Alto Ingredients Inc (ALTO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Pacific Ethanol Inc. third quarter 2010 results conference call.

(Operator Instructions).

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Rebecca Herrick. Please go ahead.

Thank you, operator. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of the quarter's achievements, and summarize the elements of the Company's recent restructuring. And then Bryon will provide details on the Company's quarter end results. Then Neil will return to discuss Pacific Ethanol's vision, and open the call for questions. Before we get underway, let me first inform you that Pacific Ethanol issued a press release yesterday that provides details of the Company's quarterly financial and operating results.

The Company also prepared a slide presentation for today's conference call. If you are not logged on to the webcast, and would like to view the slide presentation, you may do so on the Company's website at www.PacificEthanol.net. If you have any questions, please call Lippert Heilshorn & Associates at 415-433-3777. A telephone replay of today's call will be available until midnight Pacific time on November 23, by dialing 800-642-1687. International callers should dial 706-645-9291. The passcode will be 23660193. A webcast replay will also be available at Pacific Ethanol's website. Please note that information in this call speaks only as of today November 16, 2010, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we begin, I will review the Safe Harbor statement which can be found on slide one of the slide 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 presentation including without limitation, the ability of Pacific Ethanol to continue as the leading West Coast marketer and producer of low-carbon renewable fuels, expectations concerning future growth, market share margins, operational efficiencies and profitability, as well as new technologies, business opportunities, and new products and their effects, the ability of Pacific Ethanol to resume production at the Pacific Ethanol plants located in California, which is at the discretion of the third-party plant owner, expected demand growth for low carbon ethanol, the ability of the California plants to continue to qualify and ultimately receive payment 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, expectations regarding accounting treatment, and effects of Pacific Ethanol's 20% ownership interest in the entity that owns the four Pacific Ethanol plants, and the attractiveness of production facility valuations, relative to expected future valuations, 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 quarterly report on Form 10-Q for the quarter ended September 30, 2010. Also, please note that 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, and amortization, impairment of asset group, loss on the Company's prior investment in Front Range Energy, and gain associated with the Company's ethanol production facilities exit from bankruptcy. To support the Company's review of non-GAAP information later in this call, a reconciling table is included in the press release the Company issued yesterday afternoon. Likewise, to support the Company's review of pro forma balance sheet information later in this call, a reconciling table is included in the Form 10-Q filed yesterday, November 15, with the Securities and Exchange Commission. As a reminder, you may access the slide presentation today at 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 third quarter, we achieved significant milestones as we completed our restructuring. We led the Pacific Ethanol plants out of Chapter 11, in June, and in October we raised capital, enabling us to pay down existing corporate debt, and purchased a 20% ownership position in the four Pacific Ethanol plants. As a result, we now hold the single largest equity position in the plants. With a healthy balance sheet, we believe that we are well positioned to execute on our strategy of being a low-cost producer, efficient operator, and value-added marketer of low-carbon renewable fuel. By maintaining focus on our core business, our goal is to achieve long-term, sustainable profitability.

Our total ethanol gallons sold increased 70%, to 71.5 million gallons, as compared to the same quarter last year. During the quarter, our average ethanol sales price increased 12% to $1.93 per gallon, as compared to the same quarter last year. And rose at a higher rate in the quarter than that of average corn prices, resulting in an overall increase in plant operating margins. Overall, operating income improved to $1.2 million, from a loss of $9.9 million in the third quarter of 2009. Adjusted EBITDA also increased to $875,000, from the $115,000 in the third quarter of 2009. The Magic Valley and Columbia plants with a combined annual operating capacity of 100 million gallons per year continue to operate efficiently.

