Alto Ingredients Inc (ALTO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. We thank you very much for your patience and welcome to the first quarter 2007 Pacific Ethanol Incorporated earnings conference call. My name is Bill and I'll be your conference coordinator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Gregory Pettit of Hill and Knowlton. Please proceed, sir.

Good morning and thank you for attending. I'm here this morning with CEO, Neil Koehler, and COO, John Miller. First let me get through some Safe Harbor language and then we'll get started.

With the exception of historical information, the matters discussed in this conference call are forward-looking statements that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ from those statements. Factors that could cause or contribute to such differences include, but are not limited to, the ability of Pacific Ethanol to successfully and timely complete in a cost-effective manner construction of its four ethanol plants under construction, the ability of Pacific Ethanol to obtain all necessary financing to complete the construction of its other planned ethanol production facilities, the ability of Pacific Ethanol to timely complete its ethanol plant build-out program and to successfully capitalize on its internal growth initiatives, the ability of Pacific Ethanol to operate its plants at their plant production capacities, the price of ethanol relative to the price of gasoline and the factors contained in the risk factors section of Pacific Ethanol's Form 10K filed with the Securities and Exchange Commission on March 12, 2007.

And with that, I'll turn the call over to Neil Koehler.

Thank you, Gregory, and welcome everyone to Pacific Ethanol's investor call to discuss our 2007 first quarter financial results. We are very pleased this morning to report strong operating results for the quarter. Our net income grew to $3 million on record revenues of nearly $100 million, compared to a loss of $600,000 on sales of $38 million in the first quarter of 2006. We sold a record 37.5 million gallons of ethanol in the quarter. Our gross profit was a record $15 million and our EBITDA for the quarter was a record $4.8 million.

Growth and revenues, the net income in the quarter was due both to the continued expansion of our ethanol marketing business and the contribution of profitable production operations in Madera, California, and Windsor, Colorado. Our team did a remarkable job of both managing volatile commodity conditions in our operating business and continuing solid execution on our growth strategy to be the leader in destination ethanol production and marketing.

Our Boardman, Oregon ethanol plant is on track to be operational by the middle of this year and we have commenced construction on facilities in Burley, Idaho, Stockton, California and Calpatria, California in the Imperial Valley. All of these facilities will be operational by the middle of 2008.

Beyond these projects, we have a full pipeline of opportunities to meet our objective of 420 million gallons of annual capacity by the end of 2010.

This quarter we continue to build our executive team. We were proud last week to announce the appointment of Doug Jeffries as our new CFO. Doug's experience as Chief Accounting Officer at eBay and prior public company CFO and controller experience brings exceptional financial expertise to our company as we continue our rapid growth.

I want to thank John Miller for his yeoman's work as Acting CFO, while we carefully considered our choice for the new CFO. Under his watch, our financial group has met the challenge of timely and accurate financial reporting.

During the quarter, we also filled a number of other key positions in the company and we have a financial controls and reporting organization that is well-qualified and highly motivated to manage the profitable growth of our company.

We are very excited about the opportunities ahead as we respond to the rapidly increasing demand for renewable fuels to meet the energy, economic and environmental needs of our country.

With that, I'd like to now turn it over to John to run through the financial and operating details of our first quarter.

Thank you, Neil, and good morning everyone. Even though I said on the call last quarter that someone else would be sitting here with Neil today, I am back. I am very pleased to be here. This quarter we have accomplished a great deal. Our business activities produced solid results and we made excellent progress on our business processes. Also, I am delighted that we recently announced that Doug Jeffries will be joining us soon.

I'd like to start with the summary on Slide 1 after the title slide and underscore Neil's comment about execution. We concluded a number of transactions throughout last year. Those transactions were very important because they were key in providing the foundation for the current stage of our strategic plan.

The first quarter was one in which the focus on execution was intense and the financial highlights covered here this morning are evidence of that focus. First, we will review the income statement, then look at EBITDA, then review our commodity pricing and, finally, review our balance sheet. Then, I'd like to make a couple of comments on other operations and construction status.

Moving to the income statement on Slide 2, net income for the quarter was $2.975 million, which after our preferred dividend, resulted in a diluted earnings per share of $0.05, compared to a loss of $612,000 in Q1 of '06.

The quarter sales increased to $99 million, a jump of 160% over sales for Q1 '06 and a 23% sequential increase over sales during the fourth quarter of '06.

Total gross profit increased to $15.3 million, which is 16% of sales, up from $11.7 million in Q4, which was 15% of sales and up from $2.3 million in Q1 '06, which was 6% of sales.

Please take a look at Slide 3 for our steady and significant sales increases are illustrated over the past five quarters. Slide 4 illustrates the strong and growing gross margin resulting from our strategy, a well-executed marketing program supported by a destination model for ethanol production.

