we believe would have been greater.

I will discuss the latest industry fundamentals later in the call, but we saw the impact of 50 million gallons of downtime and for our shareholders it was the right thing to do to set up a longer term positive set up for the last six months of the year versus the second quarter.

Finally, with regard to a few of our smaller assets, we have transitioned York to all industrial B grade production. And Hopewell is down for several upgrades over the next couple of months, which takes over 100 million gallons of annual production off the fuel markets for the time being.

Green Plains produced 275.5 million gallons of ethanol compared with 274.3 million gallons for the same period in 2016.

This was below the minimum volume commitment to the partnership, so Green Plains trade did make a small MVC payment to Green Plains Partners for the second quarter, which shows the resilience of the partnership during structural downturns in the margin structure.

EBITDA was $24.1 million which is led by a strong contribution from food and ingredients segment. Segment EBITDA excluding ethanol production and corporate activities totaled 33.8 million for the second quarter 2017 and for the first half of the year totaled $71 million of EBITDA.

We believe we're on track to these three segments to generate approximately $150 million in 2017. The ag and energy segment was down in the quarter, driven mainly by the valuation of merchant inventories held for forward business that is fully hedged as well as we had less opportunity to take advantage of in our merchant businesses.

We anticipate the profits of these hedged sales will be realized in the fourth quarter of this year keeping the ag and energy segment EBITDA in the $30 million to $35 million range for 2017. We have seen quarter to quarter moves like this in the past where profits are fully recoverable in forward quarters and we expect that to be the same this year.

Our expectation for 2018 remain that the non-ethanol segments can generate between $165 million and $190 million of combined EBITDA. That's broken down by food and ingredients between $60 million and $80 million of EBITDA. Ag and energy $30 million to $35 million and Green Plains Partners approximately 75 million.

This is a solid base of EBITDA this company can generate in addition to the segment EBITDA we will realize from ethanol production. The transition of the feedlots we purchased in May is going smoothly. At the end of Q2, we had 30% more company owned cattle on feed than we did in the first quarter of this year.

We are pleased with the steady results we are generating from our cattle business and Fleischmann's Vinegar. The food and ingredients segment generated nearly 14 million of EBITDA in the second quarter which we believe will continue to grow as we transition to full company ownership of cattle in our lots during the third and fourth quarter.

The full margin realization will start to be felt in early 2018. Green Plains Partners reported $16.7 million of adjusted EBITDA and a coverage ratio of 1.05 times for the quarter. We did increase our distribution to $0.45 for the second quarter and added the seventh straight quarter of increasing distributions.

Now I'll turn the call over Jerry to review both Green Plains Inc. and Partners financial performance and I'll come back later to discuss current trends and the current outlook for Green Plains..

Thanks Todd and good morning everyone. The Green Plains Inc. consolidated revenues were $886 million in the second quarter, which was basically flat to a year ago.

Revenues were impacted by the additions of Fleischmann's Vinegar during the fourth quarter of 2016, the ethanol plants we acquired in the third quarter of 2016 and the three cattle feedlots acquired during the first and second quarters of 2017.

This was partially offset by a decrease in grain trading activity volumes and lower average realized prices for distillers grains. Consolidated volumes of ethanol sold for the quarter were up 7% to 381 million gallons, while the average realized price per gallon was up slightly over the last year's second quarter.

Our utilization for our ethanol production assets was approximately 75% for the second quarter of 2017. Consolidated net operating loss for the quarter was 3.8 million versus operating income of 27.4 million a year ago. This decrease is primarily due to a $30 million reduction year-over-year in our ethanol production segment.

Earnings before interest, income taxes, depreciation amortization or EBITDA for the second quarter was 24.1 million compared to 47.7 million for the second quarter of last year.

For Green Plains the total CapEx was approximately 17.9 million in the second quarter including our investment in the construction of the Beaumont joint venture as well as 4.6 million for normal maintenance capital expenditures. Our total debt stands [Technical Difficulty] at the end of the second quarter.

This balance includes 341.5 million on our commodity revolvers, which are secured by significant working capital or readily marketable inventory of 363 million at June 30. Late last week, we upsized our senior secured revolving credit facility at Green Plains Trade from 150 million to 300 million.

This amendment also will increase inventory advance rates, expand eligible inventory locations and commodities and reduce the pricing by approximately 50 basis points. Earlier in the quarter, we increased our cattle revolving credit facility from 100 to 300 million to fund the shift to company owned cattle in the new lots.

Both of these financings were well received in the market and we believe position our ag and energy services, and food and ingredient segments very well with ample liquidity.

Also last week we hosted a lender meeting as we are considering issuing a new term loan B to refinance our existing term debt facilities on our ethanol plants and Fleischmann's Vinegar, a total just over $400 million.

This new term loan would be at the corporate level, which we believe simplify their debt structure, allows our cash to move more freely within our wholly owned businesses. We will keep you updated on our progress toward achieving this key objective.

Also during the second quarter, Green Plains entered into privately negotiated agreements with holders of the company's 3.25% convertible senior notes due 2018.

Under these agreements, the company exchanged in the aggregate approximate 2.8 million shares of common stock and $8.5 million in cash or approximately 56.3 million in principal amount of the 2018 notes. We choose to utilize some cash in one of the transactions as we felt the share price at the time represented a compelling value.

These transactions were completed to manage our capital structure in anticipation of the term loan B refinancing I just mentioned. We recognized a $1.3 million non-cash loss included in interest expense from this debt extinguishment.

On Slide 9 of the IR presentation you'll note our term debt declined by over $50 million resulting in a reduction of our pro-forma term debt leverage to 2.5 times at the end of the second quarter. Our liquidity remained solid with 225 in total cash on our balance sheet along with 171 million available under our revolvers as of June 30.

