Alto Ingredients Inc (ALTO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Pacific Ethanol Second Quarter 2011 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 follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn this conference to Becky Herrick, you may begin.

Thank you, operator, and thank you everyone for joining us today for the Pacific Ethanol second 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 quarterly financial and operating 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 today 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 in 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 11;59 PM Eastern time on Wednesday, August 3rd, 2011. To access the replay, please dial 855 859-2056. International callers should call 404 537-3406. The pass code will be 85112183. A webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today, July 28th, 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 in 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 maintain an expanded position as a leading marketer and producer of low-carbon renewal able fuels in the Western United States, the ability of Pacific Ethanol to expand its asset management business and thereby enhance its value and generate additional revenue, 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, whether and to what extent E-15 will be sold in U.S. markets, the effectiveness of hedging strategies, the expected premium and 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 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 its most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 31st, 2011 and in its most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 13th, 2011.

Also, please note that the Company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to moderate 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 unaudited earnings before interest, taxes, depreciation and amortization, fair value adjustments and gain 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 this afternoon.

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

Thanks, Becky, and thank you all for joining us today. Our results for the quarter reflect the strength of our diversified business strategy. In fact, our net sales in total gallons sold represent the highest levels ever achieved in our Company's history. This strong performance was driven by our Kinergy Marketing subsidiary, which continued expanding its business to market higher volumes of ethanol and our asset management business for the Pacific Ethanol plants.

In the second quarter of 2011, net sales grew 180% from the same period in 2010 and represent a quarterly record. We recorded a gross profit of $1.3 million and adjusted EBITDA for the second quarter improved to a positive $1.2 million from a loss of $6.7 million in the same period of 2010.

Our total gallons sold of 100.6 million represent a quarterly record for the Company. This also marks our eighth consecutive quarter of growth and brings the compound annual growth rate to 70% over that period. Third party gallons sold were 62.5 million, representing an increase of 49% over the second quarter of 2010 and 31% from the first quarter of 2011. These strong results demonstrate the positive momentum in our business and the growing demand for ethanol.

I will now provide a brief review of our three business areas, production, marketing and asset management. In production during the second quarter the three operating Pacific Ethanol plants produced at near capacity. While second quarter commodity crush margins were compressed and even negative at times, by the end of the second quarter margins improved to levels that produced strong operating plant margins.

We are encouraged that this will bode will for our production business in the coming months. Our focus remains on attaining higher yields, lowering our input cost and securing positive plant margin.

In marketing we are deliberately and thoughtfully expanding our Kinergy ethanol distribution business. Earlier this year we signed a marketing agreement with AE Biofuels Keyes. In April the 55 million gallon plant in Keyes, California restarted and the company now delivers both feed and fuel to its local markets. With this in place Kinergy now markets all the corn ethanol production in California and continues to be a key driver of our growth strategy.

We intend to further expand our relationships with our customers as well as other ethanol producers and marketers to sell even greater volumes of ethanol.

In asset management we recently announced we extended and amended the marketing and asset management agreements with the Pacific Ethanol plants, which reflect our continued strong working relationship with our lenders and fellow owners. Our unique system of operations supply distribution and service in our western markets us to deliver premium value to ethanol plant owners and to our customers solidifying our position as the leading marketer and producer of low carbon renewable fuels in the Western United States.

In addition, as 20% equity owners of the four Pacific Ethanol plants, our interests are aligned in keeping costs low, efficiencies high and securing plant operating margins.

Looking ahead, we may seek to provide management services for other third-party ethanol production facilities, which would enhance the value of our asset management business and generate an additional source of recurring revenue.

We are encouraged by recent industry progress regarding ethanol policy. Both state and federal regulations support the demand for ethanol production by requiring increasing amounts of renewable fuels renewable fuels in the transportation and supply. The Federal Renewable Fuel Standard drives this demand requiring nearly 13 billion gallons of ethanol to be blended with gasoline, which represents approximately 10% of the fuel supply today.

The Renewable Fuel Standard firmly establishes ethanol as a permanent fuel source in the nation's gasoline supply.

