Alto Ingredients Inc (ALTO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Pacific Ethanol Inc. fourth quarter and year-end 2010 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Becky Herrick. Ma'am, you may begin.

Thank you operator and thank you everyone for joining us today for the Pacific Ethanol fourth quarter and year-end 2010 financial results conference call. 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 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 into 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 Lipper/Heilshorn & Associates at 415-433-3777. A telephone replay of today's call will be available until midnight, Eastern daylight time, on Thursday, March 31, 2011.

To access the replay, please dial 800-642-1687. International callers should dial 706-645-9291. The passcode is 52248750. A webcast replay will also be available at the Pacific Ethanol website. Please note that information in this call speaks only as of today, March 29, 2011; and therefore, you are advised that time-sensitive information may no longer be available or accurate at the time of any replay. Before we begin, I will review a Safe Harbor statement which can be found on slide one 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 on the Company's risk factors as updated in the Company's SEC filings.

With the exception of historical information, the matters discussed in this conference call including, without limitation, the ability of Pacific Ethanol to continue as a leading West Coast marketer and producer of low-carbon renewable fuels; expectations concerning future growth, market share, margins, operational efficiencies, yields and profitability as well as new technologies, business opportunities, and new products and their effects and ethanol blend economics; projections concerning the relative use of conventional and advanced bio-fuels; the ability of Pacific Ethanol to resume production at the idle California plant 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 payments under the California Ethanol Producer Incentive Program, also called CEPIP; the ability of the state of California to fund CEPIP payments given California's challenging fiscal environment and the price of ethanol relative to the price of gasoline are forward-looking statements in consideration 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 Factors section contained in its registration statement on Form S-1/A filed with the Securities and Exchange Commission on January 27, 2011. Also please note that the Company uses financial measures not in accordance with Generally Accepted Accounting Principles, commonly known a 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. The Company defines adjusted EBITDA as un-audited earnings before interest, taxes, depreciation and amortization, fair value adjustments, asset impairments, loss on investment in Front Range and gains from bankruptcy exit. 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. It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thank you, Becky. And thank you all for taking the time to join us today. 2010 was a year of resurgence for Pacific Ethanol. During the year, we successfully restructured the Company, preserved equity value by retiring non-performing debt, and created a very strong foundation on which to grow. We are now well positioned to leverage our leadership in the industry, and our strength in production, marketing, and asset management to further grow our business, improve profitability, and build shareholder value. As you recall, in mid-2010, we led the Pacific Ethanol plants out of Chapter 11, giving the plants a fresh start in a growing market. The parent Company and Kinergy marketing, our ethanol marketing business, were never in bankruptcy, provided stability and growing revenues during that period.

On our last call, we discussed the activities that started off the quarter when we completed our convertible debt offering, sold our minority interest in Front Range, retired non-performing corporate debt, and reestablished a 20% ownership interest in the plants. We are very pleased to report an increase in net sales in gallons sold both year-over-year and quarter-over-quarter. Net sales were up 53% for the quarter, and 4% for the year. Total gallons sold increased 50% for the quarter and 57% for the year. We have established a strong foundation from which to grow our core business and our progress was evident as we presumed production at our 60 million-gallon ethanol production facility located in Stockton, California, increased sales at Kinergy and met operational targets at the plants.

Now I will provide a review of our three business areas -- production, marketing, and asset management. In production, the 60 million-gallon plant in Stockton exited the year at nearly full capacity, providing additional ethanol and feed to the local markets. Now with Stockton operating, we are best able to meet our customers' requirements for low-carbon fuel as mandated by the recently implemented California Low Carbon Fuel Standard. Our objective is to resume our operations to an annual rate of 200 million gallons, at all four Pacific Ethanol plants, to meet the increasing demand for low-carbon ethanol in the western United States. We continue to monitor market conditions and work with stakeholders to ensure we can quickly and smoothly restart production at the Madera plant at the appropriate time.

In marketing, Kinergy consistently delivers growth as it effectively markets all of the ethanol produced in California. Kinergy recently signed an ethanol marketing agreement with AE Biofuels Keyes, which is expected to restart its 55 million-gallon plant in Keyes, California, during the second quarter of 2011. We are successfully expanding relationships with our customers and other ethanol producers and marketers to sell higher volumes of ethanol and extend our logistical capabilities which enable us to grow our market share in an expanding market. Similarly, our feed marketing business is maintaining its strong growth as it now is managing the feed from the recently restarted Stockton plant.