Going back to the income statement for a moment, our total SG&A for Q1 '07 was $9.5 million, down from $11.4 million in Q4 '06, but still too high in our view. $1.7 million of that total relates to cost items that we do not expect to recur in subsequent quarters and we plan to see sequential declines through the balance of the year for SG&A as percentage of revenues.

Among those items included in the current quarter's SG&A are one-time cost related to building sound financial and accounting capabilities. As you know, late last year we were faced with replacing our CFO and getting our business processes certified for Section 404 of Sarbanes-Oxley. Then in January, we opened our Sacramento headquarters and decided to move our accounting activities as expeditiously as practical. The plan was to find a CFO, revamp the work processes, close '06 as a large accelerated filer, close Q1 '07 from Fresno and then close Q2 '07 from Sacramento. The first group of these tasks are complete and we are on target for the last step, that is, closing Q2 from Sacramento.

To do this, we used, and are continuing to use to some extent, consultants and temporary staff to bridge between people and locations and also to develop processes for SOX certification. The non-recurring cost of that in Q1 is about $900,000 and we expect that to be about $400,000 in Q2.

So, to summarize one-time costs during the quarter, in the category of SG&A, we have some one-time expenses related to the SOX 404 certification and the move. The expense in Q1 was about $900,000 and we project about $400,000 in Q2. We do not expect any further expenses related to those items beyond what might be deemed ordinary accounting expense.

In addition, also in the SG&A category, we had accelerated amortization of an intangible of $1.5 million related to the Front Range acquisition. It is essentially the backlog that we bought with the business. We will have that amount recur in Q2 and then it will be fully amortized.

In the other income/expense category, we had a portion of the TD Banknorth loan fees which went into other income/expense. The amount was approximately $783,000. This is a one-time event. It will not carry into Q2.

Looking at Slide 5, the key point in this slide is that we were showing EBITDA for our business activities and our interest in Front Range. As a reminder, for Front Range, after we consolidate the financial results into our statements, we then back out the interests of the other owners from our net income. So, what we are showing on this page is EBITDA for just our business activities. We exclude the amounts related to the other ownership interests.

Referring to Slide 6, we illustrate in the graph the steady growth of our gallons sold as a result of our marketing strategy. Total gallons sold increased to 37.5 million from 31.7 million in Q4 '06, and 19.8 million in Q1 '06.

Referring to Slide 7, the gallons we produced rose 63% to 13.5 million gallons, from 8.3 million gallons in the fourth quarter, which reflects principally a full quarter's production at both our Madera plant and our share of the Front Range facility.

We expect production to remain fairly stable until our Columbia plant in Boardman, Oregon contributes to production in Q3.

Commodity margin per production was $1.43 per gallon, compared with $1.45 last quarter, even as our average corn price rose 59% in the period.

Our average sales price of ethanol was up 4% to $2.34 per gallon, from $2.26 in Q4, and up 23% over the $1.92 per gallon average we achieved in the same quarter of last year.

Our average delivered price of corn was $3.69 a bushel, an average basis of $0.59, or seep out equivalent of $3.10, which is nearly 23% lower than the $4.01 all end market price during the quarter.

Our co-product return was 30.9%, which is down from 33.4%, which represents a lag in the effect of WDG prices in cracking corn prices.

In the next slide, Slide 8, I have one item to point out on the balance sheet. Our total assets increased about $100 million from December 31 to March 31. This is due to a $76 million increase in restricted funds which are from the multi-plant financing and $52 million in PP&E, offset by a decrease of $30 million in current assets which is primarily cash.

That concludes our discussion of the financial results for this quarter.

On another subject, as those of you who have followed us for the past several quarters know, management has been focused on improving our internal controls. We have made great strides in improving work processes and in preparing for a successful mid-year test program. It is our objective that we go into our 2007 year end with all internal systems in place. Our 10Q, which will be published later today, itemizes a good deal of detail on our progress, so I will limit our discussion in this area to answering any questions you might have on the subject.

I'd like to put my operations hat on for a moment and update you on the ethanol and co-products operations.

First, and most importantly, we continue to operate safely. Our workforce at our Madera plant has not had an LTA, lost time accident, and we are now at 326 days and counting. We are very pleased with their dedication and their efforts to maintain a safe workplace.

Next, our Madera plant recently passed a performance test proving it is capable of operating at a 40 million gallon per year rate. Both our Madera and the Front Range facility operated about nameplate levels during the first quarter of the year.

At our Columbia facility in Boardman, we are now in the final phases of construction and, if all goes according to plan, we will be grinding corn in the middle of June and making alcohol by the end of the month. Our operating team has been hired and is commencing formal training next week. Slide 9 has a current picture of the site along with visual updates on the other construction projects.