And of course that exclude the impact of the revolver modifications that I just noted. At Green Plains Partners, we reported adjusted EBITDA of 16.7, an increase of 4.7% from the second quarter of 2016 which was 16 million.

The adjusted EBITDA includes a $1 million deficiency payment as a result of our ethanol production running below the MVC of 297 million gallons for the quarter. Under the terms of the storage contract, Green Plains Trade is allowed to utilize that payment as a credit against volumes above the MVC level during the next four quarters.

We expect that will occur fairly quickly. Green Plains Partners had 284.7 million gallons of throughput volume at our ethanol storage assets, which was approximately 2% more than the second quarter of last year. Distributable cash flow was 15.3 million which was basically the same as the prior year.

Maintenance CapEx was 58,000 in the second quarter and the partnership distribution of $0.45 unit results in a coverage ratio of 1.05 for the second quarter alone. On a last 12 month basis, adjusted EBITDA was 70.1 million, distributable cash flow was 65.5 million and declared distributions were 56.5 million resulting in a 1.16 times coverage ratio.

Our coverage ratio remains above our target of 1.1 on an LTM basis. Now I'd like to turn the call back over to Todd..

Thanks Jerry. So we've seen some improvement in the last half margin structure over the last 20 days. We're approximately 30% hedged and locked for the third quarter and margins are trending a bit better. We expect a stronger third and fourth quarter based on current markets and segment performances versus Q2.

So what does that mean specifically, [indiscernible] margins go from here, but total EBITDA using a forward ethanol margin curve is already better in each of the next two quarters than at 24 million reported this quarter with Q4 potentially being the strongest quarter of the full year.

Again we need to improve bottom line performance but as margins expand from these levels, we will start to take risk off the table. Finally, when we compare year-over-year fundamentals, later year at this time, we had 20.4 million barrels in inventory with days of demand at 19.9.

And this year we have 21.5 with 19.6 days of demand with similar production levels. Consolidated crush was almost $0.10 higher last year, with similar underlying market statistics which is why we are seeing very tight physical markets in some areas.

Is this a leading indicator of stronger markets, not sure, but it least looks like the weakest margins are behind us for now and notwithstanding the mother event around crop's weather or other macro factor. Exports continue to be strong and in line with our expectations.

The industry will have export of close to 700 million gallons for the first six months of the year, when June exports are reported later. Green Plains exports for that same period were approximately 103 million gallons or about 15% of the expected industry exports.

Gasoline demand is still about 2.3% behind 2016 for the first six months of 2017, but ethanol blended is actually up 1.6% year-over-year with the ethanol blend in the gasoline supply running at 9.9%, up over the 9.5% in 2016 year to date. E15 station expansion now has over 900 location in 29 states and growing.

And we believe this will help demand over the next couple of years absorb some industry capacity creep that we have experienced year after year. We're putting more cattle on feedlots as we ended Q2 with an average of 89,000 company owned cattle on feed, which is up from 66,000 at the end of March.

Customer cattle will decline and we will continue to increase our own cattle placement in the three recently acquired feedlots. Fleischmann's Vinegar had a solid quarter that was driven by higher volumes of white distilled, apple cider and other varietals.

We are investing in additional $12 million in the business to increase production focused on apple cider and antimicrobials. The health and wellness trends we have outlined in the past continue to help drive the results for this segment and once completed, the new production is already committed which should drive earnings growth in the future.

We continue to look at using this platform not only to gain share in current markets, but to look at acquisitions and expansions in adjacent markets as well. Our Jefferson import export terminal is coming along nicely, our current date for opening the project for the business is October 1.

And we expect to move quickly to run not only export volume but also domestic volume through there as well. The terminal in Little Rock is progressing well and should be in service towards the end of the first quarter of 2018. With the projects we have opened along with recently completed acquisition, balance sheet management is a key focus.

As Jerry indicated, our cash balance remains strong and we generated positive cash flow from operations for this quarter even in a down market, which shows the resilience of our ability to generate cash.

We utilized this cash flow, investing over $50 million in growth capital, 8.5 million in cash to effectively repurchase shares in conjunction with the convertible notes exchange to reduce our debt balance and pay $4.7 million in dividends.

Over the next few quarters, we will make investments in cattle working capital, which has proven to be the best return on capital across the whole company besides organic production upgrades. As Jerry mentioned, we're also working on a new term loan B to simplify our capital structure and provide us with more flexibility as we grow the company.

In closing, we are disappointed that our underlying asset enterprise values are not adequately reflected in our share price, but we will continue to focus on this, whether through non-ethanol acquisitions, co-location of other processing assets and a deployment of other value added process technologies, our process of our markets and even our own assets is ongoing and constant.

We work every day on closing net valuation's gap. We know margins will be cyclical and have positioned our platform to take advantage of the changes in that cycle. We have scale in all of our market segments. Thanks for coming on the call and I'll Savanna to start the question and answer session..

[Operator Instructions] And we will take our first question from Heather Jones from Vertical Group. Please go ahead..

A quick clarification question, as far as you York facility, had that been running at the 55 million gallons fuel ethanol and now it's completely converted to bev grade?.

Between kind of 45 and 50 in the first half of the year and we are now actually in B grade, not beverage grade, B grade is industrial, going to the industrial markets. That is where though we are focusing the next investment in our platform to move that into more beverage grade production and that engineering is taking place as we speak..

And so that's - the Hopewell is a temporary down time, but this sounds like this is a permanent transition?.

Well, we hope so. We think as long as we continue to B grade demand and we've seen [Technical Difficulty] we will maintain that as an industrial plant. And the Hopewell plant is down for upgrades and could be down a couple more months at least..

Not to belabor this point, but - and it wasn't just you, it was the whole industry and honestly a lot of analysts, but clearly got industry supply wrong this year. So I was wondering if you - now that you are seven months through the year and retrospect what do you missed, was it fermenters or whatever.