Looking ahead, markets in the western United States such as Arizona, Utah, Colorado and Nevada are currently blending less than 10% and we are targeting these markets for additional growth. This is particularly true for areas such as Phoenix and Salt Lake City where we believe year-round ethanol blending will soon become the standard. In asset management, we continue to manage the four Pacific Ethanol plants effectively, keeping operating costs low and efficiencies high.

We are looking at options to introduce new technologies and invest in infrastructure with the objective of further improving yields, reducing input costs, and adding recurring earnings streams through additional coal product sales and leveraging existing infrastructure for increased service revenues. For example, we have advanced our relationship with Pursuit Dynamics as we demonstrate its ERS technology which is designed to improve yields and reduce operating costs. The trials are ongoing at our Columbia plant in Boardman, Oregon and we are encouraged by the results. Further, we are developing and expanding ways to increase other fuel and feed-related services at our destination facilities.

We believe we are well positioned within the industry to take advantage of opportunities for advanced biofuels. The renewable fuels standard includes increasing amounts of ethanol that are derived from those advanced technologies and the Low Carbon Fuel Standard in California rewards plants that reduce their carbon intensity and while these are more of a multi-year focus, we are developing strategies to introduce alternative feed stocks, reduce our dependence on natural gas, and integrate advanced biofuel technologies into our existing facilities. The overall demand for additional ethanol production is also supported by both state and federal regulations.

In late 2010, Congress extended the Ethanol Blenders Tax Credit for an additional year which provides blenders a financial benefit to increasing their ethanol usage. In late 2010, and early 2011, the EPA granted a partial waiver that approved the use of up to 15% ethanol blends or E15 in gasoline for vehicles made between 2001 and 2006. This extends the previous waiver that approved E15 for use in vehicles made since 2007. In total, over 60% of the vehicles on the road today are now approved for E15. We believe the EPA's action will help drive a significant increase in the demand for ethanol over time.

As you know, the Low Carbon Fuel Standard in California encourages the use of biofuels to reduce the carbon intensity of fuels sold in the state. Starting this year, refiners are required to begin reducing the carbon intensity of their fuels to reach the mandated 10% reduction levels by 2020. The Pacific Ethanol Plants provide the lowest carbon rated ethanol commercially produced in the United States according to CARB, and as a result, the Pacific Ethanol Plants offer refiners and other fuel companies the most effective solutions for complying with the Low Carbon Fuel Standard. While the current supply of biofuels is sufficient to meet the near term needs of refiners and others subject to the Low Carbon Fuel Standard, the current online capacity is not enough to meet the projected demand three or so years further down the line. In summary, Pacific Ethanol is very well positioned to meet the increased demand for low-carbon fuels in the western United States which is the largest fuel market in the country. With that, I will turn the call over to Bryon McGregor, our CFO, to review the numbers. Bryon?

Thank you, Neil. Before we review the financial results, I'd like to briefly discuss how we are reporting the Pacific Ethanol plants and Front Range for the quarter and year. Our financial statements include the results of the Pacific Ethanol Plants for all periods except for the three months ended September 30, 2010, in which the Company had no ownership interest. On October 6, 2010, we reestablished a 20% ownership interest in the plants, giving us the single largest equity position therein and as a result, we resumed consolidating their results in the fourth quarter.

Turning to Front Range, at the beginning of 2010, we determined we were no longer the primary beneficiary of Front Range and therefore, we ceased consolidating their results. Accordingly the quarter and year ended 2009 includes the results from Front Range whereas the quarter and year ended 2010 exclude them. In addition, on October 6, 2010, we sold our ownership interest in Front Range for $18.5 million in cash, the proceeds of which were used to eliminate non-performing debt to help re-establish our 20% ownership interest back into the Pacific Ethanol Plant and to support other general working capital needs.

With that as background, let's move to our financial results. For the fourth quarter 2010, net sales were $134 million, compared to $88 million for the fourth quarter of 2009. Total gallons sold increased 50% to 76 million gallons in 2010 compared to 51 million gallons in the prior year quarter. This growth was a result of the continued strong performance by Kinergy, high average ethanol sales price during the year, an increase in sales of other third party gallons and the addition of the Magic Valley facility production in 2010 that was effectively idle in 2009. Gross profits for the fourth quarter of 2010 were $1 million, compared to $1.4 million for the fourth quarter of 2009. The decline in gross profit can be largely attributed to the rise in the price of corn relative to the sales price of ethanol, over the two periods. SG&A expenses decreased 10% to $3.9 million from $4.3 million for the fourth quarter of 2009. This decrease stems from our continued efforts to reduce expenses and build incremental efficiencies in our back office activities.

