Alto Ingredients Inc (ALTO) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol Incorporated First Quarter 2011 Financial Results conference call. At this time, all participants are in listen-only mode.

(Operator Instructions)

As a reminder this conference may be recorded. I would now like to turn the conference over to your host, Ms. Becky Herrick. Ma'am , you may begin.

Thank you, operator, and thank you everyone for joining us today for the Pacific Ethanol First Quarter 2011 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're 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 time on Wednesday, May 18, 2011. To access the replay, please dial 800-642-1687.

International callers should dial 706-645-9291. The passcode is 64676792. A webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today, May 12, 2011, and therefore you are advised that 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.

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 the leading marketer and producer of low carbon renewable fuels in the Western United States.

Expectations concerning future growth, market share, margins, operational efficiencies, profitability, cash flows, and other financial or business metrics. The relative benefits of Pacific Ethanol's destination business model, and logistical advantages related to the supply of corn. Mitigation of risks related to fluctuations in corn supply, the ability of Pacific Ethanol to lock in margins, the effectiveness of hedging strategies, the expected premium demand for low carbon ethanol, and the ability of Pacific Ethanol to resume production at the idle California plant which is at the discretion of the third party plant owner, are forward-looking statements and consideration that involve a number of risks and uncertainties.

The actual future results of Pacific Ethanol could differ from those statement. Pacific Ethanol refers you to the risk factors section contained in its most recent annual report on form 10-K filed with the Securities and Exchange Commission on March 31, 2011.

Also, please note that the company uses financial metrics 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 alternative for, the reported financial results as determined in accordance with GAAP.

The Company defines adjusted EBITDA as unaudited earnings before interest, taxes, depreciation and amortization and for value adjustment. 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 joining us today. In the first quarter of 2011, we built on the strong foundation established in 2010. Net sales for the first quarter grew 143% from the same period in 2010. We narrowed our loss from $11.7 million in the first quarter of 2010, to near breakeven this quarter, despite a challenging margin environment. Our adjusted EBITDA for the first quarter improved to a positive $1.5 million, from a loss of $6.4 million in the same period of 2010.

Pacific Ethanol again demonstrated strong growth in total marketed ethanol gallons of 26 million, and total gallons sold of 85 million gallons, which is an increase of 44% over the first quarter of 2010, and 11% sequentially from last quarter. In addition, the increase in total gallons sold represents our seventh consecutive quarter of growth, with a compound annual growth rate of 66%. In addition, our recent reopening of the 60 million gallon Stockton, California facility contributed to our growth in gross profit.

For the entire first quarter of 2011, we had three of the four Pacific Ethanol plants up and running. Over the last 18 months, we have maintained a disciplined approach to bringing on additional capacity when demand for ethanol production dictates, and managing the production to secure operating margins.

We plan to restart the fourth plant, Pacific Ethanol Madera, with the same condition as market conditions strengthen. Our business model and favorable logistics around our plant locations provide us advantages and opportunities in securing our corn supply.

With the transition from the old corn crop to the new, we may see some tightening around supply. As supplies tighten, our unique positioning enables us to shop for corn around the US, and buy locally when advantageous. Collectively, we bring corn into our plants via three railroads, so that we can source corn from a variety of markets in the Midwest. In addition, we have the option of sourcing corn from local producers around our production facilities. We also have contractual arrangements with our suppliers that guarantee delivery of corn. We foresee this approach continuing to operate efficiently and enabling us to mitigate exposure risks around fluctuations in corn supply.

With the volatility in both ethanol and corn prices, we are focused on locking in margins as they are available and when we see an opportunity to do so. Our hedging strategy is aimed at ensuring we are positioned to generate positive margins through actively working the physical and financial markets.

In marketing, Pacific Ag Products and Kinergy both contributed to our strong growth this quarter. As we announced previously, Kinergy signed an ethanol marketing agreement with AE Biofuels Keyes. The 55 million gallon plant in Keyes, California has recently restarted and is now delivering feed and fuel to local markets. This is good for both the industry and California, as locally produced feed and fuel reduce net carbon output and increase jobs and revenue in the economy.

As refiners and fuel companies evaluate ways to comply with the California low carbon fuel standard, ethanol from the Pacific Ethanol plants offer the most effective solutions for compliance. According to [CARB], the Pacific Ethanol plants provide among the lowest carbon rated ethanol commercially produced in the United States.

In addition, through Oil Price Information Service, or OPIS as it is commonly called, provides a spread on the carbon value which is essentially, on a spot basis, $0.002 per carbon point today. Pacific Ethanol is approximately 18 carbon points better than average Midwest ethanol. On a spot market basis today, that represents a premium of approximately $0.03 to $0.04 per gallon.

Keep in mind that this is only the first year of compliance, with refiners only required to meet 0.25% reduction in their carbon intensity . Over the next nine years they will need to reduce their carbon intensity by 10%.

As the demand for low carbon fuel grows, it is our view that the premium will grow and the Pacific Ethanol plants are extremely well positioned to benefit. With that, I would like to turn the call over to Bryon McGregor, our CFO, to review the numbers. Bryon ?

