Alto Ingredients Inc (ALTO) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol Incorporated Third Quarter 2011 Financial Results Conference. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions on how to participate will be given at that time. (Operator Instructions). And, as a reminder, today's conference call is being recorded.

Now I would like to turn conference over to Becky Herrick.

Thank you, Matt, and thank you everyone for joining us today for the Pacific Ethanol third 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 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, which can be downloaded from the Company's website at www.pacificethanol.net. If you have any questions please call LHA at 415-433-3777.

A telephone replay of today's call will be available until midnight Eastern Time on Wednesday, November 2nd, 2011. To access the replay please dial 855-859-2056. International callers should dial 001-404-537-3406. The pass code will be 20610222. A webcast replay will also be available at Pacific Ethanol's website.

Please not that information in this call speaks only as of today, October 27th, 2011 and therefore you are advised that time sensitive information may not longer be as accurate as of the time of any replay.

Before we begin I will review a short 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 limitations the ability of Pacific Ethanol to maintain and expand its position as a leading marketer and producer of low-carbon renewable fuels in the Western United States, the ability of Pacific Ethanol to obtain higher yields, lower input costs, maintain plant availability, achieve positive plant margins and decrease the carbon intensity of produced ethanol, the ability of Pacific Ethanol to expand its business with customers and other ethanol producers, the ability of Pacific Ethanol to mitigate risks associated with commodity volatility and ensure a cost effective supply of input commodities, expectations concerning future growth, market share margins, operational efficiencies, profitability, cash flows and other financial or business metrics, the expected premium and demand for low-carbon ethanol, the ability of Pacific Ethanol to resume production of the idle California plant, which is at the discretion of the third-party plant owner and expectations concerning payment of installment amounts on Pacific Ethanol's senior convertible notes in cash, 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 factors 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 August 11, 2011.

Also, please note that the Company uses financial measures not in accordance with generally accepted accounting principles commonly known as GAAP. To monitor their 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, loss of investment in Front Range, 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 yesterday.

It's now my pleasure Neil Koehler, President and CEO. Neil.

Thank you, Becky, and thank you all for joining us today on the call. We are proud of our accomplishments for the quarter and we believe we are better positioned than ever to leverage our strengths and expertise to execute on our diversified business model.

All areas of our business contributed to a profitable quarter for the Company. First looking at our financial highlights, we grew net sales 27% sequentially, which represents our second consecutive quarterly revenue record.

We more than doubled gross profit compared to last year. We increased operating income significantly to $4.7 million and we also recorded positive earnings per share of $0.12 and adjusted EBITDA improved to $2.9 million.

Our total gallons sold of 123 million represents another quarterly record for the Company and grew 22% sequentially marking our ninth consecutive quarter of growth bringing the compound annual growth rate to 75% over that period.

Third party gallons sold increased 18% over the third quarter of last year and 35% sequentially.

I will now provide a brief review of our three business areas, production, marketing and asset management.

In production, our three operating plants produced at near capacity during the third quarter with solid ethanol and feed sales and an improved commodity margin environment. Operating plant margins were strong and contributed to our gross profit and operating income.

Our focus at the plants remains on attaining higher yields, lowering our input costs, maintaining high plant availability and securing positive plant margins. In addition, we continued to evaluate the introduction of new technologies at the plants to increase margins, reduce input costs and decrease the carbon intensity of produced ethanol.

I want to address our plans regarding the timing of restarting the Madera Plant, the only Pacific Ethanol plant currently idle. Today margins support a restart. That being said, current ethanol demand is captive to gasoline demand as ethanol now is effectively blended at 10% in all U.S. gasoline.

Typically gasoline demand declines somewhat in the winter months, which will result in some decline in ethanol demand until we see the introduction of the 15% ethanol blend expected in some markets in 2012. Our current view is that the most prudent timing for the Madera startup from both the Company and the industry perspective may be the first quarter of 2012 to coincide with increases in gasoline demand, increases in the renewal fuel standard, minimum blending requirements and increases in the demand for the lower carbon ethanol we produce to meet the California low-carbon fuel standard.