Operating losses -- operating loss for the $3 million -- was $3 million for the fourth quarter of 2010, compared to a loss of $253 million in 2009 which included non-cash impairments of $250 million. Net loss available to common shareholders -- stockholders was $12 million in the fourth quarter of 2010, which included a $12 million non-cash charge related to the fair value accounting of our senior convertible notes and warrants issued during the quarter. This compares to a net loss of $246 million for the fourth quarter of 2009. Excluding fair value adjustments, impairment charges and gains, adjusted EBITDA improved 124% to a positive $2.2 million for the fourth quarter of 2010, from $1 million in the fourth quarter of 2009.

For the year ended 2010, net sales were $328 million, an increase of $12 million year-over-year. Net income available to common stockholders was $71 million for the 2010, and includes $24 million of non-cash charges and a gain of $119 million for bankrupt -- from bankruptcy exit. For the year ended 2009, net loss was $311 million, and includes $252 million in non-cash charges. Adjusted EBITDA for 2010 was negative $10 million, a 58% improvement from adjusted EBITDA of negative $24 million in 2009.

Turning to our much improved balance sheet. At the end of 2010, we had cash balances of $8.7 million, and working capital of $10 million, [an] almost $58 million improvement year-over-year. In the our current assets net of current liabilities of $10 million include the recognition of our $35 million convertible notes issued during the fourth quarter of 2010. When this debt is excluded from the calculation of our working capital, assuming we use common shares to repay this obligation, we exited 2010 with $48 million in available liquidity, an almost $96 million swing from December 2009. In addition, we continue to maintain excess availability under our lines of credit, further improving the Company's liquidity. In closing, we have made great strides in strengthening our balance sheet, improving liquidity, reducing both operating and overhead expenses, creating positive cash flow and generating an environment that can produce sustainable bottom line profitability. We remain focused in this regard. Now I'd like to return the call to Neil.

Thanks, Bryon. As many of you are aware, the current unrest in the Middle East and North Africa has led to a sharp increase in oil prices since the middle of February. During this time, ethanol has maintained its value as the trade that has a steep discount relative to the price of gasoline. Ethanol is the world's cheapest transportation fuel available today, supporting the increased use of ethanol in the nation's fuel supply. But with the additional economic and energy security benefits to increase the use of ethanol transportation fuel, we are currently near the 10% blend wall. However, we believe the implementation of E15 is not far off given this urgent need for higher level ethanol blends. This will provide attractive new fuel choices and benefits for refiners, consumers, and the nation.

Turning to politics. Ethanol continues to be at the forefront of the debate regarding reducing the US dependence on foreign oil for our fuel supply. Today, American-made ethanol is displacing the equivalent amount of oil we import from Saudi Arabia. We can and must do more. In fact, both former President Bill Clinton and US Agriculture Secretary Tom Vilsack recently spoke at a USDA forum on the need for the US to become energy independent. Summarizing their remarks, they stated that agricultural production and productivity can and must increase around the world. We must grow our own energy sources and continuously evaluate and refine our biofuel policies. Our country and our world needs to grow and supply more of our energy, fiber and food needs through agriculture; and finally, we need to implement thoughtful and aggressive policies to wean ourselves from our oil addiction. As someone who has been intimately involved in energy policy for the last 25 years, I firmly agree with President Clinton and Secretary Vilsack.

I believe there is no doubt that agriculture can and will supply more of our energy, fiber and food needs here in the US and throughout the world. The current corn supply in the US is enough to meet both food and fuel needs. In addition, we have the best farmers in the world with ever-increasing productivity. We need to leverage our leadership in agriculture to drive our domestic industries, strengthen national security, create and retain jobs and boost our economy by keeping more of our money in the United States. Pacific Ethanol was founded on these principles and the ethanol industry is at the cutting edge of providing both feed and fuel, while supplying and stimulating agricultural markets around the world. We are very active in federal and state initiatives and engage in discussions on the need to maximize the markets for our current technologies, such as corn-based ethanol while accelerating the commercialization of advanced technologies.

Our mission remains to be the leading West Coast marketer and producer of low-carbon renewable fuels and we are on mission. The renewable fuels standard continues to drive demand for ethanol production. We believe in 2011, supply and demand for ethanol are in a reasonable balance for the first time in several years. We believe we are well suited to capitalize on this opportunity due to our diversified business model, industry expertise, and strategy for growth. We are very focused on building shareholder value by improving earnings and generating positive cash flows while continuing to improve efficiencies in all aspects of our operating assets, maintaining the strong growth, trajectory of our marketing business, and leveraging our existing operating platform to improve profitability. With that, I'd like to open the call for questions. Operator, please begin the question-and-answer session.