And based upon those learnings, what is your best estimate of what we should expect in 2018 as far creep. I mean we have some Green - quite Greenfield, Brownfield expansion but as far as creep, like what is your best estimate now for '18..

So internally here at Green Plains, I think we will limit our creep to very a low percentage. So we won't have much impact on the industry in 2018. And in fact we're not investing much now into capacity upgrades, in fact our CapEx will go down almost to zero on that between now and the end of the year.

So when we look at ourselves, our creep will be well low. I think what we saw on year-to-date was industry was up about 4% and blending was only up about 2%.

What we're seeing in the third quarter now is that what we think in third quarter and how finish is production will be up 1.7% quarter over quarter, year over year and blending will be up about 1.7%.

So as we get towards the end of the year and in August, actually what we're seeing specifically is that blending is actually increased over production year-over-year. So it's not really reflected in the crush. When we get into 2018 I mean I think we'll still have the normal 1% to 3% creep next year, but we won't be participating in that.

That's why I'm staying on a little bit on the lower end. And then we think blending will continue to increase 1% to 2% a year as well. So in balance, notwithstanding if some other project comes on or if yields improve or the crop better and yield improve, hard to say what will happen.

But we thought this year, middle of this year is where we would see demand surpass supply but creep happened too fast this year. And obviously we're part of that, but the industry also has found ways to get more ethanol out of their plants as well.

And so, we're going to watch it closely, but we need to continue to find more demand for our product because it's probably not going to go away..

Well that's the essence of my question, it's just you know like in some industry does track, they'll check with manufacturer and who is ordering new equipment et cetera. And watching how was it that creep exceeded everyone's estimate this year.

And based upon what you've learned there do you think you had better visibility and that it will be slower in '18 than it was this year..

I think when you go back and look at when we started looking at capacity upgrades, we announced our large one that we announced across our platform at a very low cost. We don't have those low cost increases anymore, so we're not going to invest capital at these new higher costs to go after gallons.

I think after that it's almost like we set a model forward that others used to increase their capacity as well. I mean we have a very healthy industry from a balance sheet perspective that has the ability to go after that next gallon.

And so looking forward I think it's the discipline both on the production side and the demand side that have to come in line. I mean if the industry continues to push much harder than we're at today, we'll just have some excess ethanol we have to market in the world.

I think the most intriguing thing that we're seeing is that, I think margins will be better this year.

If the core market settles back down, because if you really look at it, when you look at data demand today that we have been in inventory and you go back and look at history of the margin structure with these days of demand, we're probably $0.10 too low as an industry right now. And it's a bit undisciplined out there in terms of pushing production.

But I think overall demand and supply are starting to come a bit into balance, but the market doesn't like these big 1030 numbers, 1040, for no other reason they don't like, optically they don't like the number, but it's not like there's significant excess supplies on the market today, it's just - we just need the market to settle down back really in the corn side of it..

And we will take our next question from Adam Samuelson from Goldman Sachs. Please go ahead..

Maybe first on the demand side and on exports as we think about kind of outlets to really access these new products.

Can you talk about the export book as you see it today, Todd, through the back half of the year? First half has been very robust but some signs that Brazil might be incenting their producers to push more ethanol again and obviously there's been talk about the tariffs there that haven't happened yet, but maybe a little bit of a view on the export picture.

And then as you look into '18, the opportunities in Mexico that might be emerging..

So obviously the first half was strong. We see Brazil slowing down in the second half, but that's been in our numbers. So the second half for Brazil in our numbers, we have more like 100 to 120 and a full-year around 400. And so we already have them reducing. We think Canada maintains a good pace.

India continues to take their monthly and they reengage, they didn't take anything in April and May and go right down the list. And so, yeah, we believe this passage of blending in Mexico, outside of their three large areas brings in a couple hundred million gallons of additional demand.

In addition, we are still open on the arm in northern Brazil and we still think gallons will flow into there, they are structurally still short gallons into that market. And when the arm is open they will take it into their market as well. It that looks like India we're hearing May tender again, start to tender for ethanol into their markets.

So overall I mean look we don't know exactly how and what markets will grow or go down for 2018 except to say that where we're at relative value of octane and fuel around the world, this is a product that continued, we continued to see new markets open up and new demand comes.

So we think we'll end the year at 1.2 to 1.3 billion gallons of exports and potentially next year we'll continue to see that grow..

And then maybe just a little bit on the third quarter margin dynamic, you said 30% of the quarter is hedged, I mean we're a third of the way down the quarter now.

So is it fair to say, A, that you still have most of your August and September book still to price, and second, the margin profile you talked about a little better than the second quarter, but $0.10 or so cents down from last year.

So are we talking about spot margins today that are still hanging in the kid of upper single digit range?.

Yeah, I would say as of day with the corn market, we have spot margins a little higher than that. July was recovering, but in general, if you look at the quarter I think right now on paper we are looking on average in that just about $0.10 to $0.11 a gallon right now and improving as we see today, we'll see what EIA brings.

So we are starting to see those numbers improve same for the fourth quarter across the platform. So starting to get back into double digits, all inclusive of corn oil and the consolidated. And starting to potentially accelerate from there.

But I said that in the last conference call and the two weeks prior after last conference call we down $0.15 a gallon because of these bills and inventories that got people all worried. But if you really look at August, we think August average production will be about 140 a day versus 125 last year. And average demand will be 960 a day.

Exports will make up the rest. So in the month of August and calling in the shutdowns, we actually believe demand will outpace supply in the month of August and possibly in the month of September as we kind of go into full shutdown mode as an industry. So it looks like we're stable from here. Last half looks better than the first half as we speak.

But we still have some work to do, but if we see any more expansion from these levels, we'll start to lock in probably more in Q4 than Q3, but we'll start to lock in margins..

And we will take our next question from Sandy Klugman from Vertical Research Partners. Please go ahead..