In marketing, Kinergy continues to grow impressively with a very well established position in the market place. As the industry has grown to represent roughly 10% of the transportation fuel market in the country, Kinergy has grown substantially in excess of this and continues to increase its market share. Today Kinergy effectively markets all the ethanol produced in California. Looking ahead, we intend to further expand our relationships with our customers as well as other ethanol producers.

Pacific Ag Products is also performing well as feed values have been strong in relation to corn prices. We are distributing distiller's gains to dairies and feed lots and benefit from the growing demand for the product across the feed sector.

In asset management we have recently extended our asset management services beyond the four Pacific Ethanol Plants to include services for advanced biofuel plants. Last week we signed a management agreement with ZeaChem a developer of bio refineries for the conversion of renewal biomass into sustainable fuels and chemicals. Pacific Ethanol is providing operations, maintenance and accounting services for ZeaChem's cellulosic integrated bio refinery in Boardman, Oregon, which is located adjacent to the Pacific Ethanol Columbia plant.

This agreement reflects the value of our diversified business model enhances the value of our asset management business and provides an additional source of recurring revenue for the Company.

One key to our successful operations at the plant level is managing risks associated with the volatile commodities of our market. Our supply chain strategy enables us to further manage exposure risks around the tight corn supply and price volatility. Our risk management strategy is to price corn as we sell ethanol and feed and we believe this is the best method for our Company.

We source corn from a variety of markets in the Midwest and or local producers located near the production facilities, which provide us with options for securing corn at competitive prices and in general provide supply reliability. We also have contracts with suppliers that guarantee delivery of corn even in tight supply conditions.

Our successful margin and supply chain logistics strategies have played key roles in our strong operating result for the quarter and we expect going forward these strategies will continue serving us well.

I'd like to review some key trends and regulations driving the demand for renewable fuels. The Renewable Fuel Standard firmly entrenches ethanol as a fuel source driving demand for ethanol production by requiring increasing amounts of renewable fuels in the gasoline supply. It increases the 2011 blending requirement for conventional ethanol from 12.6 billion gallons to a minimum 13.2 billion gallons in 2012 and mandates a minimum of 15 billion gallons of corn ethanol by 2015.

The Renewable Fuel Standard is in place until 2022 and continues to receive strong bi-partisan support. We believe it also represents the only meaningful long-term national security measure in place to reduce our dependence on foreign oil.

The U.S. Congress will likely allow the blenders tax credit, also known as VTEC to expire at the end of the year. Pacific Ethanol and the industry in general has been prepared for this transition of policy for some time and we believe the expiration of the tax credit, which went to refiners not ethanol producers, will not directly impact our margins. VTEC served its purpose helping generate demand for renewal fuels as a way of reducing our dependence on foreign oil. We expect the Renewable Fuel Standard to continue these positive trends for the ethanol industry as it supports demand in a rapid fashion over the next few years and ensures that an increasing amount of the nation's fuel supply is produced within the U.S.

The California Air Resources Boards' Low Carbon Fuel Standard Program calls for a reduction of at least 10% in the carbon intensity of California's transportation fuels by 2020. The program is now going into its second year where compliance obligations are doubled from last year.

Ethanol remains the principle means for refiners to come into compliance with the requirements. We believe we are very well positioned to benefit as Pacific Ethanol's production continues to have among the lowest carbon intensity rating of any commercially available ethanol produced in the United States.

While regulations certainly drive demand for ethanol, it is important to note that the price of ethanol typically trades at a discount to the price of gasoline, providing a natural economic incentive to increase ethanol blends.

With that, I will turn the call over to Bryon McGregor, our CFO, to review the numbers. Bryon.

Thanks, Neil. For the third quarter of 2011 we reported record net sales of $271.6 million, which compares to $46 million for the third quarter of 2010. The increase in net sales was primarily driven by three primary factors. First, the results of the Pacific Ethanol plants were consolidated in the third quarter of 2011, whereas in the third quarter 2010 they were not.

Second, the average sale price per gallon increased 54% and third, the Stockton Plant was operational in the third quarter of 2011, whereas it was idled during the third quarter of 2010.

Total gallons sold, also a record for this quarter, increased 71% to 122.6 million gallons in the third quarter of 2011 compared to 71.5 million gallons in the prior year's quarter. The increase in total gallons sold was and continues to be primarily due to continued strength in Kinergy's marketing business.

