Alto Ingredients Inc (ALTO) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Pacific Ethanol, Incorporated third quarter call. My name is Michelle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to your host for today, Mr. Gregory Pettit, with Hill & Knowlton. Please proceed.

Good morning, and welcome to the Pacific Ethanol third quarter conference call. Before we get started this morning, I'd like to point out that there are slides to accompany this call, available for download on the Company's home page, which is at pacificethanol.net. Also, this call will be available for replay both telephonically and in the audio webcast replay, within two hours after the conclusion of this call. Replays will be available for the next 15 days.

For some Safe Harbor language, with the exception of historical information, the matters discussed on this call are forward-looking statements that involved 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 obtain additional debt or equity financing, including additional working capital financing or failing new sources of financing, the ability of Pacific Ethanol to restructure its indebtedness, the ability of Pacific Ethanol to successfully capitalize on its internal growth initiatives; the ability of Pacific Ethanol to operate its plants at their planned production capacities, the price of ethanol relative to the price of corn and other inputs, and the price of ethanol relative to the price of gasoline; and the factors contained in the Risk Factors section of Pacific Ethanol's Form 10-K, filed with the Securities and Exchange Commission on March 27, 2008, and the Risk Factors section of Pacific Ethanol's Form 10-Q for the quarterly period ending September 30th, 2008, to be filed with to Securities and Exchange Commission.

Now I'd like to turn the call over to President and CEO, Neil Koehler.

Thank you Gregory, and welcome everyone to Pacific Ethanol's investor call to discuss our financial results for the third quarter and year-to-date for the period, ending September 30th, 2008. I am joined today by Joe Hansen, our Chief Financial Officer. I will make a few remarks, followed by Joe, walking us through the numbers. After our closing comment or two on the market environment, Joe and I will be available for q and a.

For the quarter, we achieved net sales of $184 million, an increase of 56%, compared to $118.1 million in the third quarter of 2007. In the third quarter of 2008, we sold 65 million gallons, a 30% increase compared to 50 million gallons in the third quarter of 2007. We reported a net loss available to common shareholders of $55.7 million or $0.98 cents per share. This amount includes a non-cash impairment charge of $26.6 million, associated with suspension of our Imperial Valley Project. Our operating results were negatively impacted by high corn prices, coupled with rapidly falling ethanol prices that resulted in negative gross margins in our business. We also incurred expenses related to the start-up of our Stocktown, California facility in the quarter.

While we made the considered, and we believe prudent, decision not to take forward hedge positions in corn during the quarter, we were consistently grinding higher corn into both falling corn and ethanol commodity markets. Since we bring corn into our facilities in unit trains from the midwest, we have up to a month's volume of corn purchased, either at or in transit to our plants. Conversely, we hold relatively minimal ethanol inventories, since our ethanol is sold primarily in local markets around our plants. In a market like today where corn and ethanol prices are correlated, this further compresses margins in a falling corn market, but benefits us in a rising corn market, assuming minimal hedged positions.

We sold slightly fewer gallons in the third quarter compared to the second quarter. Our produced gallon volumes were slightly higher, but we sold fewer third party gallons. While we continued to expand our customer base and increase business with existing customers and broadened our sales region, we also took the position of not renewing some business, where we concluded the pricing terms were not acceptable. We also operated our plants at approximately 10% below designed capacity. This was both in response to poor margins and an effort to conserve working capital.

With the successful start-up of our Stockton plant in the quarter, we are proud to have achieved our long standing goal of owning 220 million gallons of annual ethanol operating capacity by the end of 2008. The plant successfully completed its [performance] test, confirming annual production capacity of 60 million gallons, which allowed us to complete the financing of the facility. Our Stockton plant is now providing ethanol and wet distiller's grains to local markets to meet the growing demand for both products in California.

As we have now completed this construction phase of our business, we will focusing on being an efficient operator. We are lowering our SG&A, as we focus on production and marketing, and eliminate costs related to construction. We continue to focus on better yields, lower energy use, new distribution facilities, and new technologies to position us for meeting the Advanced Biofuels requirements of the Renewable Fuel Standard.

With that I would now like to turn the call over to Joe to run through the financial details of our third quarter 2008 results.

Thank you Neil, and good morning to everyone. Slide two has a list of the items we will cover. On slide three, we summarized the income statement. Our net sales increased to $184 million in Q3 2008, from $118.1 million in Q3, 2007, a 56% year-over-year increase. Year-to-date, our net sales increased to $543.5 million, from $331.1 million in the first nine months of 2007, or an increase of 64%.