Magic Valley in Burley, Idaho will be ready to go in the first quarter of 2008 and Imperial and Stockton will follow in the second quarter of the year.

And with that, I will hand the microphone back to Neil.

John, thank you. Before opening up the lines for Q&A, I wanted to spend just a few moments discussing our business strategy and touch on a key public policy initiative here in California.

We will continue to expand on our differentiated strategy of producing and marketing renewable fuels and high value feed in the largest market for these products. Our destination strategy we believe sustains a low cost position and a high value market position for our company. Our continued investment in both production and distribution assets in the heart of the largest gasoline market in the world is a key to our company's success. But, it's also a critical component of adding new infrastructure necessary to accommodate new demand for renewable fuels across the markets. It is our strong belief that the urgent need to reduce net CO2 emissions from transportation is a large driver in significantly increasing the demand for renewable fuels in this country and worldwide.

In the near term, displacing gasoline with ethanol is the single most effective way to reduce net CO2 emissions from transportation fuels. A key objective of our company is to be the leader in low carbon renewable fuel production. Our destination strategy reduces our fossil fuel energy inputs by 30%, since we sell all of our co-product feed locally at the wet feed, avoiding the drying of this product, which is necessary for shipment over longer distances.

We are exploring conversion technology utilizing bio-mass to generate process steam and electricity for our four ethanol facilities and to ultimately allow for the conversion of this bio-mass into ethanol. This approach offers the multiple benefits of lower carbon fuel production, lower cost and a bridge to cellulose ethanol production in the future.

We believe that low carbon fuel production will give us a significant competitive advantage in the marketplace.

California Governor Arnold Schwarzenegger has by executive order mandated a minimum 10% reduction in CO2 emissions from transportation by the year 2020, with credit given to early action. This is truly a transformational policy that is a model for climate change initiatives elsewhere. Increasing the amount of ethanol use in California will give immediate and substantial CO2 credits for California refiners to comply with this order. It is the demonstrated and certifiable positive lifecycle energy balance of ethanol that delivers net CO2 reductions from ethanol use.

This policy, combined with the compelling blend economics of ethanol, should resulting the migration from 6 to 10% ethanol blends in California over the next 12 months. This change alone would result in 700 million gallons per year of new ethanol demand in California.

We are also seeing substantial new growth in ethanol demand in other Western states where we offer it.

On a national basis, we see the ethanol market naturally growing to a 10% blend in the entire gasoline pool. That translates into annual demand for nearly 15 billion gallons of ethanol. There are now active discussions between fuel providers, automakers and policymakers around increasing ethanol blends beyond 10%, up to 20% for use in all cars, which would create an annual demand for ethanol of 30 billion gallons.

Considering constraints on gasoline refining capacity and continued increase in worldwide demand for transportation fuels, we remain very optimistic on the strong growth in ethanol demand over the years to come.

And with that, Bill, John and I would be happy to answer any questions.

Thank you very much, sir. [Operator Instructions] And our first question comes from the line of Mike Judd of Greenwich Consultants. Please proceed.

Congratulations on a good quarter.

Thank you, Mike.

You were kind enough to give us the equity volumes, but, unfortunately I was a little slow in writing down the numbers. Could you repeat those please for last quarter and this quarter?

Yes, we would be happy to do that. So, this quarter the total sales of 37.5 million gallons of which 13.5 were from production operations. That's our share of Front Range, plus 100% of Madera and 24 million of third party sales.

Okay. What was it last quarter again?

I don't have- - I believe it was- -

Hang on, we've got the number here. We can look it up and I can give it back to you.

Okay. And while we're on, just switching to a separate subject. It appears that you guys did a pretty good job in getting higher prices for the distillers' grants. I know you gave us something where we could basically calculate it, but I just want to make sure my calculations are right. Do you have an actual average DDS price for the quarter?

We do. On a dry distiller's grade basis, it would work out to roughly $125 per ton. It's a wet distillers grade product that's roughly between 30, 35% solids and our average price in the quarter was approximately $45 per ton.

Okay, great. Thanks for the help.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of [Ronan Walsdorf] of Cowen and Company. Please proceed.

Good morning. Congrats on a strong quarter. I just wanted to try to understand a little bit better how to be modeling SG&A through the remainder of the year. I appreciate the clarification around some of these one-time, non-recurring costs. But if you could give us a sense of what your, what the ramp may be, what the sort of normalized level is. Then I just have quick follow up.

In the last call, we talked about our SG&A not exceeding last year's levels during the coming year. And we are staying with that projection. We would exclude from that the amortization of the costs related to the Front Range acquisition. So, both one-time costs in the first quarter of $1.5 million and in the second quarter of the same amount would be in addition to last year's SG&A level.