A follow-up question on Mexico. There have been some suggestions that the transition to 10% blend could be challenged by stewards limitations as well as concerns from retailers regarding tank corrosion. I'd be curious to hear your thoughts on these issues.

And then as a follow up, how much capacity would you expect to be built out in Mexico to potentially meet the new demand?.

I'll let Steve comment on that, he's been working on that and has spent plenty of time in Mexico..

We're seeing a lot of build out on terminal, receiving terminals as many as 18 around the country in the metropolitan areas and outside of it. It's obviously a challenge because MTBE wants to stay in the mix and the gasoline specification right now is still built for MTBE. But we don't see the corrosion issues that you mentioned.

We have people that are actually working.

You have some of the retail chains that are looking at valuations and talking about the [indiscernible] blend and trying to push the government towards and [indiscernible] blend outside - obviously outside of the metro areas right now, which is still a fairly large robust volume somewhere in that 250, 300 million gallon range..

On the 1.2 to 1.3 million gallon export projection? Does that include any volumes to China and more broadly how do you think about the longer term opportunity in that market?.

It doesn't include any volume to China this year, we have them in for zero. And that's up to them. I mean they can use it, but we don't see them returning in any kind of robust fashion anytime soon. It's a nice to have when we have it, but we don't expect it..

And we will take our next question from Brett Wong from Piper Jaffray. Please go ahead..

First I just wanted to ask you high level question just around the crop and what you're seeing of course from expectation that yields will be down after the record year last year. But as you mentioned forecasts are a little bit more favorable here, specifically on the temperature side.

So just wanted to know your thoughts, Todd, around where the crop may end up and now that sets us up..

We're just starting our crop tours of the company. Last year, we did an extensive crop tour around all of our sites and beyond and our team was within around a bushel an acre from where the final number was. This year right now, we still think mid 160s is still attainable.

I think we're starting to get some bushels back here, basis this Midwestern weather calming down a little bit and a little bit extra rain in the forecast. I don't think anybody knows because of the advanced genetics that are in these crops.

Now what's going to happen through the next month or so, but it looks like their conditions are improving in Minnesota and other areas. Iowa is finally we think adjusted down to where I think the market, where I think the producer think it's going to be. But we do see some improvement there as well.

So we're kind of sticking in that little bit over 165 yield right now, which is still gives us carry out of 2 billion plus potentially with a lower export number. There's plenty of corn around, we have no issue buying any corn, we're actually filling our piles right now with old crop corn to carry into new crop.

So we should be potentially full coming into new crop with old crop stocks. The farmer is starting to reengage as the weather is turning a bit here. And I think we're starting to see that reflected in the overall pricing structure of the market..

Just on that, can you talk a little bit about kind of the basis in your footprint, obviously we've seen a lot lower cash prices than the board and so just some comments would be helpful there..

So what we're seeing across the board in every market that we operate in is a lower structural corn basis this year, whether you're in Nebraska in the 30s under or 20s - mid to low 20s under, Iowa mid to low 30s, Minnesota mid to low 50s.

Even Indiana is starting to give us the incentive to actually take new crop corn into old or old crop corn into new crop. And then down the mid-south crop is excellent. And so, did we start out with an excellent mid south crop coming into maybe some of the northern areas, I think the market is set up for a continued cheaper basis level.

It just with exports and competition from Brazil. I think the lows are in on the basis, but I don't expect a big basis rally from here.

But I don't believe that we'll see another gap down on basis levels unless the farmer truly engages at the end of this crop year and puts a lot of corn back into the market, which is, we're being incented to do against new crop values at almost all of our locations just actually fill our storage now with old crop corn to against the $0.14 carry into new crop and we are buying old crop corn cheaper than we can buy new crop corn today which will help the Q4 crush as we carry it in we think.

A bit more technical probably then you wanted want to hear, but it was….

No that's exactly what I was hoping to hear, that's really Todd, thanks. And then just one last from me as you're guys are talking about some fuel grade reduction in your footprint.

Obviously we heard this morning from one of your competitors that they are also going to focus on producing more actual average grade rather than just industrial? Are you seeing that come from anybody else and as the industry tries to tighten up supply?.

No, we haven't heard many others talk about that. I mean for us, the B grade [indiscernible] always had that capability in York and we just reengaged in those markets and to go get share after we purchased those plants.

And then when you look at overall from a beverage grade standpoint, we do have our own internal demand with the Fleischmann's Vinegar acquisition that we've made. We haven't gone after but there is another margin to go after and we're engaged to go after that.

But in general, I don't think it's a - I don't think it's a big widespread initiative to take volume and convert - alcohol volume and convert into either B or beverage grade. Because the demand is still finite, it's not necessarily growing. They have to be careful on oversupply because it could happen very quickly in those markets.

So I don't think anybody taken and it costs a lot of money. If you want to convert even York into a full beverage grade facility, it's a $15 million to $20 million dollar CapEx just to do that on a small plant. So it's a big investment to make with a finite amount of demand..

And we will take our next question from Farha Aslam from Stephens Incorporated. Please go ahead..

Recently we've had a court case that the EPA was not allowed to lower blend level and that sent RIN values up.

Has that affected blending of ethanol and what impact do you anticipate that court ruling to have on the ethanol market?.

Well, every time RIN values go up, obviously if you're a discretionary blender, you want to go after those gallons and we are seeing the discretionary guys continue to push harder.

Steve, do you want to comment on that?.

Well, it's obviously the E15 campaign that helps them quite a bit with the higher price RIN, but that's all we've really seen on it..

Yeah. So if you're thinking about E15, you definitely have an incentive to go after that additional RIN in addition to the blend value that you're getting.

In terms of the court case, look, I think there's ways that, we saw that yesterday that the EPA can adjust other areas of the RFS to see if they can make up for that additional need around RINs, taking it from what we thought was 300 million to 400 million gallons of RINs, possibly down to 100 using the cellulosic waivers and things like that.