Yes, sir. (Operator Instructions) Our first question comes from Gary Jacobi of Wexford.

Good morning. A simple question. When will you be posting results for your Pacific Ethanol subsidiary on IntraLinks?

That would be a question that would be answered by the agent, Gary. That's not one that we post.

Okay. Well, possibly you can direct the agent to post them as quickly as possible.

We'll (inaudible) do that.

Thank you. Our next question comes from Paul Resnik of Resnik Asset Management.

Good morning.

Good morning, Paul.

A couple of questions. On the CEPIP, given where the price of corn is and the price of Los Angeles ethanol is, would your plants currently -- are your plants currently qualifying for payments under that program?

The Stockton plant which is the one that's operating is qualified for those payments, yes.

So, that's it -- I mean the [crush] spread is less than $0.55, using --

That's correct.

Okay. And secondly, is there any further guidance you could give regarding Madera as to what the considerations are of that opening?

Well, it really is a function of market conditions, Paul. As you just observed yourself, the margins have been somewhat depressed in the first quarter, but what we have seen in the last number of weeks is a re-balancing of supply and demand on ethanol, an increase in demand for gasoline and a consequent increase in demand for ethanol. Very strong exports. So we have seen the relationship between corn and ethanol improve significantly over the last number of weeks. We do expect that to continue. We do believe that the low-carbon ethanol that we can produce in Madera is going to be in real demand here in the state of California. We just want to have a little more comfort level on the sustained margin environment. We certainly don't want to bring a plant online when the market is not calling for those gallons but we are monitoring that situation very closely and are prepared to start when we make that decision.

And lastly, certainly the fourth quarter reported results, the reported results were very much affected by the non-operating $11.7 million charge regarding the valuation.

Correct. I think it's very appropriate to note that taking that out, we had basically a breakeven quarter.

Right. When I was publishing estimates, that's about what I expected. Going into the future, is that going to be a number that's going to be positive and negative showing up a lot, that non-cash charge, or benefit as the case may be?

Yes, Paul, it's Bryon. There will be a charge but it will be related to -- the number will -- may differ depending on, one, if we've issued shares, depending on how we address the interest and principal payments and assuming that you use shares that--how that is-- There's the relationship of that to the price of that -- of the value of the convertible. So there will be over the next 12 months to the extent shares are used to repay that obligation.

Okay. Very good. That's all I have.

Thanks, Paul.

Sure.

Thank you. (Operator Instructions) And our next question comes from Chris Marai of Wedbush Securities.

Good morning, guys. Quick question. I saw the -- that you're planning to launch the PDX technology there at the Columbia plant. I was wondering if you could comment on how you expect that to influence your cost of goods?

We've been working with PDX now for going on two years and they're very encouraged, they said, by the cooperation and the technology that they have to offer. The system is -- continues to be demonstrated. It is online as part of our commercial operations as we speak today and we are working to fine-tune that machine and to be able to ascertain the benefits. We are very hopeful that it will both improve our overall efficiencies, our chemical use, and improve yields. So as you know, this is a business that is extremely sensitive to the yield.

We get relatively standard yields per bushel of corn in our plants and if we can improve that even by 0.10 or 0.20 of a gallon per bushel, that would literally be millions of dollars of a bottom -- direct bottom line benefit across our 200 million gallons. So we are very focused on this technology and very encouraged that it, in fact, will allow us to significantly improve our financial performance.

Great. Could you provide any percentage-based impact potentially from what you're seeing?

When we have results that we can stand behind in that regard, we will. So I think it's premature, Chris. It's just very difficult when you look at all the variables and starch differences in the corn, differences in the corn from year to year, differences in each individual fermentation. So we work very closely with PDX, coming up with a very robust methodology for evaluating all of that and when we have results that we can speak with more clarity on, we'll certainly share those with you.

Okay. Thank you. Much appreciated. Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Bryce Dille of JMP Securities.

Hi, guys. Thanks for taking my call. Just two quick questions. I guess, first, can you give me any sense of the potential financial implications to refiners here in California for not complying on the carbon standards side of the equation?

Well, it is a -- the refiners take compliance whether it's at state level or the federal level very seriously so it's really not even an issue of their not complying. They are complying and will comply. Refiners certainly look ahead two years to three years and say, we're not sure exactly how we're going to comply because it's a pretty aggressive target on the part of the state which is why they're very focused and interested on making sure that they're working with Pacific Ethanol to get the lowest carbon ethanol produced on the state -- in the country, that is. They -- there are financial penalties. The CARB has actually taken a fairly relaxed approach this year at the first year of compliance, so they're being very flexible in the implementation but I can tell you that it's -- while the monetary penalties are significant, what's even more significant to the refiners is not being in compliance with government regulations. So they do not even see that as an option and as I said, are complying and will continue to comply in the future.