On June 28th the EPA approved the label for fuel pumps that carry ethanol blends of up to 15% or E15. Gas stations are closer to selling E15 for cars built in 2001 and later, which represents approximately two-thirds of the vehicles on the road today. The EPA approval is a significant market indicator that E15 will be sold in U.S. markets, even as early as the end of this year, and that the American consumer will have more choice of fuel options at the gas pump.

We are also encouraged by the ongoing implementation of the low carbon fuel standard in California and the development of similar policies in other states. This differentiation of product by carbon intensity has already created price signals that favor production of low carbon fuels. As Pacific Ethanol production has among the lowest carbon intensity rating of any commercially available ethanol produced in the United States, we feel we are well positioned to benefit from these policies.

The volatile and uncertain markets for corn supply demonstrate the value of our destination plant model. The Pacific Ethanol plants are located at the intersection of very large fuel and feed markets to provide renewable fuels and feed to local markets. For corn procurement we have several options from which to source our production needs. We can purchase from local farmers or from various locations in the Midwest on three different railroads.

Historically this has enabled Pacific Ethanol to shop for low cost corn and in the current market this is expected to provide supply reliability on a key ingredient during the next couple of months as the old corn crop is used up and the new corn crop is harvested.

For most of the second quarter the commodity crush margins remained challenging. While corn prices have increased this year, it is important to note our commodity crush margins at the end of the second quarter improved significantly as corn prices fell relative to stable ethanol prices. So far in July commodity crush margins remained strong as ethanol supplies in balance with demand, as corn supply in certain regions of the country is tight and as demand for transportation fuel increases for summer driving.

To mitigate 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. Looking ahead, if margins were to hold at their current rate we believe we will experience improved profitability and liquidity providing a compelling case to restart the Madera plant.

With supply and demand for ethanol in a reasonable balance and with overall positive market fundamentals, we believe we can capitalize on the current market opportunity due to our diversified business model, industry expertise and growth strategy.

With that, I'd like to turn the call over to Bryon McGregor, our CFO, to review the numbers. Bryon?

Thanks, Neil. For the second quarter of 2011 we reported record net sales of $214.6 million, which compares to $76.8 million for the second quarter of 2010. Total gallons sold, also a record this quarter, increased 54% to 100.6 million gallons in the second quarter of 2011 compared to 65.4 million gallons in the prior year's quarter.

This growth was a result of the continued strength in the Kinergy marketing business with 49% increase in third-party gallons sold as well as a 52% increase in production gallons sold when compared to the second quarter of 2010. The increase in production gallons is attributable to the Stockton plant production, which comparatively was idle during the second 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. In addition, the average sale price per gallon increased 67% over the same period, which also contributed to our growth during the second quarter of 2011.

Gross profit for the second quarter of 2011 was $1.3 million compared to a gross loss of $2.7 million for the second quarter of 2010. The $4 million improvement was largely attributable to improved marketing and production margins with three of four Pacific Ethanol plants in operation during the period.

SG&A expenses, including all professional fees, were $4.1 million in the second quarter of 2011. This compares to $3.2 million for the second quarter of 2010 when we were working through the reorganization and the related professional fees were charged to reorganization costs. On a combined basis these costs have declined $1.8 million in the second quarter of 2011 compared to the second quarter of 2010. We again reduced SG&A expenses both year-over-year and sequentially and we will continue to seek ways to further reduce these costs.

While the challenging commodity margin environment in the second quarter delivered an operating loss of $2.8 million, we narrowed our loss from the $5.9 million reported in the same period of 2010. If current favorable market conditions continue we believe we can generate positive operating income.

As you recall, on October 6, 2010 we issued convertible notes and warrants and recorded them at fair value. Accordingly, we revalue the convertible notes and warrants and adjust their fair value on a quarterly basis. Generally speaking, the change in fair value is largely determined by our stock price and at June 30th the stock price was lower than the prior quarter end and, as such, we recorded a quarterly non-cash fair value adjustment of $1.9 million for the second quarter of 2011.