Gross profit for the third quarter of 2011 was $8.2 million compared to $4 million for the third quarter of 2010. The increase in gross profit was attributable to an improved commodity margin environment and the contributions from the three operating Pacific Ethanol plants.

SG&A expenses, including professional fees, totaled $3.5 million in the third quarter of 2011 compared to $2.7 million for the third quarter of 2010 with the increase primarily due to the consolidation of the Pacific Ethanol plants. On a sequential basis SG&A expenses declined 14%, which reflects our continued focus on cost reduction and margin improvement strategies.

Accordingly, operating income for the third quarter of 2011 increased to $4.7 million from $1.2 million for the same period in 2010 due to improved commodity margins. During the third quarter of 2011 we recorded aggregate non-cash gains of $4.1 million for quarterly fair value adjustments on our convertible notes and warrants. We continue to revalue the convertible notes and warrants on a quarterly basis.

Net income available to common stockholders for the third quarter of 2011 totaled $4 million compared to a net loss of 12.9 million for the third quarter of 2010. Diluted earnings per share for the third quarter of 2011 was $0.12 compared to a loss of $1.10 per share for the third quarter of 2010.

Adjustable EBITDA, which excludes the fair value adjustments and loss from our investment in Front Range, improved to $2.9 million for the third quarter of 2011 and from $900,000 in the third quarter of 2010. For the nine months ending September 30th, 2011 net sales were $659.4 million compared to $194.1 million in the same period in 2010.

Net income available to common stockholders was $4.2 million compared to $83.2 million in the same period of 2010, which included a non-cash gain from bankruptcy exit of $119.4 million.

Diluted earnings per share was $0.20 compared to $7.71 per share for the third quarter of 2010. Adjusted EBITDA was 5.6 million, an improvement from a loss of $12.3 million for the first nine months of 2010.

Turning to our balance sheet, at September 30th we had total cash, a total cash balance of $16.8 million, up from a cash balance of $9.8 million at June 30th, 2011. The $7 million increase reflects strong cash flow generated across all business areas during the quarter. Our strength in cash position enabled us to make our recent convertible note payments as well as the upcoming November payment in cash in lieu of issuing stock.

Working capital was $53.7 million at September 30th, 2011 compared to $34.1 million at June 30th, 2011. Our current ratio improved at 3.3 times from 1.9 times over the same time frame.

During the quarter we continued making monthly amortization payments on our convertible notes. The aggregate unpaid principal balance of the notes as of October 25th, 2011 has been reduced to $6.4 million from $8.4 million at October 3rd, 2011, the last time we provided an update.

As previously announced, we elected to make our November 1st, 2011 installment payment in cash. As a result of additional voluntary conversions through October 25th, the November payment is currently expected to be $600,000. To date a total of $27.4 million in principal has been converted into 40.3 million common shares at an average conversion price of $0.68 per share. As of October 25th we had an approximately 56.6 million common shares outstanding.

The convertible notes provided us the needed capital to purchase our 20% ownership interest in the Pacific Ethanol plants from which we benefited greatly. We remain confident this was an important strategic move, which it clearly demonstrated by our improved cash flows and profitability in the third quarter.

With that, I would like to return the call.

Thanks, Bryon. Our third quarter results demonstrate the effectiveness of our growth strategy. We grew sales, became more profitable and expanded our asset management and marketing businesses. With our unique system of operations, supply, distribution and service in our western markets we believe we are poised for continued profitable growth. Going forward we will evaluate opportunities to further leverage our expertise and industry leadership to gain even greater value from our plant operations to increase market share for our ethanol marketing business, to partner with or provide services to other advanced biofuel producers with the goal of building additional revenue streams for Pacific Ethanol.

In addition, regulations, such as the Renewable Fuel Standard and California's Low Carbon Fuel Standard continue to provide a strong platform for ethanol production growth as refiners look to increase ethanol blends in the transportation fuel supply. These measures also provide meaningful advancements in policy as they reduce the nation's dependence on foreign oil.

We believe our diversified business model, industry expertise and strategy for growth provide us with the tools to solidify our position that the leading marketer and producer of low carbon renewable fuels in the Western United States.

With that, I'd like to open the call for questions. Matthew, can we begin the Q and A session?