Thanks for that. And then I guess, just secondly, because of your standing versus the Midwest fuels or other ethanol providers, are you able to garner premium pricing, either coming out of the new Madera facility or from your existing ethanol footprint being lower carbon versus competitors at this point?

Yes, we are. So the market, without going into any of our proprietary contractual information, there is a posting by Oil Price Information Service that is giving a spread on the carbon value. And that essentially is in and around on a spot basis that, $0.0025 per carbon point and we are about 18 carbon points better than your average Midwest ethanol. So on a spot market basis today, that's in and around a $0.04 plus premium per gallon. And that's in -- this is the first year where the refiners are only required to meet 0.25 of a 1% reduction in their carbon intensity, needing to get all the way to a 10% reduction over the next nine years. So our view is that, that premium is there today and will grow in the future.

Thank you. (Operator Instructions) Our next question comes from Joe Roseman of FBR Capital.

Hello, gentlemen. Given, I guess, where crush spreads have been and the volume coming out of Stockton, do you anticipate maxing the CEPIP payments this year or how soon this year?

Yes, if you run the math, you would see that based on the first quarter that we would be maxing out the CEPIP payments. The program was intended to be there in times when the market is particularly unfavorable from a crush spread perspective and that's certainly what the case in the first quarter. We are now in a situation where the margins have come back and the program has served its purpose, particularly in a delicate time when you're starting up an ethanol plant.

Understood. Thank you. Are you guys engaging in any hedging and if you're not, are you contemplating doing so?

We do some hedging. The -- we're -- our strategies has mostly been -- being fairly close to the market and make sure that we are buying corn and selling ethanol at the same time. The market today, there is not a tremendous amount on a physical basis of forward contracting of ethanol from which you then could forward purchase the corn and lock in the spread. There's some opportunity to do that in financial markets. We do some of that. We do lock positions and we take them more in the short-term basis, whether it be one week, one month or a number of months but it's all relatively close in which is fairly typical of the business. So the best risk management is to be a very efficient operator, high value marketer and to very closely tie your purchase of corn with the sale of the ethanol and that's what we do.

Very good. Thank you.

Thank you. Our next question comes from Gary Jacobi of Wexford.

Thank you. My question's already been asked and answered.

Thank you. Our next question comes from Kam Bansil of Mirabaud Securities.

Hi. Neil, sorry, just to follow up on an earlier question on the PDX system that you're looking to implement, one is, do you -- can you give us a bit more of a [stair] as to when you may have results from that? And secondly, you mentioned 0.10 or a 0.20 of a gallon per bushel additional in terms of yields. Is that something with results that you've seen to date which you think are quite possible?

Yes, we think that is quite possible and we will have results when we have them. It's never been our style to speculate on something that's potentially valuable and important as this and we want to make sure we're getting it right and working very closely with our plant and our partner, PDX, to do that.

Okay. And is there any -- I guess in terms of the other plants you have, do you have any time frame in terms of when you're looking to implement the technology in those?

The -- as soon as we have results that are definitive, our intent would be to, if they are positive, that we would roll that out to the other plants.

Okay. Perfect. And lastly, in terms of E15, how do you see that progressing in terms of the implementation?

There are a number of regulatory hurdles. It would have been a lot cleaner if the EPA just granted the E15 for all vehicles. So we do have a problem with the legacy fleet that is turning over rather quickly before the year 2000. The refiners that we speak to, certainly the majors are very concerned about liability so that's an issue for the regulators and potentially the Congress to address. Our bottom line view is that we need to have E15, certainly when we get into 2012, to meet the increased requirements under the renewable fuels standard. And given the energy security and economic development benefits of ethanol that are becoming clearer every day with the strife in North Africa and the Mid East, we think that, that is going to help drive what are now -- while they're not insignificant issues, they really are clean-up and regulatory items that need to be addressed so that we can liberate E15 and give the consumer access to higher level of ethanol blends because that's what the market is calling for and we need.

Perfect. Thank you very much for that.

Thank you. That does conclude today's Q&A session. I'd like to turn the call back over to Mr. Koehler for closing remarks.

Thank you. Thank you all of you for joining us today. We appreciate your time and we look forward to speaking with you after our next quarter. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.