Alto Ingredients Inc (ALTO) 2010 Q2 法說會逐字稿

Ladies and gentlemen, good morning. At this time, I'd like to welcome everyone to the Pacific Ethanol Incorporated second quarter 2010 results conference call. Today's conference call is being recorded. At this time, all participants will be in a listen-only mode. A question and answer session will follow the Company's formal remarks. (Operator Instructions).

And now, I would like to turn the call over to Rebecca Herrick. Please go ahead, ma'am.

Thank you, Shawn. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of the financial highlights, recent accomplishments and competitive positioning. Bryon will follow with a detailed review of the quarter-end results. And then Neil will return to discuss the Pacific Ethanol vision, and open the call for questions.

Before we get underway, let me first inform you that Pacific Ethanol issued a press release yesterday, which provides details of the Company's quarterly financial and operating results. A replay of today's call will be available until Midnight, Pacific Time on August 19, by dialing 800-642-1687. International callers should dial 706-645-9291. The passcode will be 91992580.

A webcast replay will also be available at the Pacific Ethanol website. If you have any questions, please call Lippert Heilshorn and Associates at 415-433-3777. Please note that information recorded on this call speaks only as of today, August 17, 2010, and therefore you're advised that the time-sensitive information may no longer be accurate as of the time of any replay.

Before we begin, I will review a Safe Harbor statement, which can be found on slide two of the presentation. Management's comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Information about the potential factors that could affect the Company's financial results is available in the Risk Factors, as updated in the Company's SEC filings.

With the exception of historical information, the matters discussed in this call, including without limitation, the ability of Pacific Ethanol to continue as the leading West Coast marketer and producer of low carbon renewable fuels, the ability of Pacific Ethanol to resume production at the California plant which is at the discretion of the third party plant owner, the ability of Pacific Ethanol to successfully staff, manage, and operate the four ethanol production facilities, and the expected renumeration for those services. If it elects to exercise its option, the ability of Pacific Ethanol to raise additional debt or equity capital, or both, to timely finance the purchase price for up to 25% of the ownership interest in the four ethanol production facilities, the ability of Pacific Ethanol to grow its business and generate revenue, earnings growth, and increase its market share. The ability of the California plants to continue to qualify, and ultimately receive payments, under the California Ethanol Producer Incentive Program, the ability of the State of California to fund the program payments, given California's challenging fiscal environment, and the ability of Pacific Ethanol to restructure its remaining indebtedness are forward-looking statements, and considerations that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ from those statements.

Pacific Ethanol refers you to the risk factor section contained in Pacific Ethanol's most recent Form 10-Q, filed with the Securities and Exchange Commission on August 16, 2010, and its Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.

Also, please note the Company uses financial measures not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the reported financial results, as determined in accordance with GAAP. Adjusted EBITDA is defined as unaudited earnings before interest, taxes, depreciation, amortization and gain associated with the Company's ethanol production facility's exit from bankruptcy.

As a reminder, you may access the slide presentation today at the Investor section of the Company's website at www.PacificEthanol.net.

It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thank you, Rebecca, and thank you all for joining us today. During the second quarter 2010, we posted improved financial performance. And over the past several months, we have achieved several major milestones, including leading the production facilities out of bankruptcy. As a result of these accomplishments, we believe now is the appropriate time to reinitiate quarter-end conference calls.

Today we will be addressing those who are new to Pacific Ethanol, as well as those who are familiar with our Company. To educate the first group, I will start with a brief synopsis of Pacific Ethanol, our mission, our business strategy, and discuss our recent highlights. Then Brian will review the financials in greater detail. I will return to comment on the market, and our growth opportunities, after which we will open the call to questions.

Now let me begin with a review of some of the Company's recent highlights. I will talk more about the ethanol industry later in my remarks. However, it is important to note the overall industry outlook has improved, and presents opportunities for Pacific Ethanol, particularly as the demand for ethanol increases, with no new ethanol plant construction having been initiated in the last two years. Crush margins, while not optimal, have improved. In the face of what has been a challenging market, we have delivered significantly improved financial results.

For the second quarter of 2010, we grew ethanol sales in total gallons sold, from our production and marketing businesses compared to last year. Combined with prudent cost management, we improved adjusted EBITDA to negative $6.7 million, compared to negative $15.1 million in the second quarter of 2009.