Going to slide four, we show our net sales in gallons sold. We sold 65 million gallons of ethanol in Q3 2008, up 30% from 50 million gallons in Q3, 2007, but down 3% over the prior quarter. For the first nine months of the year, we sold 191 million gallons of ethanol, up 44% from 132.8 million gallons in the first nine months of 2007. Our third-party purchases and marketing activity represented 49% of our gallons sold in the third quarter, and 54% of our gallons sold on a year-to-date basis. Going forward, we expect that our marketing volume will continue to represent a significant portion of our total ethanol sales.

Going to slide five, we recorded a gross loss of $20.3 million in the third quarter of 2008, compared to a gross profit of $4.8 million in the third quarter of 2007. In the third quarter, we experienced negative crush margins at our production facilities, non-cash charges, including an inventory valuation adjustment, and a relatively low co-product return. Our gross loss includes a lower of cost or market inventory valuation adjustment of $5.6 million, reflecting a mark-down in the value of our ending ethanol and corn inventories, as commodity prices continued to fall at the end of the quarter. In addition, our gross loss also includes a $1.7 million adjustment related to derivative positions, and $6.9 million of depreciation expense.

Our commodity derivative loss of $1.7 million for the quarter is comprised of derivative gains of $1 million, related to hedge positions that were settled during the quarter, and $2.7 million of unrealized mark-to-market losses on open positions that will settle in future periods. For the first nine months of 2008, we had a gross loss of $4.2 million, or negative 0.8% as a percentage of sales, compared to gross profits of $13.2 million or 9.4% as a percentage of sales in the first nine months of 2007. Our year-to-date results include the $5.6 million inventory valuation adjustment just discussed, unrealized derivative losses of $4.5 million, and $17 million of depreciation expense.

Returning to slide three, our SG&A fell as a percentage of sales, but increased by $0.8 million in the third quarter of 2008 over the same period last year, primarily due to an increase in payroll, non-cash compensation, and bad debt reserves. Year-to-date, our SG&A was slightly higher in absolute dollars versus the first nine months of 2007, but also fell significantly as a percentage of sales. We expect our SG&A expenses to continue to decrease on a per-gallon and percentage basis relative to sales.

In the third quarter, we recorded a non-cash impairment charge of $26.6 million, related to our Imperial Project to write down the value of capital previously invested in the Project. As you may recall, we suspended construction of our Imperial Project last year, due to unfavorable market conditions. Since the production margin environment has remained very challenging, we are recording an impairment charge related to these assets, as we do not intend to resume construction in the near term.

We recorded a net loss of $54.9 million in Q3 2008, compared to a net loss of $4.8 million in Q3 2007, primarily due to the swing in gross profit and non-cash impairment charge discussed earlier. Year-to-date, we have a net loss of $98.3 million, compared to net income of $0.3 million during the same period last year. Recall that our year-to-date results include non-cash charges totaling $65.2 million, including a $38.6 million goodwill impairment charge related to the value of Front Range Energy, and a $26.6 million impairment related to the suspended Imperial Project.

After deducting preferred stock dividends of $0.8 million, our net loss available to common shareholders is $55.7 million for Q3 2008, or $0.98 per share. Year-to-date, our net loss available to common shareholders is $102.4 million, or $2.14 per share, of which $65.2 million or $1.36 per share, respectively is related to the goodwill and Imperial impairment adjustments.

Going to slide six, EBITDA was negative $18.5 million for the quarter, compared to a negative $1.4 million in Q3, 2007. For the first nine months of the year, EBITDA was negative $6.8 million, compared to a positive $6.9 million for the first nine months of 2007. The swing in EBITDA in both periods is due to significantly increased volatility in commodity markets, negative margins from ethanol production, and the $5.6 million inventory valuation adjustment.

On slide seven, we summarize our commodity price performance. Our production gallons increased significantly in Q3 2008, versus the same period last year, due to the addition of production from our Magic Valley and Stockton plants, while third-party sales were down slightly. Our average selling price of ethanol was $2.45 a gallon during the quarter, up 16% from $2.11 in the same quarter a year ago, but down 4% from $2.55 in Q2, 2008. Year-to-date, our average sales price was $2.43 per gallon, up 9% from $2.22 per gallon in the same period last year.

During the third quarter, our delivered cost of corn was $6.99 per bushel, up 54% from $4.54 per bushel in Q3 2007, and also up 4% from our Q2 2008 delivered cost of $6.73. Our corn basis average $0.71, up $0.04 from a year ago, due to higher freight costs, but down slightly from $0.75 in the prior quarter, due to falling fuel surcharges. In the third quarter, our CBOT equivalent corn cost was $6.28 per bushel, compared to the average CBOT market price of $5.78 during the quarter.