Okay. And then, you're talking about the Schwarzenegger initiative and there are others obviously at the federal level to push biofuels. Are you seeing, what are you seeing from Detroit or from the Japanese or German automakers as far as their appetite to bring to market flex-fuel vehicles?

We are seeing some discussions at Toyota and certainly there have been other discussions with the foreign automakers. But, clearly, it is the U.S. domestic automakers who have led the way on flex-fuel vehicles. But, as the fuel becomes more prevalent in the marketplace and the demand for the vehicles becomes more prevalent, we certainly believe that all automakers will respond.

Thanks very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Phillip [Chen] of [Arbor] Capital. Please proceed.

Good morning.

Good morning.

Wanted to get a sense of, or what kind of growth you anticipate for Kinergy's operations in the remainder of '07?

We don't give any particular guidance on that, so we really can't discuss that in any detail other than to look at the past record of growth and we continue to expand in all the markets that we are operating and we expect growth, both from our production, as well as our marketing operations.

Okay. And the other question I had was, could you provide us some more color as to your initiatives to develop cellulosic ethanol?

Yes. We as a company are extremely careful about not making commitments until we have a plan and are ready to announce specific initiatives. And we do not have any specific initiatives to announce today, but we can say that we, like others, are deeply engaged in exploring all of the opportunities out there. We are in discussions with technology providers, strategic partners, that can help us understand the opportunities in cellulose and we are in the research and development of the appropriate strategy going forward.

Okay. And earlier in the call you had mentioned that you were using biomass to develop process heat, as well as electricity.

Correct.

To what degree have you implemented those technologies and, if not, what kind of horizon to you see?

Well, we have not yet implemented those technologies. So, what we have done to be a first mover in the market was developed a strategy around a cookie cutter plant that we could put down in all these various locations that we are simultaneously building in. And that involved natural gas boilers for the production of the steam and buying electricity off the grid. So, what we are looking at in a couple of locations is to come back in and install biomass combustion and look at that as a way to produce the steam and potentially electricity as well. So, we believe that would be an initiative that we would be implementing in 2008 at one or more of our facilities.

Okay. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Preeti Dubey of Thomas Weisel Partners. Please proceed.

Yes, hi. I'm trying to understand what are trying to do in 2008. So, in 2008, when you have a lot of your own production come in, would you be focusing on third party sales as much as you are doing right now? Or, should we see a shift of more towards own production marketing vis--vis for a third party?

It is our objective to continue to expand the marketing of ethanol, along with our production. And I think if you go back to my comment on the, what we consider to be, the inevitable move here in California from a 7 or 6% blend to a 10% and 700 million gallons of new demand. And you look at even with our 2010 plan to be producing 420 million gallons. That's just a little more than half of the incremental new demand.

So, we see tremendous opportunities for growth in the market and growth in our marketing business along with our production. And we also are honored to have commitments to market ethanol for a number of other producers and so we will continue to expand those relationships as well.

Okay. And the other question I have is more of a clarification. I'm trying to get, when I calculate your total ethanol [Inaudible], which I do by multiplying 37.5 times the average ethanol price, the difference that I get between the reported the number and the ethanol sales is about 11.5 million. Is that all due to co-product sales or is there something else also included in it?

You know, I'm not sure I understand that question. Could you rephrase it?

Okay. I'm trying to understand what exactly were your sales for co-product in the quarter and what I'm trying to do here is I think the difference between the sales figure that you have reported, which is 99.2 million and I subtract from it the total ethanol sales, which is 37.5 million gallons times 2.34 for a gallon. And the difference that I get is about $11 million. And I'm trying to understand, is that all due to co-product sales or is there something else also?

No, it's all co-product sales.

Well, there is about $2.5 million worth of corn sales.

That's correct.

Okay, that's the- -

So, it's about 7.5 of co-product, or WBG, and about 2.5 million of corn.

That's the missing link. Thank you.

So, that's a good point John brings up, which I think shows also how we have leveraged our position in these feed markets to sell not only the wet distillers grain, but we have been also in the business of providing rolled corn to the dairy market here in California. So, we are a seller of corn, processed corn, to the dairies, along with our wet distillers product.

Thank you.

Thank you very much, ma'am. Ladies and gentlemen, your next question comes from the line of Paul Resnik of Dutton Associates. Please proceed.

Good morning.

Hi, Paul.

Two questions. One, any trend you see in rail costs you see at this point for the corn shipment?

Neil Koehler; The trend in transportation costs generally with higher fuel and higher demand on all of the modes of transportation, the rates are going higher. As it relates to the relative increases between unitrains of corn and single manifest cars of ethanol and distillers grain, the increases in the more efficient shipments of unitrains have gone up at a slower rate than the single cars and actually at a slower rate than even the unitrains of ethanol. So, just another supporting factor in the spread analysis, which is essentially at the heart of our transportation advantage, bringing corn to our facilities in the unitrains shipments. We have seen those rates go up at a slower rate than other increases. Very good. And secondly, with the high price of corn, have you had an opportunity to access increased corn production in local markets?