So I think this is yet to be determined. And, you don't forget, you can also carry forward your obligations as well and go to the next year.

So I think in general, the market is priced as it is and if we can get to full E15 year round, if we can get some traction on that, that is the thing that will probably cut this RIN market down hard from a pricing standpoint, as you're on E15 and more and more RIN generation across the industry that can be retired.

So we're working hard on that initiative, but these things always take longer than you want them to..

And along the lines of an E15 full year, the RVP waiver, what's an update you think will get it in time for next kind of key driving season?.

Well, I mean basically we open up to, across the US, blending back on September 15th. So we got through the summer. Demand, and as we said in August, should outpace supply and September, when we get into the shutdown season and we get the year round, any market can use E15. I think that for this year at least, we missed the window.

We'll continue to work. It can come in two ways, it can come legislatively or it can come through the EPA. But you don't want to lose it in a lawsuit if it comes through the EPA.

So we're still pushing the legislative process, but it's not probably the highest priority of anybody today in Washington is to give us an RVP waiver unless we can get attached to some other bills. So we're working hard on it, but it's challenging when not much else is happening there..

And we will take our next question from Ken Zaslow from BMO Capital Markets..

This is actually Omar filling in for Ken. Hey Todd, just one big picture question with regards to 2018.

We've talked about many, many puts and takes here, but as we stand today, slightly probably higher supplies than previously anticipated, but also stronger exports, Mexico allowing 10% blends and the incremental growth in E15 stations, what's the likelihood for the industry to return to normalized margin levels in 2018 and what are some of the main catalysts there?.

Well, that's our expectation is even, we're starting to push towards at least a mid-cycle margin as we speak today, so in the spot market. So it's not like it would take very much at all.

I mean I think the impetus of this corn price as well as a bit of stocks build in the second quarter just hurt the industry and the industry has had to be more disciplined in margin compression on what they do with their own production.

But in general when we kind of look forward as Green Plains to 2018, first and foremost for us when we look at 2018, we should have a strong food and ingredients segment, because of a full year in cattle feeding and placement margins are improving as well as there - the CapEx put in place, we should see the benefit of that.

So that's why we had in there between that $60 million and $80 million of food and ingredients in terms of a great opportunity for Green Plains. Ag and energy should be consistent in that $30 million to $40 million range and then if we're on the full production, the Green Plains Partners as well.

So then it just comes down to the ethanol crush and so if we continue to see gas demand strong and I think we'll see that through at least the next couple of months, end of the year and going to 2018, there are still 275 million cars on the road that use gasoline every day, a minimum of 275 million cars.

We're confident that the fleet won't be electric next year and if you look at kind of the last year, we were at the five year average, above the five year average and this year, we're above the five year average as well on gas demand. So no time soon is ethanol going to be kicked out of anybody's fuel supply.

So when you go down to '18, depending on where gas demand is, if it's 14.3 again, 14.4, that's 14.4 to start with, 1.2 of exports is 15.6. Couple of hundred million gallons of E15 next year is 15.8 and the industry is producing around 15.8 and if you get a little capacity creep.

So overall, there is no big impetus that says stocks are going to net expand over a 12-month period to any significant unattained or unmanageable levels, but we are still dealing on the week to week. But overall, we thought as we said, demand would outpace supply by now.

We're seeing in August potentially, but we haven't - we're just right at that point where we're not drawing and we're not building net over a 12-month period and it's just maintaining a margin structure that allows us to earn a little bit of money and keep running, but if we can get any new impetus, whether Brazil returns and Mexico or whether E15 gets a lot of traction next year at 2000 stations instead of 900 stations or whether others start to implement it, I think overall, we should be at mid cycle to better than mid cycle in 2018..

And we will take our next question from Laurence Alexander from Jefferies..

Just a couple of question. First of all, can you help flush out a little bit the levers to get from the call it, 80 to 110 range in the food and agri business and energy up to the 150 in non-ethanol EBITDA.

And I guess in particular, I'm curious about the economics around the cattle farm acquisition, I mean how much of a tailwind that should be giving?.

Yeah. So let me pull up the chart here and like walk through. Perfect. So when we look at ag and energy, that consistently has been a $30 million to $40 million a year business, opportunities up and opportunities down from there. So we'll just leave that at that. I think that's consistent over the time period.

Where we get the opportunity is in food and ingredients. So as we've outlined in the past, we're going to have 255,000 head on feed that markets so two point, will turn our lots 2.1 times a year. So we should market about 535,000 head of cattle next year.

Our immediate margin that we go after to, if we're going to be full, our basis that we buy or our margin that we want to buy off is between $50 and $60 a head base margin. Last year, we earned $80 to $90 a head base margin, fully hedged, on flat price risk. And so we always start out to say 535,000 head, times about $60 a head is about $30 million.

And if we can get any increase, we think that cattle can be a $30 million to $50 million a year EBITDA business, if we can get another dollar or two underweight out of our margin structure like we did last year. So that gives us space.

We think Fleischmann's makes up most of the rest of that and so on the low end kind of a $60 million turn and on the high end about $80 million turn. So in terms of looking at the total platform and Fleischmann's continues to grow business.

We're focused on antimicrobials, we're focused on apple cider vinegar and that's where we spent most of the CapEx to go after that business and we think that that will remain strong using that platform among other opportunities that we see around other areas of growth within Fleischmann's.

So when you add all that up together, this year, we should be, in 2017, around in ag and energy, somewhere between 30 million and 40 million; food and ingredients, somewhere between 45 million and 50 million and Green Plains Partners somewhere between kind of 70 million and 75 million of EBITDA, altogether and then the increases for next year.

So it's a good base business. If we get a little margin out of the ethanol, then it accelerates very rapidly into a significant free cash flow generator..