Though we did not have any material commodity hedge positions going into the third quarter, our CBOT equivalent corn price was $0.50 per bushel higher than the market, due to corn inventory positions at our plants, and the normal timing lag from when unit trains of corn were priced upon shipment to the arrival and processing of corn into ethanol. Due to these factors, our ethanol pricing lagged our corn pricing by approximately one month, which significantly hurt production margins in the third quarter, given the unprecedented volatility and rapid decline in the market prices of both corn and ethanol.

Year-to-date, our delivered corn cost has averaged $6.48 per bushel, up 55% from $4.19 per bushel in the same period a year ago. Our basis averaged $0.73 in the first nine months of the year, versus $0.64 last year. Our co-product return was a disappointing 21.6% in the third quarter. This metric continued to be pressured by significantly higher corn prices during the quarter, and as we indicated in our prior call, a relatively high ratio of fixed priced sales contract that were in place through the third quarter of this year. Our co-product return in Q3 2008, is down from 25.3% in Q3 2007, and in line with the 21.7% realized in the previous quarter. Year-to-date, we realized the co-product return of 22.6%, down from 25.6% in the same period last year.

The net impact of the corn, ethanol, and co-product metrics resulted in a weak production commodity product margin of $0.35 per gallon for the quarter. The production margin is down significantly, from $0.99 per gallon in Q3 2007, and $0.49 per gallon in the prior quarter. Year-to-date, our production commodity margin averaged $0.54 per gallon, versus $1.18 per gallon in the same period last year.

At quarter end, we had forward fixed priced ethanol sales contracts with a dollar value of $27.3 million, as well as 81.5 million gallons of forward index-based ethanol sales. Our forward corn purchased commitments consists of $18.5 million of fixed price contracts, as well as 6.4 million bushels of forward index-based purchase contracts. Additional details of our purchase and sales commitments are available in the 10-Q in the Commitments footnote to the Financial Statements.

Referring to the balance sheet on slide eight, our consolidated cash balance of $33.6 million, including restricted cash, was down slightly from total cash of $35 million at the end of the second quarter. We used cash during the quarter primarily to support operating losses and working capital needs at our production facilities, and to fund construction of the Stockton Project. At the end of the quarter, approximately $13.4 million was remaining to be spent on the Stockton Project to pay final construction invoices. Of this amount, approximately $10 million came from availability under our construction loan facility and restricted cash on hand for construction, and the balance of $3.4 million was additional equity that was contributed from our unrestricted cash.

In the third quarter, we completed our construction program and achieved our goal of 220 million gallons of installed production capacity. Our Stockton facility successfully completed performance testing at the end of the quarter, and in October, we made a final $24.2 million draw from our debt facility that was a return of our previously invested equity of the project. After funding required debt service reserves and the payment of final construction invoices, $15.7 million became available to the [parent] for working capital.

Going to slide nine, we show our operating facilities, consisting of Madera, Colombia, Magic Valley, Stockton and our 42% ownership interest in Front Range Energy. In the third quarter, we reduced our operating rate at some of our production facilities below their designed capacity. As we have previously stated, we will continue to adjust our production levels according to market conditions. That concludes the summary the financial results for Q3. I would like to turn it back to Neil for further comments and the Q&A.

Thank you Joe. The market environment in the ethanol business continues to be very challenging. While demand continues to grow, ethanol supply has increased approximately 50% year-over-year. While the physical market is actually reasonably well balanced, with total US inventory holding constant at around 22 days, the supply has grown faster than minimum levels of blending required by the Renewal Fuel Standard, which has resulted in pricing power favoring the buyers.

In 2009, we believe there will be a shift in this dynamic, as 1.5 billion gallons of new minimum demand will be required, and new capacity coming online will be one billion gallons or less. With the strains on ethanol margins resulting in some existing capacity, currently being off line in new capacity, and the industry being delayed, we expect supply-demand balances to tighten considerably over the next 12 months. We will certainly need new capacity to be built to meet the Renewable Fuels Requirements in 2011, if not before. Margins will have to improve to not only provide a better business environment for existing capacity to operate, but also to attract investment and needed new production.