In addition, we lowered our outstanding principal amount of indebtedness. And we successfully completed the financial restructuring of the production facilities exiting bankruptcy June 29. As a result, we have dramatically reduced Pacific Ethanol's total liabilities by $294 million. In summary, we are stabilizing our Company by establishing predictable, recurring revenues, and a platform for continued growth.

Pacific Ethanol's mission is to be the leading West Coast marketer and producer of low carbon renewable fuels, where we believe we have a sustainable competitive advantage. We produce, manage and market ethanol, and its co-products. I will discuss our business activities in the order as they occur along the value chain.

First, I will review our ethanol and feed production. Pacific Ethanol has the only existing business model in the industry, integrating destination plant production, grain procurement, marketing and logistics. While there are a few individual and separately owned destination plants, they are not integrated with other production facilities, and do not have the marketing and asset management capabilities of Pacific Ethanol.

A destination plant is one that is located in the markets where it sells its fuel and feed products. This creates several advantages. First, we provide more efficient distribution of ethanol to markets than by shippers of ethanol from the Midwest, to those same markets, avoiding double handling costs. We also produce the co-product wet distillers grain, or WDG, which is a more nutritious animal feed, eliminating approximately 30% of total plant energy costs required to dry grain for long distance shipping. These transportation and energy cost efficiencies support our low cost and high value production and marketing business model, and contribute to the fact that we have secured our position as a producer of ethanol with the lowest carbon rating of commercially produced ethanol in the United States, according to the California Air Resources Board.

Next I will discuss asset management of production facilities. Upon reorganization of the production facilities, we have continued our asset management contracts for the four plants that have the capacity to produce 200 million gallons annually . The current owners of the plants recognize the value Pacific Ethanol offers, based on our history, knowledge and expertise with these production facilities. Under these agreements, we receive an asset management fee, delivering stable revenue to PEI. In addition, we can earn production profit-sharing incentive fees, thereby providing an upside.

We are efficiently managing operations at the plants. The Pacific Ethanol Columbia plant in Boardman, Oregon, and the Pacific Ethanol Magic Valley plant in Burley, Idaho, are operating at full capacity together, at approximately 100 million gallons annually. The Stockton and Madera California plants, which also have a combined operating capacity of 100 million annual gallons, while currently idle, are being well maintained so that they can restart quickly and efficiently. The goal is to resume operations at the idled plants, when there is an economic advantage to do so.

We believe that the recently announced California Ethanol Producer Incentive Program, or CEPIP, for which the Stockton and Madera facilities are eligible, provide an additional reason to restart these facilities. The CEPIP is designed to provide payments to eligible operating California ethanol producers under specific unfavorable ethanol and corn crush margin conditions. Conversely, under exceptionally favorable crush margin conditions, participants will be required to reimburse the State for any outstanding CEPIP payment balances. Current funding is subject to final adoption by the State of California for its 2011 fiscal year budget. In addition to our asset management activities, we continue to implement working capital, cost management, and efficiency improvement programs.

Finally, I will discuss our marketing subsidiaries, Kinergy and Pacific Ag Products. Kinergy markets ethanol in western United States markets, sourcing supply from the plants, and from third parties across the country. Kinergy offers value to its customers beyond simply marketing a commodity, including marketing to a broad range of customers, including the large oil refineries and small independent refiners and distributors, offering unique services for delivery and storage logistics that reduce the cost for its customers. And providing reliable and immediate delivery of ethanol through multiple terminal locations, enabling customers to efficiently manage their inventory and supply. In doing all of this, Kinergy has provided a stable growth platform, even during periods of challenging market conditions.

Since Kinergy sold the ethanol from the four production facilities, Kinergy was negatively impacted by their bankruptcies. That said, we were able to quickly adjust, and have strengthened our foundation of suppliers and customers. As a result, Kinergy has delivered quarter-over-quarter sales growth for the last four quarters, maintaining a position for long term sustainable growth.

We expect to continue this growth by adding key resources to strengthen our position in our core western markets. Our goals for the marketing business are to increase volume within the existing customer base, add new customers in our core markets, and further stabilize our earnings. We believe this will deepen our market share, expand our business, and minimize risk.

Ethanol blending continues to rise in all our markets. Further, in January 2011, new low carbon fuel standards are scheduled to be implemented for all blenders of gasoline in California. We believe these factors provide Kinergy the opportunity to generate substantial growth.