On October 6, we closed several important transactions to successfully recapitalize the Company, improve our balance sheet, and position us for continued growth in the ethanol industry. We raised approximately $35 million in cash, in a convertible note and warrant financing transaction. We sold our minority ownership interest in Front Range for $18.5 million in cash, at an attractive valuation in relation to market. We exercised our option, and purchased a 20% ownership interest in the four Pacific Ethanol plants for $23.3 million in cash. We retired approximately $17 million in corporate debt that was in default, including interest and fees. And we increased our cash reserves by approximately $10 million. Overall, by these actions, we were able to reinvest in the ownership of core production assets, at a time when plant valuations are offering considerable upside potential. We believe these transactions best enable us to drive our growth strategy, and maintain our position as the leading West Coast marketer and producer of low-carbon renewable fuels.

Our business model can be divided into three areas, asset management, marketing, and production. First, I'd like to discuss asset management. During the third quarter, under an asset management agreement, we efficiently managed the four Pacific Ethanol plants. Now as a 20% equity owner our interests are even more aligned to keep costs low and efficiencies high. Looking ahead, we may seek to provide management services for other third-party ethanol production facilities in the western United States, which would enhance the value of our asset management business.

Turning to marketing, Kinergy, our ethanol marketing subsidiary continues it's steady growth. We intend to further expand our relationship with our customers and our ethanol producers -- other ethanol producers and marketers, to sell higher volumes of ethanol. Last week, we announced an exclusive marketing agreement with AE Advanced Fuels Keyes to sell all ethanol produced by the 55 million-gallon per year ethanol production facility located in Keyes, California, which is expected to commence production in the first quarter of 2011. This adds to our portfolio of ethanol marketing agreements. To support these additional volumes, we have negotiated an increase in availability under Kinergy's credit facility. Pacific Ag Products, our feed marketing subsidiary, has established a strong business in wet distillers grains, or WDG, the high value feed protein product for the dairy and feed lot markets and the local markets surrounding the Columbia and Magic Valley plants. As the Stockton and Madera plants resume operations, we expect to continue on our success in serving the local markets with WDG.

Now turning to production. As we are now 20% owner of the Pacific Ethanol plants, we have begun to hire, train, and prepare to resume operations at the 60 million-gallon per year facility in Stockton, California. We expect to be producing ethanol at this plant next month. For the last several months, production margins have been positive, and through efficient operations and prudent risk management, we believe these margins are sustainable. Our goal is to resume operations to an annual rate of 200 million gallons at all four Pacific Ethanol plants. We believe the combination of the production from these plants, our marketing agreements, and our third-party ethanol business will enable us to meet an increasing share of the growing demand for ethanol. Through these efforts, we believe we can achieve profitability, and deliver high value to our stockholders.

Recent regulatory actions are in part, supporting the continued demand for ethanol. The 2010, 2011 California state budget which was approved on October 8, provided funding for the California Ethanol Producer Incentive Program or CEPIP, for which the Stockton and Madera facilities are eligible. CEPIP is designed to provide payments to eligible operating California ethanol producers under specific unfavorable ethanol corn crush margin conditions. On October 13, the Federal EPA permitted ethanol to be blended in gasoline up to 15% or E15, for 2007 and newer cars. Prior to this, fuel blends were limited to 10% ethanol. While we may not see an immediate impact to our sales, it is a much needed start as a way for refiners to meet the expanding requirements under the renewable fuels standard.

Starting in January 2011, California's low carbon fuel standard will be implemented. It requires refiners to reduce the carbon intensity of their fuel by 10% over the next nine years. Pacific Ethanol provides refiners with the most effective way to comply with that regulation, as the ethanol produced by the Pacific Ethanol plants and others for whom we market, have the lowest carbon rating of ethanol commercially produced in the United States, according to the California Air Resources Board. In addition, California voters rejected Proposition 23 in the recent election, in effect, supporting California's low carbon fuel standard. With that, I will turn the call over to Bryon, our CFO, to discuss the financial results in more detail. Bryon?