We are having conversations on a daily basis with farmers in the Western United States. So, it is really a matter of price, as you point out, and we are seeing a great deal of interest in our local markets and we do believe that we will have incremental corn from local growers. I think on a macro basis, you can look at the planning and tension report. On a nationwide basis we saw increases in corn acreage of 15%. In California that number was 20%. So, the market is responding. We're seeing corn being produced in areas, incrementally produced in areas outside of the traditional corn belt. And that is one more option for us and gives us, you know, we believe additional opportunity to leverage our destination position to lower our cost of corn.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jonathan Lichter of Sidoti and Company. Please proceed.

Can you give us- -

Good morning.

Good morning. Can you give us a sense of if you will still have favorable corn hedges in Q2 and beyond?

We have a very active risk management program and clearly that showed the benefit to our company in this quarter. We will continue and have a number of positions on corn on for the subsequent periods. If you look at our 10Q filing of this afternoon, we do report both on a dollar basis and a volume basis our corn position on a go-forward basis. And to summarize those numbers and actually do the implied math that would be required by looking at that, we have, as of the end of March, between the Front Range and the Madera facilities, we had a total of 12 million bushels of corn that had been fixed-price. For the subsequent periods at an average CBOT equivalent price of about $3.57 a bushel.

Okay. Thanks. And one question on, you mentioned the possibility of blends beyond, I guess, 10% blends. Can you comment on the GM Vice Chairman, I think it was last month, mentioned that current engines couldn't really handle anything beyond E10.

Certainly that has been the position of the automakers, but I can say that of late we have had conversations with GM and other automakers about what might be an appropriate blend beyond 10%. And I would point out, just from the underwriter laboratory's position on the fuel dispenser equipment, it's all currently registered up to 15%. In Brazil, they run cars that are very similar to the cars on the road here, up to 25%.

It is certainly our belief and we think that through testing that is going on between the industry and State of Minnesota and the car manufacturers today, that we will see some results here in the next number of months on that pilot program that will demonstrate that all cars can run on, certainly blends up to 15%, and we believe that up to 20% is possible as well. But we certainly think an intermediate plan certainly, 11%, 12, up to 15, would be very viable in today's cars. It would take the EPA from a legal standpoint to allow anything more than 10% to be a legal fuel, which it's not today.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ian Horowitz of Soleil Securities. Please proceed.

Good morning, Neil, John.

Good morning, Ian.

Good morning.

Congratulations, guys, by the way. Couple of questions. I think the first one would just be kind of maybe your macro thoughts on ethanol to CARBOB gained some real spread compression year over the first quarter. A, what's your thought on why that happened? What do you think is a much more reasonable spread between the two products?

Well in terms of CARBOB, what we see in California, and this really gives significant additional underlying value to ethanol, that wholesale gasoline prices in California historically always run above the rest of the country. And in the last number of months, really over the last year, that spread has even grown to be much larger. $0.15 to $0.20 premiums in the past have been typical, but we've seen $0.25, $0.30 as being more typical in the last quarter or two with that spread blowing out as high as $0.60.

So, that just gives ethanol, which has its own supply and demand economics, that much more value in the markets that we are in. On a macro basis, looking at whether it's CARBOB or RBOB, the spread between ethanol and gasoline certainly has eroded of late. But I would point out that that is a very recent phenomenon. As recently as a couple of months ago, we were trading at and above the historically normal spreads, call it $0.40, $0.50 a gallon, over gasoline. What we've seen in the last number of weeks is a very rapid run-up in price of gasoline and not atypical, we've seen a lag on ethanol. So, it's- -

Do you think it's a lag rather than a disconnect?

That certainly is our belief. When you have very high gasoline prices, I guess we would expect if they were to sustain at levels in the $2 and $2.50 range on wholesale gasoline, that you might see a larger spread, because it still generates a very solid operating margin for ethanol producers and gives refiners some additional incentive to open up new blend markets in the Southeast and other areas that will be critically important to the continued growth in the marketplace.

But, no, we do not see that there has been, in some way, some sort of shift that we have a new relationship between ethanol and gasoline. But that will have a lot to do with what the absolute price of gasoline is on a go-forward basis.

Right. Okay. And then, talk to me a little bit, Stockton and your other California facility, as well as Madera. I mean, they all make sense in terms of the local market. But, talk to me a little bit about your thoughts on Burley and Madera. Are you looking to sell directly into those local markets? Or is there a logistical backend to this that you can be considering?