The new Obama administration, we believe, will continue to support the rapid growth of the biofuels industry. In fact, in his campaign platform, President-elect Obama called for an increase of the Renewable Fuel Standard to 60 billion gallons by 2030, from the 36 billion gallons currently required by 2022. Combining continued policy support for the rapid growth of the ethanol industry with a significant value that ethanol delivers to the transportation fuel supply, should result in a much healthier ethanol industry as we move through 2009.

Low Carbon Fuel Standards will be the next wave of policy support interaction for the growth of our industry. California is pioneering this effort, and will be finalizing the rules early next year to implement Governor Schwarzenegger's Executive Order calling for a 10% reduction in the carbon intensity of fuels by 2020. We believe California's program will be the model for the national Low Carbon Fuel Standard, which was also a policy goal in President-elect Obama's campaign platform.

Expanded ethanol use remains the quickest, most cost effective way to achieve meaningful CO2 reductions from fuels. Our business strategy of building energy-efficient plants that use 30% less process energy than typical midwest plants, by avoiding [drawing] our co-product distiller screens, gives us a distinct, competitive advantage in the Low Carbon Fuel regulatory environment. While average US ethanol reduces the lifecycle CO2 emissions by roughly 25%, the ethanol that Pacific Ethanol produces reduces CO2 emissions by over 40%. We will be able to monetize this advantage as state and national Low Carbon Fuel regulations are implemented.

The Renewable Fuel Standard's requirement for advanced biofuels, combined with low carbon fuel standards, will also provide strong impetus for the rapid growth of cellulose ethanol. We continue to develop our strategy to be an industry leader in this area. Our geographical position and initiatives supported by our collaboration with BioGasol of Denmark and the Department of Energy, are moving us toward an integration of cellulose technology into our current corn ethanol production platform. Michelle, at this time, please open the lines for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Joe Gomes, of Oppenheimer. Please proceed.

Good morning. Hey, I was wondering if you guys might be able to just give me the amount of DDG sales in the quarter, and what your average price was.

I'm sorry, could you repeat the question.

Yeah, I'm just trying to get the ddg sales in the quarter and what the average price for those were?

We don't actually break those out, Joe.

Okay.

But, you can you know certainly back into, if you look at our co-product return, from a modeling standpoint, you can probably look at work with the co-product return number based upon our corn, the typical amount of distillers grain versus the corn used.

Right, I'll also ask my typical question on the pursued dynamics, anything new going on there?

Yes, we're still working very diligently with the Pursued Dynamics, the status there, and we do believe that it is going to result in meaningful yield improvements. Some of the operating issues that we ran into when were putting it into commercial operations required us to work with Pursued Dynamics to really reconfigure and expand the equipment so that we can be having the units more integrated and be able to clean it off line while we continue to operate. So it's essentially putting in a new unit that is currently being constructed, so we hope by the end of the year, early next, to have that new equipment installed and continue with the testing regime.

Okay, and I was just wondering on liquidity issue, if I was doing some quick back-of-the-envelop calculations hearing Joe correctly, with the money you got back, the final draw down on the debt facility, it sounded like in October you had roughly $36 million worth of cash left over for use of working capital purposes. Is that somewhat in the ballpark?

Well, we don't give forward guidance on exactly where we were, but you can see from the end of the quarter, the cash on the balance sheet was a bit over $30 million, and it was actually roughly the same as it had been the prior quarter. Subsequent to that, we did get the additional return of the equity that Joe talked about.

Okay, and one last one on the SG&A. You mentioned about, it would be going down on a per gallon basis and on a percentage of revenue basis, when on an actual dollar basis, I know it has been coming down, is this level today, or in the third quarter, is that a good level to be modeling, or do you still think there is more to wring out in that?

Well, there is probably a little bit more to wring out in that, Joe. The SG&A was impacted by our Stockton facility.

Right.

Us bringing it on line, and plus we have got a number of initiatives currently in place to reduce SG&A. So, I think you're going to see a reduced SG&A number in the future, but I really can't comment on what that number would be.

Okay. Thanks guys.

Thank you, Joe.

Your next question comes from the line of Jinming Liu of Ardour Capital, please proceed.

Hi, there is this is [Shaun Lockman] for Jinming, quick question just in terms of your marketing business, you talk as it being a more increased percentage of your total ethanol sales. Can you shed some light on that, are you anticipating buying more ethanol in the fourth quarter, or how are you finding the market in terms of getting a hold of it and reselling it?

Well, it currently represents about 50%. That proportion was down slightly from the prior quarter, so we're very responsive to market dynamics and opportunities. We are seeing good growth in the demand for ethanol in our market, specifically as California moves from a 5.7% to a 10% blend over the next 12 months, so we will certainly evaluate opportunities to grow our marketing business along with our production.