(Operator Instructions). Ian Gilson, Zacks Investment Research.

I have several questions. Do you want me to do them all at once or a couple, then give somebody else a chance?

Just go ahead. If you're going too long we'll cut you off.

First of all, congratulations to the great quarter. Regarding the third-party sales, are these material that you receive on the contract or opportunistic trading that you do?

They are both so we have a pretty diversified strategy in terms of where the ethanol that we sell comes from, a good portion of it coming from roughly a third from the plants that we own and manage.

A third of it comes from ethanol marketing agreements that we have with three other facilities where we are under contract to market 100% of their output and the other third of it comes from our trading business where we have -- you know, it is opportunistic but their long standing relationships with producers in the Midwest that we bring through our very well established distribution channels in the eight western states where we principally operate and sell those to the downstream markets.

That gives us a fair amount of diversification in terms of how we source that ethanol.

Yes and now you mentioned that you produce all the ethanol in the western states or California or I didn't quite get that comment.

That comment was that there are three operating ethanol plants in California, one of which is our Stockton plant, and we market the ethanol for the other two plants, so that gives us a very strong position in California as through our marketing company we sell all of the ethanol produced in the State of California.

So you have 100% of the production in California?

That is correct under marketing and that's very valuable in that that block of ethanol represents the lowest carbon ethanol produced in the United States, so it's a Low Carbon Fuel Standard that gives us tremendous leverage in the market to obtain extra value for that ethanol.

Okay, okay the price -- I presume that the price of ethanol goes up and down with the price of corn.

It goes up and down with the price of corn. It goes up and down with the price of gasoline and obviously it has its own supply/demand variances, which also affect the price.

Okay we've seen a lot of commodities become over priced and then drop from their peaks. If that happened what would happen to your margins?

Well, at this point our forward view is that today supply and demand is actually very tight. Margins are quite strong and our view going into 2012 is that supply and demand with the minimum requirements under the Renewable Fuel Standard continue strength in exports and an industry that is running over 90% capacity that the supply/demand balances will continue to be balanced to slightly snug and that that will result in -- while we will continue to see volatility, our view is optimistic on margins in 2012.

Okay so if the price of corn went down you could capture some of that decrease?

That's absolutely what we've actually seen here of late is that corn has been coming off of its highs, which neared on the Chicago Board of Trade about $8 a bushel. We're down in the low sixes today and ethanol has not followed corn down and we have seen an expansion of the ethanol production margin because of it.

Okay that's great. ZeaChem relationship, first of all, does ZeaChem a conventional production based on corn or are they using some other cellulosic, some other enzymes?

They have an enzyme process to convert cellulose into ethanol and other chemicals.

That's not corn based.

Non corn so yes they're advanced biofuel, non-corn producer.

Okay so they do come up into a slightly different category of regulations.

That is correct.

Now you are going to maintain the refinery?

That is correct. We're under contract with the new agreement that we recently announced to provide services to manage the operations there.

And so you'll produce the ethanol and you will sell the ethanol.

The ethanol in the first phase is only anticipated to be 250,000 gallons. That is not directly addressed in our marketing agreement as it is a relatively insignificant amount of ethanol. We certainly could place that very effectively in the marketplace but that -- this is really more a commercial demonstration of their process as opposed to a full blown commercial production operation with larger firms.

From an accounting point of view will this be treated as other income or folded into miscellaneous revenue under the top line?

It will be top line in terms of a revenue stream.

If you open Madera in say the first quarter are there going to be any extraordinary charges to get that up and running?

No there's some fairly customary working capital. There is some actual CapEx. The plant has been down for now over -- well over two years and so we have some -- we've maintained it in very good working order so that we can start it up relatively quickly but we're going over that plan right now and there is some capital improvements that we will make before we start the plant but nothing out of the ordinary.

Great, great. Okay that does me. Thank you very much.

(Operator Instructions). And I currently show no questions in queue. (Operator Instructions). Gentlemen, I am showing no questions at this time. I'd like to turn the call back over to Neil for any closing remarks.

Thank you and thank you everybody for participating in the call. We continue to be very optimistic of the future of the Company and the industry and look forward to speaking with you next quarter. Have a great day.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program and you may now disconnect.