Thank you, Neil. For the first quarter of 2011, net sales were $173 million compared to $71 million for the first quarter of 2010. Total gallons sold increased 44% to 84.6 million gallons in the first quarter of 2011, compared to 58.7 million gallons in the prior-year quarter.

This growth was the result of the continued strength in the Kinergy marketing business, with a 22% increase in third-party gallons sold, and an 87% increase in production gallons sold coupled with a 38% increase in average sale price per gallon. The increase in production gallons are attributable to the Stockton plant being in production the entire quarter, whereas it was idle during the first quarter of 2010. With Stockton running, we now have three of the four Pacific Ethanol plants operating and delivering feed and fuel to their local markets.

Gross profit for the for the first quarter of 2011 was $2.6 million, compared to a gross loss of $3 million for the first quarter of 2010. The increase in gross profit was largely attributable to the Stockton plant being in operation for the quarter. SG&A expenses were $4.2 million in the first quarter of 2011, compared to $3.2 million for the first quarter of 2010. As you recall last year when we were working through the reorganization of the plants, the related professional fees were being charged to reorganization costs on our P&L.

Now that we have exited the restructuring, all professional fees incurred by New PE Holdco are recorded in SG&A. On a combined basis, these costs have declined $400,000 in the first quarter of 2011 compared to the first quarter of 2010. We continue to seek ways to further reduce these costs in the business. Operating loss was $1.6 million for the first quarter 2011, compared to a loss of $6.2 million in 2010. During the first quarter of 2011, we recorded a quarterly non-cash fair value adjustment of $926,000 associated with our convertible notes and warrants.

As you recall, upon their issuance last October, we recorded them at fair value and subsequently adjusted their fair value at the end of the fourth quarter. We will continue to revalue the convertible notes and warrants on a quarterly basis for the remainder of 2011. Generally speaking, the change in fair value is largely determined by our stock price at the end of each quarter. Therefore, the gain this quarter reflects our lower stock price over the prior quarter end.

Net loss available to common stockholders was $294,000 in the first quarter of 2011, compared to a net loss of $11.7 million for the first quarter of 2010. Adjusted EBITDA, which excludes the fair value adjustment gain of $926,000, improved to a positive $1.5 million for the first quarter of 2011, from a loss of $6.4 million in the first quarter 2010.

Turning to our balance sheet, at March 31, 2011, we had cash balances of $8.5 million and working capital of $20.9 million, up from $9.5 million in working capital at year-end. During the quarter we began making payments on our convertible notes through issuance of our common stock.

We continue to believe that this is in the best interest of our shareholders, just as we did when we restructured our balance sheet in connection with this financing last October. With the option to pay the remainder of the debt in other stock or cash, given sufficient cash balances, we will continue to do evaluate this each month and choose the method that is most accretive to shareholders.

Our results demonstrate our efforts to transform our balance sheet, grow revenues, and improve profitability . We expect top and bottom line improvements to continue as we marshal all our efforts and resources in this regard. Focusing on those things within our control, and attempting to minimize any negative impact of areas beyond our influence.

Our efforts are aimed at returning value to our shareholders. Now I would like to return the call to Neil.

Thanks, Brian. Looking ahead, we are more focused than ever on building our position as the leading marketer and producer of low carbon renewable fuels in the Western United States. We have made significant progress on our growth strategy. In the first quarter, we built on the strong foundation established in 2010, and we look forward to building on this momentum in the months and quarters ahead.

Our strategy going forward is to capitalize on our business model, industry expertise, and logistical advantages to grow revenue, increase cash flows, and improve profitability. Our restructured balance sheet and the significant market demand for low carbon renewable fuels provide us with the opportunity to do just that. With that, Regina, I'd like to open the call for questions.

Thank you.

(Operator Instructions)

Our first question comes from George [Magher], which is a Private Investor.

Yes. Good morning.

Good morning.

My name is George Magher, and I've been a stockholder for some time now. This is a very simple question, but I think it's an important one. Would you call this first quarter report a reflection of your turning point?

Yes. I think that really the last two years, from when we really went into the downturn of the whole ethanol industry and went through the restructuring process, it did take us the better part of two years. I think the real turning point began with our bringing the subsidiary ethanol plants out of the restructuring at the end of June.

We've been building on that ever since, and certainly having reached a point , of basically breakeven in the first quarter. We see both industry fundamentals and our company fundamentals turning very much for the positive. So yes, I would say that is a fair assessment.

Thank you, sir.

(Operator Instructions)

Our next question comes from Craig Irwin with Wedbush Securities.

Good morning, gentlemen.

Good morning.

So you mentioned in your presentation, I believe you covered this in your remarks, your prepared remarks, the probable start up of the Madera facility during the current year. Can you discuss the decision process there that the current owner of the facility would go through, and what sort of working capital requirements this might call on you to use for the startup of the facility?

Good question. The, taking your last question first, the working capital to start that facility would be in the range of $4 million to $5 million. We have that availability under our credit facility at the plants company level. So that part is secured and ready to go.