Net income available to common stockholders was $435,000 for the second quarter of 2011 compared to $107.8 million for the second quarter of 2010. As a reminder, the second quarter of 2010 net income included a $119.4 million gain from bankruptcy exit.

In the second quarter of 2011 adjusted EBITDA, which excludes the fair value adjustments and gain on bankruptcy exit, improved to a positive $1.2 million from the loss of $6.7 million for the second quarter of 2010.

For the six months ended June 30th, 2011 net sales were $387.7 million compared to $148 million on the same period of 2010. For the first six months of 2011 net income available to common stockholders was $141,000 compared to $96.1 million including the $119.4 million non-cash gain from bankruptcy exit in the same period of 2010.

For the first six months of 2011 adjusted EBITDA improved to a positive $2.7 million from a loss of $13.2 million for the first six months of 2010.

Turning to our balance sheet, at June 30th we had a total cash balance of $9.8 million and working capital of $34.1 million up from a cash balance of $8.5 million and working capital of $20.9 million at March 31st, 2011.

During the quarter we continued making monthly amortization payments on our convertible notes and, as of the end of the quarter; we had repaid over $14 million in principal balance through the issuance of stock. We continue to evaluate monthly whether to make the next payment in either cash or stock based on what we believe is in the best interest of the Company and stockholders.

As a reminder, we used a portion of the proceeds from the convertible notes to purchase the 20% interest in the Pacific Ethanol plants at a discount to market. We believe that the purchase was integral to the future security of the Company and core to its future growth and stability. We believe the decision was sound then as well as today and hope to consolidate more interest in these assets in the future.

Finally, it is beneficial to consider the improvements we have been able to make over the past 12 months. Last year at this time we reported cash of $2 million, negative working capital of approximately $20 million and we were in default on significant amounts of our corporate debt. Over the past year we have made significant improvements in our financial position. At June 30th, 2011 we had approximately $10 million in cash, working capital in excess of $34 million and we are in compliance with all our debt obligations. We also have excess availability under our lines of credit.

In summary, we feel very confident in the state of our business. Our balance sheet is stronger than it has been in years and we have net sales of nearly $1 billion on an annualized basis. While our work is not complete, we are pleased with our results to date and we remain focused on further improving operating results and maximizing stockholder value.

With that, I'd like to return the call the Neil.

Thank you, Bryon. Pacific Ethanol is as focused as ever on building our position as the leading marketer and producer of low carbon renewable fuels in the Western United States. The Renewable Fuels Standard continues to drive demand for ethanol production and we believe our diversified business strategy, industry expertise and focus on growth position us to capitalize on this opportunity. As market conditions improve and demand for renewable fuels increases, we expect to have a strong third quarter.

With that, Latoya, I would like to open the call for questions.

(Operator Instructions). Our first question is from [Eric Gotlieb] of [Stefans].

First right off the bat some housekeeping, what drove the 49% increase and 39 in third-party gallons? Was that in addition to the AE coming on? How much was that expansion at those guy's plants? Or was -- how much was new business?

It's it was both so that plant produces 55 million gallons a year. That's its operating capacity. It started up in May so it actually was a contributor but really third-party gallons outside of that was a larger contributor. Again, we do believe that we have a very well established position in the marketplace and we have been able to not only grow along with the market that grows but increase our market share in those markets.

We saw a lot of growth in the Salt Lake market, which was one of the most recent markets to -- one of the last big city markets in the U.S. to convert to ethanol blending and we have a very significant presence. Wherever we have ethanol production plants as well as downstream terminals, we do have a very valuable offering to the customer base and that has allowed us to significantly expand our market share.

Okay great. Moving on to -- you had highlighted this in slide seven that the spot ethanol margins are -- have widened significantly in the last couple of weeks and looking forward, if you look at the futures, it's actually even wider. Wondering how much -- well, one what's driving that and two, how much are you able to take advantage? Like how much have you already locked in versus how far do you usually lock things in, how far out?

Your questions, I mean on your macro question it's something that we anticipated that with the increase in summer driving and gasoline demand and where ethanol is now 10% of all of that demand that -- and with ethanol production being relatively flat and frankly assets running fairly close to capacity, that we would see a tightening of that supply/demand balance. That's exactly what we have seen. We continue to see very brisk exports.