In addition to Kinergy, Pacific Ag Products, our animal feed marketing subsidiary, procures the corn for and markets the wet distillers grain from the plants, to local cattle feed lots and dairies. Currently, the business is focused on delivering value to the production subsidiaries in which Pacific Ag Products receive a service fee for marketing and distribution. Longer term growth for Pacific Ag Products may take the form of additional service and logistics in the feed marketing business. That is a brief recap of our primary business activities.

And with that, I will turn the call over to Bryon McGregor, our CFO. Bryon?

Thank you, Neil. I will begin with a review of our performance for the second quarter ending June 30, 2010, compared to second quarter ending June 30, 2009. We reported net sales of $76.8 million, an increase of $6.6 million or 9% compared to $70.1 million. This growth is primarily due to an increase in sales from the Magic Valley facility, partially offset by a change in reporting of our 42% investment in Front Range Energy. Prior to January 1, 2010, we consolidated all Front Range sales volumes in our reporting of net sales. Now we account for their results under the equity method, in which we report the earned marketing fees and include Front Range production in the total for third party gallons. Had we used the same method previously, our second quarter 2009 net revenues would have been $46.5 million. On this basis, we would have delivered $30.3 million net sales growth for the second quarter of 2010.

Total gallons sold were 65.4 million gallons, an increase of 88% compared to 34.7 million gallons. As noted, production and third party sales volumes are impacted by the accounting change. Of that total, production sales volume increased by 3.6 million gallons or 18%, to 23.5 million gallons, compared to 19.9 million gallons. And we increased third party sales volume by 27.1 million gallons or 183%, to 41.9 million gallons compared to 14.8 million gallons. The average sales price of ethanol decreased by $0.08 per gallon or 5%, to $1.67 per gallon compared to an average sales price of $1.75 per gallon.

Gross profit reflects maintenance and depreciation on four plants, even when fewer plants are in operation. Second quarter 2010 gross loss was $2.7 million, which included $2.6 million in depreciation, compared to $7.8 million, which included $8.3 million depreciation in second quarter 2009. We cut SG&A expenses in half to $3.2 million from $6.3 million, reflecting professional fees and general corporate cost reductions.

Net income available to common shareholders was $107.8 million, which included a non-cash gain of $119.4 million associated with the ethanol production facility's exit from bankruptcy. And a non-cash charge of $544,000 associated with the reduction of debt through the issuance of stock. This compared to a net loss of $27.4 million for the same period in 2009. Adjusted EBITDA was a negative $6.7 million, including $2.7 million of reorganization costs, compared to a negative $15.1 million, including $9.5 million of reorganization costs.

Now I'll review the six months ending June 30, 2010, compared to the same period ending June 30, 2009. We reported net sales of $148 million, down from $156.8 million, due to lower production gallons sold, which were partially offset by an increase in average sales price per gallon. Total gallons sold were 124.1 million gallons, an increase of 56% compared to 79.6 million gallons in the prior year. The average sales price of ethanol increased by $0.05 per gallon or 3%, to a $1.74 per gallon, compared to an average sales price of $1.69 per gallon for the same period in 2009.

Net income available to common shareholders was $97.7 million, which included the aforementioned gain, and a non-cash charge of $2.2 million associated with the reduction of debt through the issuance of stock. This compared to a net loss of $51.3 million. Adjusted EBITDA was a negative $13.2 million for the first six months of 2010, including $4.2 million of reorganization costs, compared to a negative $24.3 million for the same period last year, including $9.5 million of reorganization costs.

Now I will review our balance sheet at June 30, 2010. Cash was $2 million, compared to $2.9 million at March 31. Working capital improved from negative $62.2 million at March 31, to a negative $19.5 million at June 30. The ongoing Kinergy revenues, and new asset management agreement, will continue to contribute cash flow to the Company.

We continue to maintain significant excess borrowing availability under our $10 million Kinergy line of credit. Additionally, management is evaluating the other financial options, including those authorized at our recent annual shareholder meeting.

We completed the financial restructuring of the production facilities, which exited bankruptcy effective June 29. PEI disposed of $294.5 million liabilities, net of $175.1 million assets, and recorded a non-cash gain of $119.4 million. In addition, we further reduced the principal amount of our corporate notes payable by $9 million during the quarter, bringing the total reduction to $19 million for the year. Now our total corporate debt has been lowered to $14.5 million. We continue to work productively with our creditors to address the remaining obligations, and find suitable resolutions. In parallel to our efforts to capture future growth opportunities, we will continue our efforts to improve our liquidity position.