Well, certainly, Burley would be the one plant where we're already engaged in market development. We can sell 100% of the ethanol we produce in Idaho in Idaho. If the state were blending 10% ethanol, it would be a market for ethanol that would exceed 100 million gallons. We are working with the fuel, the oil companies, in Idaho to put in place the infrastructure that will allow 10% ethanol blending.

Does Idaho have a blending requirement now?

There is not a blending requirement, no. There is actually a state tax incentive for blenders, so that gives some additional impetus for the growth in the market. So, Idaho is the one plant where we modeled it. We will sell probably 50% in the Idaho market, but then it is a very good staging point for shipments into Salt Lake, which is also a very close market, and into Las Vegas market, potentially Northern California and the Northwest. So, there will be some shipment of ethanol from our Idaho facility by rail. But we certainly have the opportunity to sell all of it locally as the infrastructure is developed. All the wet distillers grain will be sold locally in what is the Magic Valley there, the largest dairy shed in the region.

Madera is sold locally. Virtually all of Madera is sold into Fresno California by the blending facility there in Fresno for that surrounding region.

And Boardman?

Boardman, 100% of the ethanol we are presuming will be sold in, there's a local market, Pasco, is a blending facility, and the balance would go to Portland.

Okay. And then, now what do you think, last summer we had some serious issues in California with temperature and being able to offload product and you guys were able to take a little bit of advantage of that because of your, with the Kinergy side, with your local production and delivery. Do you think that everyone's kind of working on figuring out this issue for the July/August timeframe in California? Or is that still an exposure there, to high temperatures?

No, I don't see that as a high exposure. I see the issue in California and generally in the marketplace as demand is increasing, need for infrastructure. The industry and certainly Midwest producers have done a great job of improving the efficiencies of delivery, moving to unitrains of ethanol in the market. We at the marketing company have been adding to the infrastructure to make sure the ethanol is where it needs to be when it needs to be for the blending with the gasoline. So, we see improvements, both on the origin and the destination, improving the logistics. But certainly it is a key advantage of ours with our Kinergy marketing company to be truck-delivered provider of ethanol to the final point of wholesale distribution. So, when there are moments in time, as there will continue to be, railcars are not where they need to be when they need to be, we are there as a very reliable supplier. On short notice we can deliver ethanol to blending racks anywhere in our marketplace.

And then, can you give in the queue, or are you willing to give kind of an estimate of geographic breakdown on your corn pull?

On our corn what?

On your corn supply? Where it's coming from?

It again is an advantage of ours that we operate on two railroads at our various plants. And we can pull corn from virtually anywhere it is grown. So, that moves around in time, depending upon where we can get the lowest cost, source of corn.

Do you have any breakout for what you did for the first quarter?

No, we don't.

Okay. Thanks. I'll get back in queue. Congratulations.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Pavel Molchanov of Raymond James. Please proceed.

Hi, guys. This is actually [Cory]. I'm filling in for Pavel. Great quarter, by the way.

Thank you.

Kind of touching back on the previous question, you were able to achieve that premier pricing over CBOT in the past two quarters and I'm wondering if you can see this trend continuing and really on a company-specific basis, if you could throw a little more color into it?

Well, we don't give any specific guidance, because obviously we can't tell the future. But we manage our risk exposure to the best of our abilities and so we have taken some significant positions on forward corn and we do that in conjunction primarily with positions that we take on selling ethanol and we then are able to lock a margin that we find to be acceptable. So, that's the strategy. What corn does from here, it's certainly a very volatile environment. We've seen just in the last week moves where it's gone up $0.10 a bushel in a day and down $0.10 the next. Our position right now on cost is slightly better than market, but if we were to see some significant falloff in corn prices here over the next period, then obviously it would be a different situation. Conversely, if corn goes right back up, we'll be in a very advantaged position. So, it's hard to call. What we really do is look at it from a margin management standpoint and what the markets then do on a daily spot basis is not as important as what we've been able to lock in terms of a gross margin.

Sure. And as far as ethanol sales, as well. Is that kind of a regional thing as far as the premium receipt and all that?

Yes, I mean, if you look in a balanced market, the value of ethanol in our markets is going to be Midwest plus freight. And so that is why you would expect an actual premium. I would also point out that our competitors also sell a great deal of ethanol in California and other destination markets. So, their price is partly reflecting that premium as well. We then have an added premium where, when ethanol comes to California, for instance, it typically- - from the Midwest- - typically receives, comes into terminals where it's received by rail. But then it has to be double-handled and trucked back out to the final point of wholesale distribution. Our model is that we don't double-handle the ethanol. We bring corn in once to our plant. We ship products, ethanol and distillers grain, out directly to the final point of distribution and consumption. And that is also a cost advantage. It's also a price premium because a lot of our ethanol is truck-delivered to these points of distribution, where we're able to build in that added value of avoiding the terminaling and secondary transportation in our markets.