Corn ethanol, even at these higher prices, is the lowest cost source of ethanol for world markets, even exporting to Brazil. So with those factors combined we just have seen a good old fashioned supply/demand balance that is encouraging higher ethanol prices and better margins. We think that continues. You certainly get into the later in the year and early in the next year when you see overall gasoline demand come off but then that coincides with another 600 million gallons of minimum mandated demand. So we're reasonably bullish on supply/demand and consequently margins, albeit given the corn situation, volatility is the name of the game but on average we think that the balance of the year will be good as well as into 2012.

We've been -- in terms of our margin management we manage to the market. When we forward sell ethanol we do buy our corn. When we forward sell feed we buy that equivalent portion of corn as well, so we do go out some distance. We do not do a tremendous amount of financial hedging in the physical markets right now. The buyers don't go out more than 30, 60, in some cases 90 days so our forward sales in terms of locking those margins are relatively limited. We are more managing the market in the spot so we are able to benefit very significantly from today's current margin environment.

Okay great and then my last question has to do with the Madera plant. What do we need to see to have that reopen? How long -- how high profit do you need to be or for how long do they need to be and is there a timetable given for your goal as to opening the doors?

Well, there is no specific timetable. It really is that Q2, as I mentioned in the prepared remarks, was a very challenging environment, not that basically the market was saying we don't need additional ethanol capacity. We're actually long; well, what we've seen is that the days of inventory that were in the high 20s are now in the low 20s, which typically is a recipe for higher margins and tight supply/demand balances.

Given that we believe that condition will carry, we do need to see it for some period of weeks, if not a month or two, since this really just kicked in at the end of June. We would like to see that plant opened up as soon as possible. It could be as soon as later this year. It could be later than that but it is something that we're very focused on and the market signals today are very encouraging in that direction.

Great thanks a lot, very helpful. I'll pass it on.

(Operator Instructions). [Bruce Galloway], [Galloway Capital].

Guys, great job in turning the Company around. You guys seem like a big sophisticated Company with almost $1 billion in sales. I just don't get why you did this death spiral convert. It seems like companies that are super desperate do those. It's really impairing the shareholders. I see a lot of shorting going into the stock. Could you just address where you stand with regard to that death spiral, why you did it and what the current share count is and how you could ameliorate some of the shorting that's going on? Because I see that there's a big short activity in the stock.

Sure and there have been on a number of ethanol stocks. I mean I think this has been -- ethanol has been somewhat out of favor in public markets. We would object to the characterization of the convert as a death spiral. While it did have protections for investors, that is not the way we would characterize it.

At the time it was in the capital markets back last fall, given the current condition or the condition that we were in at that time, we had a very limited number of options on raising capital and raising the capital to take away some non-performing debt and to recapitalize that 20% interest in the plants we believed and believe today was absolutely critical to the success of the Company and we think that that is born out by the results today. We are working through that convert. We are more than halfway through it and we believe that we will continue to be able to expand the business and next time around we should have even a greater option in terms of capital raised and as we continue to grow the business.

What's the current share count now and how much of that what I call a death spiral is left?

The current share count as of June 30th was 19 million and in terms of the convert that was left at the end of the quarter I believe about $20 million.

Okay well my suggestion is if you could pay it out you should pay it out and that would get the shorts running for cover. If you could pay it out for cash, if you could get the cash I mean it's as the markets improve and the financial conditions improve, which it has, you should pay it off in cash rather than stock.

Appreciate your input.

And I think your stock would perform much better.

Well, appreciate your input and that is why we object to any characterization of it as a death spiral because we do have that option to pay it in cash and we evaluate that every month.

Okay well I hope you do the right thing for the shareholders because you know, it's been painful.

That's my number one job.

Okay.

(Operator Instructions). There are no further questions at this time.

Thank you, operator, and thanks everybody for joining us today. We look forward to speaking with you again on our third quarter earnings call. Have a good afternoon.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect. Good day.