Now I would like to return the call to Neil.

Thank you, Bryon. I'd like to address some industry trends. Over the last five years, demand for ethanol has grown substantially, from approximately 3 billion gallons to 12 billion gallons annually. Even with this significant compound annual growth rate, the demand for ethanol continues to increase, due to favorable blend economics, and the federal requirements to increase renewable fuel in the country's transportation supply. The industry has met the challenge, and currently nearly 13 billion gallons of annual capacity is online to meet a minimum required 12 billion gallons of use in 2010, translating into a relatively tight relationship between supply and demand.

By 2015, the renewable fuel standard will mandate minimum demand for corn-based ethanol of 15 billion gallons, which will require new installed capacity. We believe that these trends will support ethanol production margin improvement necessary to support new investment in capacity.

The California Low-Carbon Fuel Standard, scheduled to begin on January 1, 2011, will require a 10% reduction in carbon intensity of all fuel sold in California by 2020. This is an ambitious goal. Blending low-carbon ethanol with gasoline is the single most effective means available to refiners to meet this new regulation. Pacific Ethanol, through both production and marketing, has a key strategic advantage, as it relates to the low-carbon fuel standard.

With the Federal Renewable Fuel Standard, and favorable blend economics, many states are approaching the maximum 10% ethanol blend allowed by the Federal Environmental Protection Agency for all cars. Our market region still contains new growth opportunities to reach the 10% limit. The EPA is reviewing the current 10% limit, and considering a petition to increase the ethanol blend level to between 12% and 15%. We are optimistic that this will occur, as testing has shown that all cars can run effectively on up to 15% ethanol blends, and higher. And this additional market access is necessary to meet the requirements of the Renewable Fuel Standard.

Overall for the Company, we intend to drive growth in production and marketing by strengthening our position in core markets, increasing volume with existing customers, as well as adding new customers. Finally, we are exploring our option to purchase up to 25% ownership of the plants. While we believe ownership would increase our operating leverage, we intend to evaluate all of our alternatives, and only proceed with a financial structure that would be accretive to our shareholders. In summary, today we have stable, core fundamentals, and a growth strategy to capture an expanding market.

With that, operator, I'd like to open the lines for Q&A.

(Operator Instructions).

Our first question comes from Paul Resnik with Olympia Capital.

Good morning.

Good morning, Paul.

I'm sorry, I got a little late to the call, so if you covered this, my apologies. What are your current time schedule or hopes, regarding starting up the California plants?

Well, we did address that, Paul in the call. But to review that again, we have qualified the two plants in California for the California Producer Incentive Program, which is contingent upon a final budget being passed in California, which we would hope would occur some time in September. We believe that combined with the low carbon fuel standard that gives a special advantage to the ethanol produced in California that begins January 1, that we are in a good position to start up the plants. But that is going to be contingent upon the factors that I mentioned, overall economic conditions in the marketplace, and ultimately, the agreement of the owners of the plants to start up the plants.

So that kind of gives a time schedule, all things working out, some time early next year?

That would certainly be allottable objective. We think that the market will need those gallons by then.

Very good. And secondly, on the remaining debt to Lyles, I guess the principal is $12.5 million, but there's also fees and accrued interest. What's the total debt there?

With interest and fees, the total is about $16.5 million.

Okay, very good. Thank you very much.

(Operator Instructions).

Our next question comes from [Robert Dulow] with [Pet Stop].

Hi. I was just curious if you could give a probability of buying the 25% of those companies?

I really can't give a probability on that. I can just say as I did say in the prepared remark,s that we are exploring all of our options and alternatives in that regard. And do feel that it makes sense for us to have an ownership position. But that is going to be contingent upon adequate financing, and a program, that is in a structure that is accretive to our shareholders. And we are certainly spending a lot of time analyzing that, evaluating that and we'll make that determination when the time is right.

Okay. Thank you.

(Operator Instructions).

I'm not showing any further questions at this time. I would like to turn it back over for closing comments.

Thank you. And thank you all for joining us today. Today, 2010 has been pivotal, market conditions have improved. The plants have exited bankruptcy. We are managing the operating plants efficiently. Kinergy has demonstrated substantial traction and growth. In summary, we are stabilizing our foundation, and are creating a solid growth platform. In addition, there are great growth opportunities that would be augmented by potential positive regulatory changes. Again, thank you for joining us on the call, and have a nice day.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.