Great. One other quick question. Prices have continued to sort of pull back in fourth quarter. Is it fair to assume that we could see some more inventory write-downs in the coming quarter?

The inventory write-downs, we don't want to comment on the current quarter on the - - on the future quarters, but it is solely going to be dependent on where the commodity markets go. So it is highly uncertain, and you're just going to have to watch the commodity markets.

It all depends on your assumption on where ethanol prices will be at the end of December, and that is awfully hard to call, given the current volatility of all commodity markets.

Okay, thanks guys, that's it for me.

Your next question comes from the line Pavel Molchanov of Raymond James, please proceed.

Good morning guys, two questions, first on your liquidity. Do you still have a $30 million loan payment that is due in the first half of '09?

Yes, that is true. And it's due to a strategic partner, Liles, and we are talking with Liles currently, and have been talking with them throughout both the third quarter and like I indicated currently, about a possible restructuring.

Understood, and if you do need to make the pre-payment, can you talk about some of the options for raising that cash?

That would be conjecture on our part at this point, but obviously it would be dependent upon where the margins were and what kind of cash is being generated by operations. And we obviously have options and access to debt and equity markets as well.

Great, and the second question is, in third quarter, seems like third party sales kind of dropped off a little bit. Can you just tell us what you're seeing in terms of production from some of the smaller private producers?

It would probably be inappropriate for us to comment on partners that we work with, but certainly you have seen generally industry reports on how some production has come off line and some has been reduced. So, certainly we're seeing that across the industry. Our own reduction on third party sales was also a function of not only our own production increasing, but really our taking a fairly disciplined approach to the market, and we were walking away from business that we thought was inappropriately priced. So it is part of what we're able to do with the marketing, the production business, is that we can calibrate our sales and how much we buy, versus how much we produce, depending upon our view of the market.

Understood, and on that last point as a follow up, I know you haven't historically given marketing margins, but have you seen any noticeable change in marketing margins let's say, in the last two or three months?

No, so many of our deals, we take a pretty low risk view, and we have marketing agreements that are based upon a fixed margin, so typically they don't change all that much. Certainly you can see it from our inventory write-down when you are purchasing product and selling into a falling market, we do end up taking a hit on inventory as the market goes down, and conversely pick that up on the way when the markets go up.

Understood, thank you very much.

(OPERATOR INSTRUCTIONS) And you do have a question from the line of Ian Horowitz. Please proceed.

Joe I think you made a comment on the distiller grain side, that you had a high ratio of fixed priced contracts for the third quarter. Are those anniversaried, or (inaudible), or are we to expect another fourth quarter with a significant volume still remaining under these (inaudible question - microphone inaccessible)?

Well we normally don't comment on what is going to happen in the fourth quarter, but traditionally these fixed price contracts are renewed. They're called clock contracts; they're normally renewed in the late third quarter, early fourth quarter. I really don't want to comment on what we're going to be doing in 2009. And maybe I'll just leave my comments on that, unless Neil has got something further to add.

Well the only thing I would add Joe is correct, and there is still some of that contracting we have done obviously that it's reset at different values of corn. But just as we have been fairly close in on our going out and taking forward positions on corn and ethanol, we have tended to try to match up our our distillers grain sales as well, and we also are seeing a response on the part of the feeders, the dairies and feed lots are taking a similar view. So there is less long-term contracting that's going on in that business as well. So it is more weighted to contracts are shorter term, and often indexed to corn prices.

And still can you just run down the non-cash charges for the quarter again? You have an inventory adjustment of 5.6, a net derivative loss of 1.7. And I understand the Imperial ones as well, but were there any others that I missed?

It is would be 0.7 of non-cash compensation. And I think - -

Depreciation. Yeah, you remember the depreciation was that we provided?

$7 million, $6.9 million of depreciation about, and there was also a GAAP reserve of about $300,000. I think that would catch all of it.

Right, and then you have the $26.6 million impairment.

The reserve of 300 and then the depreciation. Okay great, thanks.

And your next question is a follow up from the line of Joe Gomes. Please proceed.

Just kind of following up on what Ian said on the co-product, you guys think you can get back to that mid-20 co-product return level?

It is our effort to increase the value of all of the products we sell. So Joe it is our effort to move that number up. Without offering guidance on that, we do see some indications in the market that we're going to be able to improve some value.

Okay thanks.

And that does conclude the question and answer session. I'll now turn it back to management for closing remarks .

Thank you all for participating on the call. Appreciate your interest and support, and look forward to speaking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.