All right. Thank you. And one final question. Looking at your marketing margins, it seems like they were a little above the historical norms, or at least what we were modeling. Can you speak on any particular reason for this or how we can model this going forward? Any trends you see?

We don't offer any specific guidance on our margins and in fact I'm not sure where you're deriving margins from, since we don't break it out separately. It is the case that, if you look at when we were a marketer only before we were a producer, our margins did exceed what would be considered more of a normal 1% margin. We've been able to take positions in the market at times, trade in and around our system to add some margin to that. But, on a, the way we look at it, we have contractual commitments where we are limited to 1% margin and so we see that business in a steady state as a 1% margin business. But certainly that can flex around that number based upon our ability to position ourselves in the marketplace.

All right. Thank you, guys. Great quarter.

Thanks.

Thank you very much, sir. [Operator Instructions] Our next question comes as a follow up from Preeti Dubey of Thomas Weisel Partners. Please proceed.

Hi, actually, I just noticed that inventories were up quite a bit, about 17 million. Is that all due to ethanol, which is being stored in one of your facilities?

It actually would be combination of ethanol and corn. So, we were, certainly with the price of corn being what it was in the quarter, we made an effort to maximize the amount of corn that we had stored by the end of the quarter. So, there was a fair amount of that was corn. There also, we ended the year based upon just sales at the end of the year, we ended with a very, very low ethanol inventory, so we returned to more normal, yet still relatively minimal, amounts of ethanol inventory on hand at the end of the quarter. So, it was a combination of both ethanol and corn.

Okay. And just one more question. What's the reason for moving your headquarters to Sacramento? I think that was in the press release.

Well, if you look at Sacramento and you look at the Western region where we are currently focused, Sacramento is really the epicenter certainly of the agricultural and political heartbeat of California. And it makes it a good place to be. In that regard, it's very central. It's a city that is larger than Fresno. We're still very committed to the central valley of California and maintaining a strong regional office down there. But, as we are growing rapidly and trying to attract additional talent, Sacramento becomes a very good place to be able to attract that talent. Just from a logistics standpoint, with all of the travel that we do, both inside the company and with people visiting us, Sacramento with its transportation hub here, it's also a very good place to be. So, we're involved in the policy and the regulatory work on literally a daily basis, so being right here in the seat of the state's capitol is very helpful as we work through all of the issues of the day.

Thank you.

Thank you very much, ma'am. [Operator Instructions] Our next question comes from the line of Joe [Arsenio] from Arsenio Capital. Please proceed, sir.

Yes, thanks. In taking a look at the P&L, you have this entity that you reference as a non-controlling interest and variable interest entity. And you subtract out, I guess, the profits that appropriate for that entity. It's hard to detect how this moves proportionate to sales. Are you in the position to describe that relationship?

No, we're not. The accounting rules that drive the consolidation of the numbers are pretty well set. We're following those. The results that you see are the results of those guidelines. So, we have a couple of ways of doing that. The decision is driven by, again, the accounting rules. We are following those and so what we do is consolidate all of the financial results of the entity into our results and then subtract out, as you say, the interest of the other parties and subtract that from our net income.

And why is that interest of the other party described as variable?

It's the, oh, the variable interest entity?

Correct.

That's a technical term related to the way that that is categorized. This is a, there is a set of guidelines that dictate how an entity is categorized within the accounting arrangements. I don't have the expertise to fully describe that to you. We'd be happy to do it in a separate call. But, there are guidelines under 1046 that you can refer to that will take you down the same path that we've been down for how we treat the Front Range interest and you'll see how the tests occur and what drives us to that particular conclusion.

Okay. And will there be any more description of this relationship in the notes to your financials or some other way that we can try to pin down this relationship with the entity? Because it's hard to deduce from what you've presented.

The transaction was fully described in the 10K at the end of the year and I think that's your best reference document. There's no, if there's no changes going ahead, and we don't anticipate that there will be, there won't be any notes in the Q.

Okay, thank you.

You're welcome.

Thank you very much, sir. [Operator Instructions] And we do have a follow up from Ian Horowitz of Soleil Securities. Please proceed.

Hey, Neil. Any comments on bottlenecks at the EPC level or the equipment level? Is anything getting easier or getting harder for you guys to work with?

On the equipment front we saw- - this is John. I'll answer that question. On the equipment front, we saw a pretty tight market last year. It has opened up over the last few months we are noticing. We, as we pointed out I think, we have pre-ordered the equipment for the sites that we're developing right now, or that we're constructing right now. So, we're in good shape. Our prices are locked in and we don't see any issues related to the projects that we're working on right now.