Thank you, Neil. Before I start with the review of our financial results, I'd like to discuss some of the changes that have taken place in 2010 that have affected our reporting. As you recall through the end of 2009, we consolidated the financial results of Front Range. However, due to changes in accounting standards beginning in 2010, we ceased consolidating these results, and have accounted for our interest in Front Range under the equity method. Through the end of June, our financial statements include the financial results of our four Pacific Ethanol plants, when we owned 100% of the plants. But at the end of June, the ownership of the four Pacific Ethanol plants was transferred to New PE Holdco, as a part of the exit from bankruptcy. Accordingly, our results for the third quarter do not include the results of the Pacific Ethanol plants.

We did, however, continue operating the plants under the asset management agreement, which resulted in approximately $700,000 of asset management revenue in the quarter. Of course, for all periods presented, we earned revenues from our marketing activities by Kinergy and Pacific Ag Products, which include the marketing ethanol and feed produced by the Pacific Ethanol plants. As further comparison, in 2009, of the four Pacific Ethanol plants, only the Columbia facility was operating. In 2010, both Columbia and Magic Valley facilities were operating. Now looking forward, as a result of our recent 20% equity purchase, in the Pacific Ethanol plants, and based on our significant involvement in both management and marketing, we expect to again consolidate the financial results of the four Pacific Ethanol plants with our financial statements, beginning in the fourth quarter of 2010.

As you can see, our third quarter 2010 results are somewhat unique as compared to other quarters. Indeed, the change made over the past nine months, make it difficult to effectively measure current performance against prior results on a comparable basis. Nonetheless, the third quarter results do provide a view into the operations of the Company, excluding production activities. Keeping these changes in mind, I will now turn to the financial review for the third quarter ending September 30, 2010. Net sales for the third quarter of 2010 were $46 million, which included asset management and marketing fees for the Pacific Ethanol plants. Net sales were $71.9 million for the third quarter of 2009, and included sales from ethanol production. Total gallons sold increased 70%, or 29.4 million gallons to 71.5 million gallons in the quarter, compared to 42.1 million gallons in the prior year quarter. Of this increase, 14.2 million gallons was due to Magic Valley facility operating in 2010. The facility was idle for most of 2009. The balance of the increase is attributable to our third party sales.

Gross profit for the third quarter of 2010 was $4 million, or 9% of net sales based primarily on the marketing revenues and asset management fees earned during the quarter. For the third quarter of 2009, consolidated financial results of the Pacific Ethanol plants and Front Range, gross loss was $4.5 million, which included $8.3 million in depreciation related to the fees production facility. SG&A expenses decreased 15% to $2.7 million from $3.2 million, reflecting both a reduction in professional fees due to our ongoing cost-saving efforts, and the deconsolidation of the financial results of the Pacific Ethanol plants and Front Range.

Operating income improved to $1.2 million in the third quarter of 2010, from a loss of $9.9 million in the third quarter of 2009. During the third quarter of 2010, we recorded a $12.1 million non-cash loss on our investment in Front Range, as the sales price of our interest was less than our carrying value of $30.6 million, based on our original cost basis established in 2006. During the third quarter of 2009, we recorded a $2.2 million non-cash charge for the impairment of our Imperial Valley plant construction project. For the third quarter of 2010, net loss available to common stockholders was $12.9 million, which included the non-cash Front Range charge. For the third quarter 2009, net loss available to common stockholders was $12.8 million, which included the non-cash Imperial Valley impairment charge. Adjusted EBITDA for the third quarter of 2010 was $875,000, up from $115,000 for the third quarter of 2009.

Now I will review the nine months ending September 30, 2010. Net sales for the first nine months of 2010 were $194.1 million. For the first nine months of 2009, net sales were $228.7 million. For the nine months of 2010, net income available to common stockholders was $83.2 million, which included a non-cash gain from bankruptcy exit of $119.4 million, and the non-cash Front Range charge. For the first nine months of 2009, net loss was $65.7 million, which included the non-cash Imperial Valley charge. Adjusted EBITDA loss for the nine months of 2010 was $12.3 million, an improvement from a $22.5 million loss for the first nine months of 2009.