And then given that opportunity set, what's your thinking about deploying capital in two areas.

One, would you start looking at any opportunities outside the US, whether terminals or any other kind of side ventures or where you have a particular insight or given the volatility in the ethanol industry sort of picking off smaller planes? I think if my memory serves, some recent M&A was down around $0.85 or $0.90 a gallon.

So just your perspective on those two?.

Yes. So the opportunity to acquire now is low. There are, the last purchase we made was about $1.11 a gallon roughly, or $1 a gallon on average over the three plants. There is not anything today that we are working on actionable.

Just because of one quarter of down margins, before that, you had a strong third, fourth and first quarter, a strong to stable end margins. So this was a one down quarter that's improving from now.

There's not a lot that anybody wants to do in terms of selling ethanol assets and so that's why we believe there's a big disconnect between the value of our ethanol asset to the value of the market today, because of the spread between private and public market valuations.

So right now, our focus on growing the business, we will allocate capital to Fleischmann's and that platform as they need it and that's what we did this quarter going after more of the varietals and antimicrobials and the whole health and wellness organic - some of the organic things that we produce - organic vinegar that we produce, among now focusing even on the agricultural production side where we have a herbicide, that's the only vinegar herbicide approved for organic production in the United States.

So we're looking at that. In terms of the cattle business, we have one area - one plant that - one, we can expand about 12,000 head and we're finalizing some of that right now to increase our production there. That is just a matter of investing working capital more than it is investing a lot of CapEx.

But I think there's other opportunities around growing that business and then, and then we'll look at other adjacent businesses that we can find that we believe that add value to our shareholders.

But at this point, our focus will be on maintaining what we have, growing our free cash flow, tucking in acquisitions that are - that we believe are accretive to our shareholders and trying to realize the value of our full asset base.

But when you look at our term loan that we're marking right now, we have significant collateral against the $500 million term loan in the $2 billion plus collateral that we're putting forward and it's not being reflected in our overall enterprise value today.

So we're going to work on closing that gap and we'll look at everything that we can to do that..

And we will take our next question from Craig Irwin from Roth Capital Partners..

Todd, I wanted to ask a couple of questions related to the partnership. You've got some interesting assets you've been developing that are widely expected to be dropdowns over the course of the next year, the Jefferson and Little Rock facilities.

Can you update us on the status of these facilities? Where are they in the construction cycle? Have the capital needs changed? Have the financials or probable ratios that we should be looking at for valuation changed and any other color you can share on these to help our understanding of their potential contribution to the partnership?.

So, the North Little Rock is a small terminal that we're building. It should be on in the first quarter, maybe second quarter of 2018. That's already being developed by the partnership. So there'll be no dropdown needed for that and then the full benefit of that EBITDA will - and cash flow will come into the partnership in 2018.

In terms of Jefferson, we're in final stages of construction. We do expect an Oct 1 start date. That's always plus or minus a couple of weeks, but we do expect an Oct 1 start date.

We think that not only will we be exporting ethanol out of there, but we also are going to - there is also domestic ethanol that we can go after as well through our own platform. So we're excited about that. That has not been offered to the MLP, to Green Plains Partners yet.

We're still in contracting phases with third parties and finalizing some of those contracts as we speak. Once that's all done, within six months, it's our obligation to offer that through the partnership based on the contract and we will do that. So everything is on track, no capital needs, extra capital needs than we expected.

The Jefferson terminal is on budget and on time for what we had said what we were going to do there.

So we are continuing to look at external projects in terms of terminals and terminal acquisitions, which we haven't talked about yet on this call, but we are in several different processes, looking at potential terminals that we can buy to help accelerate the growth of Green Plains Partners.

We're heavily focused on that and bringing in other assets outside of ethanol production. And as I said, we are evaluating several potential assets as we speak and we'll keep you updated on that.

Obviously, we don't know what will come to fruition, but our goal is to continue to drive value in Green Plains Partners, mainly - number one because our Green Plains shareholders own a big piece of it, but number two it's because what we said to the market in terms of our growth objectives, both internal and external.

So there is not and we believe it could be one of the greatest or greater creation or value creators for Green Plains' shareholders as well Green Plains Inc.'s shareholders than we've had in the past several years..

My second question is about international markets, particularly Canada. So you mentioned Mexico, I guess everybody saw the 10% ethanol being approved there. But I understand there's a process in Canada to move to a 10% blend rate over time.

Do you have an update for us? Do you think that this can start contributing to growth of US demand in the 2018-2019 timeframe? How do you discount the probability of this 10% blend rate moving forward in Canada?.

I think you saw in 2016, when they were running more at a 5% blend rate in certain provinces there. You're seeing a lot of it now run at 10, but they do have a new Standard coming in, where it will be a mandated 10%, but we're running fairly close to that right now into Canada at 10%..

I think what you watch is when ethanol and gasoline are at parity or ethanol is plus or minus a little bit or the discount, you really start to see Canada accelerate their blending and very sensitive to price. So if we spend a lot of time over the price of gas, Canada can flex down, but in general, I think we're fully into their fuel supply..

Correct, but the sensitivity is what sometimes we felt in 2016 to that, which have dropped down..

And we will take our next question from Selman Akyol from Stifel. Please go ahead..

I appreciate the little rock is small, but I'm just curious how much capital is devoted to that this quarter..

This quarter, it was probably - the total capital for that is about 3.5 million is our share of it and so this quarter, I think it was probably less than 1 million this quarter..

And then you outlined sort of next year non-ethanol, 165 million in EBITDA and you said Green Plains or Partners would contribute 75 million of that.

I was kind of curious what is behind your assumptions on that and then as well as in terms of Jefferson terminals, is it included in there or not?.

Yeah. We do not include dropdowns until they occur in our outlook numbers. So we would include our base business in terms of ethanol throughput -.