It has been a pretty volatile margin environment in the first quarter. January and February were not good months. March was better. April turned back down. We're now seeing improvements again.

So we are seeing a margin environment improving with the pickup in gasoline demand and a relative limited supply of new incremental capacity on ethanol. We continue to believe that will be the trend for margins to strengthen.

There's also a quite a bit of risk around corn. The transition from old crop to new crop, we are watching that closely. And if there is any particular concern, it will be in the August and September time frame.

So both on the corn supply in the margin environment, we are looking for a little more security around a confidence level that we can start that plant up in a margin environment that justifies that. So it's -- I know that's not a definitive answer, but there are a number of moving pieces, and it still is our objective to start that facility up this year.

Great. And then on a number of different occasions in the past, you've shared with us your production commodity margin in the quarter. Is that something that you're able to share with us today?

I don't know that we shared our production commodity margin per se. We -- whatever we have shared in that regard is in the filings. I can tell you that if you look at the industry margins, generally, they were choppy. They went from negative to breakeven, to positive and back again in the first quarter.

We think that we did a pretty good job managing that, around corn and corn basis, even with one of our facilities not operating, and one of them in the startup mode. And as I said, they have those commodity margins today in the industry are more positive.

Great. Then my next question was related to PE Holdco. Can you update us on our equity ownership there, and if there have been any changes during the quarter, and what the outlook is for potential increase in equity ownership there over the course of the year?

Sure. Our equity ownership position is 20%. We, in addition to having asset management and marketing contracts with the plant company, we are also the single largest holder of the equity.

There certainly is opportunity, and it is our objective over time as it is accretive to our shareholders, to recapitalize more of an ownership interest. Certainly it's of interest to our lenders and fellow owners to see that occur.

So we continue to evaluate that opportunity, evaluate capital markets. And clearly, from a growth strategy, the acquisition of additional ownership interest in those plants is an objective.

Great. And then my last question is your balance sheet debt that you show at the end of the quarter. I haven't seen the Q yet, so I can't break out the Kinergy related debt, but let's say a mid-50's debt level per gallon on your plants. Is there any external debt or other debt that third parties could have pledged against the assets of your facilities?

No.

So $0.55 a gallon is a debt load on those facilities?

Well, at the new PE Holdco level, there's $51 million in term debt and then there's the revolver, the $35 million revolver, of which approximately $22 million was outstanding.

Great. Thanks very much, gentlemen. That' s all my questions.

Just to put that in further light, because I think it's a very important note that on a term debt basis, we're looking closer to $0.25 per gallon, which is an extremely low level of leverage in this business.

Thank you, sir. Our next question comes from Pamela Basset with Protegras Life Science.

It's Protegras. Thanks for taking my question. I wonder if you can talk about your longer-term strategy and potential for diversification of both technologies that might grow the breadth of the feedstock possibilities as well as any geographical diversification, and I apologize if you had addressed that in the beginning of the call that I missed.

No, we didn't. It' s a very good question. We feel that we already have a fairly diversified platform. We're certainly distinctly different from the Midwest being out in the Western region.

We have a very integrated model of production and marketing, so have some level of vertical integration which is also distinctly different than many of the producers. When we put these plants in place out West, it was with an eye towards diversification into new technologies and new feedstocks.

The options are fairly limited in the Midwest. Out West, we have a wide variety of both agricultural feed stocks, waste products from agriculture, waste products from the urban areas, opportunities to grow energy crops in and around, opportunity to source raw materials off the water as we have two port facilities.

We already bring in small amounts of streams from the food and beverage industry that diversifies the feedstock. We have a grant with -- a matching grant with the Department of Energy, and a technology partner, BioGasol in Denmark, to commercialize the cellulose to ethanol technology, starting with our Boardman plant, using wheat straw, and potential energy crops in that area. That objective is to put in a 2.9 million gallon per year facility integrated into our 40 million gallon per year facility.

So our strategy in that regard is to build on the corn platform, not replace the corn, but rather than incrementally adding corn ethanol capacity, we would incrementally add cellulose and other new technologies to that platform to diversify the feedstock and grow the production that way.

On geography, we feel that we have such a strong position in the West and there are opportunities, both from a build out of our own platform that it potential M&A strategy to continue to build that presence. But certainly we look forward on the longer-term to the opportunity to be become more of a national player as well.

Okay. Great . Thank you. And any plans for South America?

We have looked at opportunities being on the coast and on the Pacific Rim. We certainly have conversations often with opportunities and companies. I think at this point, we're pretty focused on making sure that we are really bringing this current strategy and current platform to strong profitability, from which we could consider any number of growth opportunities. And South America is one of those.

Okay. Great . Thanks.

Thank you.

(Operator Instructions)

And sir, I'm showing no further questions in queue. I'd like to turn it back Neil Koehler for further remarks.

Thank you, Regina, and thank you all for taking the time to join us today. We look forward to seeing many of you at our upcoming investor conferences, our annual shareholders meeting, and our second quarter earnings call later in the summer. Have a nice day.

Thank you. Ladies and gentleman, this does conclude your call for today. You may now all disconnect. Thank you very much, and have a wonderful day.