Turning to our balance sheet, at September 30, 2010, cash was $1.6 million, and working capital was $7.4 million. As Neil mentioned, we entered into a series of transactions that closed on October 6, 2010, that resulted in an improved and restructured balance sheet. Had all these transactions occurred at the end of the quarter, we would have had cash of $18.6 million, and positive working capital of $34.7 million. During the quarter, we also increased Kinergy's working capital line of credit from $10 million to $15 million. With these changes, our balance sheet as well as our overall health, as a Company has greatly improved, providing a foundation for additional growth. Now I'd like to return the call to Neil.

Thanks, Bryon. Our mission continues to be the leading West Coast marketer and producer of low carbon renewable fuels, in areas where we believe we have a sustainable, competitive advantage. We also believe there are opportunities to further consolidate this leadership position. We are going to work to optimize the performance of the Pacific Ethanol plants, obtain better yields, and lower all of our input costs. Over the next year, we intend to introduce new technologies and business opportunities at the Pacific Ethanol plants that will enhance the yields on corn, reduce their carbon intensity, deliver new products to customers, and further utilize the plant assets to increase profitability.

We continue to market significantly more ethanol than we produce today. And given our unique position in the market, and its projected growth, we have the opportunity to expand our market faster, than we are expanding our own production. In addition, we expect to leverage our assets to grow the feed marketing business beyond our existing feed production. As I talked about earlier, both state and federal regulations are supporting this demand for additional ethanol production, in order to meet requirements to increase the amount of renewables in the transportation fuel supply.

It is important to note that in late November, early December, Congress will be dealing with the tax incentive, and determine if it will extend the Ethanol Blenders Tax Credit. While the tax credit extension will positively impact our business, we believe that we are well-positioned in the market to be successful, even if it is not extended. Finally, we are confident that the restructured Pacific Ethanol offers a strong platform for increasing stockholder value. With that, operator, I'd like to open the call for any questions.

(Operator Instructions).

Our first question comes from Paul Resnick of Olympia Capital. Please go ahead.

Good morning, and congratulations on the quarter. Madera. Do you have any -- other than sometime next year, any feeling for when that plant could start up?

We have not offered any more specific guidance on that, Paul, other than it is our objective to start that plant up as soon as it is practical, and as soon as we have the support from the other owners as well to do that. I think it is largely an issue of market conditions. While they are very strong and we continue to expect them to be strong going into 2011, given some of the uncertainties here at the end of the year with the tax credit, I think it is definitely a situation where we want to get into January, and assess the situation on the ground at that time.

Okay.

But it's, just as these other facilities have been -- these plants have been maintained in such a way, that with a very short notice, really about 60 days, we can start up any one of the shut down plants.

The SG&A came down in the quarter. Do you foresee additional reductions in SG&A? And also, will the fourth-quarter SG&A include costs regarding the transactions that happened October 6?

Paul, it's Bryon. We don't provide guidance. But again, the SG&A that you are seeing on this -- with regards to this quarter -- is not, for lack of a better term, biased by the production facilities. That being said, we do continue to focus on reducing our SG&A costs and expenses. And what was the other part of the question?

The financing costs, having to do with the transactions that happened October 6, would those costs show up in SG&A in the fourth quarter?

Yes, certainly the costs associated with financing will show up in the fourth quarter. And then I guess, what I would also indicate, is you'd asked if the plant's SG&A would start showing up in the fourth quarter. That is, indeed, correct. We anticipate that we will start reconsolidating those financials.

Okay, so--?

I would add on SG&A, Paul, that we are always looking for opportunities to further reduce the SG&A. And as you can see over the last 12, 18 months, we've done a fairly remarkable job of I think getting our SG&A down to a level that is very, very competitive in the industry. And I think the real opportunity is, as we grow, continue to grow the business and start up these plants, that we can actually do that without increasing our SG&A by any measurable level. Because clearly, we are, given the volume growth, there are new demands on the corporate staff. And I think we have put together a team here that is capable of supporting significant growth, without any material increase in SG&A. I think that's probably the best way to think about it, on a go-forward basis.