Which is kind of a 75 to 80 number. I don't think it's fair just to say 75. It's 75 to 85. I don't think it's just fair to say 75. So I was using that as an absolute, but that's not the way that we're approaching it, just so..

So, just using a more normalized throughput level going forward on our base business, then a small contribution from the Little Rock terminal, no acquisitions, no dropdowns included in those numbers..

And then the last one, just in terms of and I appreciate your commentary, you're still contracting up Jefferson terminal, but when you expect to offer to the partnership, what kind of utilization rate do you think it would have or contracting rate?.

Yeah. I think the economics that we're looking at were based on between 10 and 12 trains per month that's going through that terminal..

Yeah. So 12 trains at 3 million gallons a train is 36 to 40 million gallons a month roughly going through that terminal. That's both domestic and export..

And we will take our next question from Pavel Molchanov from Raymond James..

It sounds like you're pulling all the weight of rebalancing the market or at least you did in June. I'm curious why you think none of the other top tier producers followed suit in joining you in some production discipline..

We don't talk to them about it. So obviously, we have to make our own decisions and that's why we did not announce to the market what we're doing. We just have to when we slowdown. I mean certainly, they make their own decisions based on what they see internally.

We believe somebody had to do it, somebody had to exert leadership in this industry to do it and if we did not slow down, we would be in a much worse margin situation today. So while certainly not great for the quarter, I think it invested in the last half of the year to get us to where we're at today.

Obviously, people have to make their own decisions based on their own factors and - but it was - when we slowed down, obviously we don't offer ethanol, we don't offer DDGs, or corn based slips.

I mean, it wasn't hard to see the Green Plains slow down last quarter if you're watching closely in the daily markets, but overall, I think the industry still remains a bit on discipline when margins are compressed because they have strong balance sheets and they can withstand it and they just keep running and we decided based on our scale and we always said we would, if margins get to a level that we think our impact could be, can certainly have a positive impact for our shareholders, then we're going to, we'll make the adjustments needed, but it would help others make their own decisions and not anything we can really discuss with them obviously..

Okay. Let me ask another kind of slightly broader question about the industry landscape. What do you think is the likelihood that given the rather weak margin environment currently will have smaller producers run into trouble, perhaps get into insolvency type situation, the way it happened for example in 2012-2013 timeframe..

I think there's extremely low risk of widespread insolvencies in this industry any time in the future and it's mainly driven by the fact that even if you look at our own debt structure, we're going out on a $500 million term loan, of which there's only about, in that term loan about how much from an ethanol perspective, in terms of, I mean, our cents per gallon on ethanol debt is so low.

It's been the lowest it has ever in our history and we have such good collateral against those loans that I think any chance of any widespread insolvencies in this industry, because they all are the same thing. If you look at [indiscernible] across the United States, they basically have low debt.

Is that correct Steve? If you look at the large producers like some of the biggest ones, they have zero debt. And so when you look across this industry, chance of insolvency is low. Now, if margins stay compressed for a long time, plant shut down, sure, but that doesn't mean that any bank is going to own any ethanol plant any time in the near future.

We probably move past that in our lifecycle of that being a big issue. Now if a plant of size that's going to be in the business anymore and they would sell, that's a different story than a margin structure driving insolvencies in this industry at all, because it can be adjusted very quickly.

If you think about what we did last quarter, it took 50 million gallons off the market. We were still producing a significant amount of ethanol in the month and in the quarter, but if you did that over a year's period of time, if we took our production down and we're not going to, but if you did it, that would almost drain the US stock situation.

That's how sensitive this market is to it. So when you got 21 million barrels of stocks and that's about 840 million gallons and if Green Plains did what we did last month to do it all year, we would have not a lot of ethanol left in the United States.

So it's highly sensitive to that, but I don't think that the market appreciates that quite as much as we thought they would or they show it..

And we will take our next question from Ethan Bellamy from Robert W. Baird..

First, on the Jefferson terminal, you mentioned ongoing contract negotiations.

Just trying to get a sense for the timing of those relative to the completion and if there are any other gating factors on offering that to the MLPs, so we can try to at least get the timing on that dropdown?.

Yeah. So we're going to be contracting right through and probably past start up. I mean I would say that there are still others, some on shorter term, some on longer term, some on larger supply, just really depends on what we're going to be able to do there. I think from our standpoint, when that terminal starts, Green Plains Inc.

will fully support that terminal from day one. We will begin to, even as we're contracting, we are going to be shipping units into there to support the economics of that terminal. So, we are excited about it.

If we need to, we can - we've built that terminal understanding that we, Green Plains wouldn't mind taking the whole thing, but that's not what we're going to do in that market.

So we believe we can ship 10 to 12 unit trains during a month within our own platform and we will start to do that as many as we can starting in October, both domestic and export. So if contracting isn't complete by then, volume will start to go through there.

Once that happens, it's kind of up to the MLP as well as ourselves to determine what's the best time to drop this down. We would like to do it quicker than later and we'll just have to see how - what happens through the rest of this contracting season..

On Little Rock, what's the rationale for doing the construction at GPP rather than GPRE? Is that a size of the investment thing and then if that's the case, is there some sort of threshold above which you don't want to spend money at the MLP and you do at the parent?.

Yeah. It certainly was a size factor that we felt very comfortable that we could handle a $3.5 million investment with obviously, maybe a 12-month lead time to get that to turn on to cash flow. We don't have a hard and fast dollar amount in terms of what could be developed at the MLP.

It really just - it's a function of size as well as time to positive cash flow. So we just, we model that and we'll use Green Plains Inc., to support the larger projects like Belmont. Obviously, the preference would be to build at the partner's level, just simply because you have a better EBITDA multiple on a grassroots build..

And then on those MVCs, are those MVCs sufficient alone to support that project.

And can you give us any details on the sort of duration or quantity or any other features of those?.