That's on, you know, on a price issue and I totally understand that. But, from a physical issue, I mean, are these, is there still a bottleneck delivering these pieces of equipment out to the facilities?

I think- - in terms of the availability of the equipment?

Yes.

Availability has improved slightly over the last few months.

Ian, this is Neil. There's no question there's long lead times on these, on key pieces of equipment. But we fully anticipated that. And again, it's part of our strategy is to have expertise internally that manages these processes. And we feel that we've done a very good job of making sure that any of those items that we order them far enough in advance to not interrupt our schedule. And we've been able to manage that successfully.

And managing construction plugs has been fairly easy with Delta T?

It has been. The format that we've taken is one where we manage a lot of the aspects of the project ourselves. So, we worked with Delta T for example. We work with our constructors. We work with other key suppliers on an individual basis. And we pull that package together. And using that format, we have been able to deal with both the equipment supply and the timelines that we're up against. So, we have been able- - Oregon, I think is a good example. We started that project when things were fairly tight. We have with our construction team, which has really proven themselves here in the last few months, been able to do work-arounds on a number of issues. We're able to stay on budget and on schedule for that project.

Okay. Great. Thanks, guys.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Michael [Cohen] of Pacific American Securities. Please proceed.

Congratulations, guys.

Thanks.

Thanks. Neil, I was wondering, when the Columbia plant comes online mid-year, do you expect non-produced sales through Kinergy to decline to kind of take up that kind of shock? Or do you think that non-produced sales will stay pretty flat?

It is certainly our objective to look at that plant and other plants as incremental to our overall marketing program. So, no, we do not expect them to decline.

Okay. And I was wondering if you could talk a little bit about your ethanol sales contracts. Do they tend to be for a specific term and is there a period when there's large expirations?

I will answer that question in sort of a market general sort of way. We don't give specific information on our contracts, either term or price, customers, et cetera. But it is fairly typical in the market that there are terms of from spot to six months, occasionally 12 months, where we have seen- - it's somewhat ironic- - but on the one hand, there is definitely a longer term commitment on the part of the oil industry to continuing and expanding the use of ethanol. But given the volatility in markets for both ethanol and gasoline, if anything, the time frame of the contracts has actually contracted to where they are shorter term and there is- - it used to be very typically, you would have these two 6-month blocks of time where the bulk of the contracts were done, the October through March and April through September periods. And I would say that, while there still are those periods, that it is broken up and we have a much more diverse set of buying and selling habits out there. We also have a much more diverse set of pricing mechanisms. Typically, fixed price contracts were the flavor of the day a number of years ago. Today, it's a mix of fixed and then index pricing, both to gasoline and to ethanol postings.

Okay. And you sell your distiller grains wet. I was wondering, have you ever quantified the savings that you get by being able to sell them wet as opposed to having to put all of the energy into drying it?

Yes, that's a very good question and it's obviously very central to our competitive advantage. It all depends on the price of energy, which is an interesting hedge, because as natural gas prices go up, that cost advantage actually becomes greater. So, if you look at, take today's range, $7, $8 and then MMBTU and we use 30% less BTUs in our process than if you were drying the distillers grain. That equates on an ethanol per gallon basis of roughly $0.06, $0.07 per gallon of energy savings.

Okay. And my last question is, I'm trying to figure out how to model SG&A and it's been down significantly this quarter compared to the last. And I was wondering if you could talk why your SG&A was lower.

The primary reason that it was lower was that there was, we had a non-cash expense in Q4 of '06 related to compensation. So, it was, Q4 '06 was larger than, spiked up due to that reason.

Is that something we'll always see in Q4?

No, you will not. That was a one-time event. What we are doing now is amortizing that cost over each quarter as we have done in Q1. So, Q1 reflected the run rate, so to speak, absent the one-time costs that I pointed out earlier.

So, Q2, you don't see anything that would be a significant change really from Q1, probably pretty quiet?

Other than we have some ongoing costs related to the move and to our Sarbanes-Oxley testing, which we projected at about $400,000. Other than that, we are pretty much at a steady run rate.

Small bump. Okay, thank you.

Thank you very much, sir. [Operator Instructions] At this time, we have no further questions in queue. I'd like to turn the call back over to our speakers for any closing remarks they may have.

Great. Thank you, Bill. I want to just quickly to get back to Mike Judd's question on Q4 of '06. We pulled those numbers up. We had total sales of 32 million gallons, of which 7 were from production and 25 were from marketing. That was the startup mode at Madera. So, that's why the number was less in the fourth quarter than first quarter.

And with that, I would like to thank everybody for participating. I would like to thank shareholders for supporting our company, thank our employees for their continued dedicated work. And look forward to speaking with you all again next quarter.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation and you may now disconnect. Have a good day.

Thank you. 11