Okay. And the California subsidy, relative to current margins, I'm trying to remember again, I thought that subsidy kicked in pretty aggressively, when margins were still not too bad. Where do the current crush spread stand, relative to the California plant?

Well, the crush spread as is defined in our program, and as we look at it, which is CBOT corn and -- a function of CBOT corn, and OPIS LA ethanol It kicks in at a level when that crush spread drops below $0.55. We were hovering around $0.50 last week, a little bit lower than that if you take a snapshot of yesterday. So we would be qualifying for some payments, starting when that program is put into final position for next year, we would be generating some payments on that program today.

Great. Thank you. That's all I have.

Thank you.

Thanks, Paul.

(Operator Instructions).

We do have a question from (inaudible) of Marblegate Asset Management. Please go ahead.

Hi, guys. Neil, would you mind providing a little more detail on VEETC, and what you think will end up happening there, if you use your crystal ball a little bit, but also how that could impact the business? And then separately, if you could comment on what is going on in the export side of the business? A couple of other ethanol producers have talked about that growing, in light of sugar prices.

Sure. The VEETC, that's a very cloudy crystal ball, as you can imagine.

Sure.

Given the current state of affairs in Washington. But the situation is that we have the lame-duck group coming back into -- going back to work here. And they will be in session until the middle of December or so. And this is the time and opportunity for us to get that tax credit extended. The way that it is shaping up right now, is that it looks pretty clear that there is going to be a vehicle, a tax vehicle, that would be an extension of the Bush tax cuts. And it appears that there is at least some growing consensus to make that a relatively short-term extension. And that would be that the compromise has worked out between the Congress and the President and the two parties, which becomes a very natural vehicle then, for a relatively short-term extension one year or so of VEETC. That the White House has supported that.

We have tremendous bipartisan support in Congress, whether or not we actually even have a vehicle remains to be seen. But we are optimistic, that if there is a vehicle, that there will be support for extending the tax credit in this lame-duck session. Obviously, no certainties on that, but we are cautiously optimistic that there is an opportunity for that to happen. I would say that if it does not happen, there is an opportunity early in the next Congress to extend it, and make it retroactive. So that would be a fall back position on that. And if it's not extended at that time, when you asked about the impact, the real driver today is the renewable fuel standard, which is requiring the 12.6 billion gallons of conventional ethanol -- corn-based ethanol next year. That is -- our current production rates are bit over 13 billion gallons, so you can see that's quite a driver, even without the tax credit.

The impact would be, that you do still have, with that tax incentive discretionary blenders, 10%, 15% of the market is blended because of the economics of doing so. And you might see some of that reduced. So there would potentially be, given the current relationship between corn and gasoline, you might see some drop in demand that could have a negative impact on the overall supply demand balances and margins. So certainly, it is of concern. And we are keeping a close eye on it.

In our own market, we are supplying almost exclusively into markets where there are requirements. So we do not think that it would have any impact on our own customer base. But to the extent it has an overall impact on supply and demand, there could be some impacts. And then it's all about who is the most efficient operator and low-cost, high-value performer in the market. And we feel very good about our position in that regard.

On the exports, we are on track to export more than 300 million gallons of ethanol from the United States this year. That is quite a shift from past years, where we have been a net importer. As you've mentioned, it is due to world sugar prices being at very 15-year highs and corn ethanol has been the lowest cost source of ethanol for the world markets, specifically in Europe and Asia. That continues today. That has certainly helped support the supply and demand. and is in part why margins have been fairly strong in the last number of months.

Thanks.

(Operator Instructions).

And I am showing no further questions, and would like to turn the conference back over to Neil for any closing remarks.

Ali, thank you very much. We appreciate everybody's time, and support of the Company. We are very optimistic about the future growth of the industry, and our business. And we will talk to you soon. Thank you.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect, and have a wonderful day.