Yeah. I mean when you look at the, first of all, for North Little Rock, all that volume has been committed. So there is no issue there and it does support the project and contracting is over for there. So it happened before, can started between the two partners, we will both support that project and are both committed to.

When you look at the project on in Belmont, it was built on those assumptions that we had mentioned earlier.

And right now, there isn't an MVC because we're not obviously, we're just in contracting season right now, but we believe that the numbers that we've put forward when we built it are still very much intact and consistent with what's happening in the market today.

And then finally, obviously for the rest of the year, with the MLP, our assets are turned on. I mean, we will go through normal maintenance season on some of our assets, but some we won't have to because of what we were able to accomplish when we went down in the month of June.

We did a lot of maintenance and during that downtime, so that we can get through maintenance season with probably less than we have in the past. And so - but in general through the end of the year, for the MLP, we'll run strong almost at full volumes, starting next month.

So we think that albeit we made an MVC for the month of or last quarter, but we think we'll get a credit for that for the rest of the year.

Is that correct Jerry?.

It should be utilized very quickly..

So the MLP is intact for the rest of the year and on track in that low to mid-70 range..

Excellent. Thank you for the help gentlemen. I just want to compliment you on the capital and operational discipline on shutting the plants down. We could certainly use some of that in the broader oil and gas industry..

And we will take our last question from Heather Jones from Vertical Group..

Just had a couple of - quick - first on the clarification.

On food and ingredients, did you say you think it will be 40 million to 50 million in EBITDA this year or were you talking about a normalized level?.

I missed that question.

Can you repeat that again?.

I think you said something about food and ingredients being 40 million to 50 million in EBITDA.

Were you referring to 17 or were you talking about what you thought it could be in '18?.

No.

I was referring to 17, because don't forget, it's a full year of Fleischmann's and very much a partial year of most of the cattle lots, because obviously, Supreme was our first lot, our first two lots we're running full year, but you have to remember when we purchased the Cargill lots, it was all Cargill cattle in there and our return on those really gotten start to accelerate until 2018 when we owned all the cattle.

We're getting paid a small fee to finish that is out based on the agreement that we made with them, but it's not as much of a margin as we make feeding our own cattle. So next year is the year we have a full year of everything..

Okay. And a two-pronged question really quickly on DDGs. We've seen a pretty substantial improvement and the relative price to corn over the last, I don't know, call it, four to six weeks.

So is there physical tightness developed in that market because you do have strong production growth in hog, et cetera and so are we seeing physical, more physical tightness there and the second part of my question is, do you guys have any intention of adopting the new tech that yields higher protein DDGs or premium price DDG..

So yes, over the last four to six weeks, we have seen the increase in replacing values versus corn on distillers grains, mainly in the west, but a little less in the east, because we're still working through the toxin problems that we've had and that marker remains at a discount.

But we've seen a 10 to 12 percentage point replacement improvement in the west.

Some of that is because the pre-unit value of protein on DDGs is so compelling and besides the cattle feeding or the animal feeding margins that there are, our replacement protein value is very compelling and also don't forget a bit of weather helped in terms of dryness in areas where cattle would be on feed and other animals and so we've seen some of that also help recently.

And so - and then the last thing that probably helped was also the fact that when we turned down 50 million gallons of production, that's a lot of DDGs that the market is expecting as well and so I would say again besides helping the ethanol margin in terms of stabilizing with our production decrease, we probably had some impact as well on DDG pricing.

With regard to next generation or advanced distillers production around - going after that higher protein using technologies that are out there, we are evaluating that as we speak.

There are several technologies that are still kind of serial number one-ish type technologies, but they do work and so the real question is how quickly and how long would it take to adopt this new technology to upgrade a portion of your distillers' grain to a higher protein. And so we're evaluating that now.

If that were to happen, we believe the economics are extremely favorable to an ethanol plant that does it, but the CapEx is not cheap at either. So you have to evaluate where, when and how you want to do it, but I would say that is a technology that is being very close to commercialization and we are watching very closely.

We would be, of that one, a potential early adopter where we would start to allocate some of our platform.

We believe that the higher protein would have a place, competing against high protein soymeal as well as going all the way in to corn meals, but you got to have the, first of all, you got to have the balance sheet to do it and you've got to have the platform to do it.

But we are - we are evaluating that and we believe that that is something that will come in this industry.

It's just a matter of time, but it will change the margin profile significantly for the industry going forward where you potentially are running these plants for protein and potentially less so for ethanol, which will be an extremely interesting dynamic if it's proven out.

But we believe that over time, this technology will prove itself out, but it's not going to - it will not convert all of the DDGs at an ethanol plant. It only converts a percentage of them and it takes a significant capital investment to do that, but the payback could be pretty good..

And that concludes today's question-and-answer session. Todd, at this time, I'll turn the conference back over to you for any additional or closing remarks..

Thanks and thanks to everybody for coming on the call.

While we're not satisfied with our Q2 results, we feel like the discipline that this company divested in the market and doing the things that we needed to do was a bigger longer term investment in the forward margin curve and we believe that the last half, as we said, will certainly be better than the first half and sequentially third quarter and fourth quarter will be better than the second quarter, the margins certainly have been under pressure but are recovering from the lows.

Our production levels are returning back to normal, which is obviously something for the MLP investors and Green Plains Partners investors understand that we are fully committed to meeting our obligations under the contracts. Our non - our segments outside of ethanol production are all performing well.

We expect a strong finish in our food and ingredients business as well as ag and energy to start coming back and realizing the margins that were booked and overall, we're optimistic about the future. We believe we're in a great position from a balance sheet.

Liquidity is very high, in fact, some of the highest we've had in years and we think we're well positioned now to capitalize on this margin expansion and potential growth in all of our platforms. So thanks for coming on and we appreciate your support. We'll talk to you next quarter..

And this concludes today's conference. Thank you for your participation and you may now disconnect..