Alto Ingredients Inc (ALTO) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Pacific Ethanol fourth-quarter 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, this conference call is being recorded. I would now like to, conference over to Ms. Becky Herrick. Then, you may begin.

Thank you operator, and thank you everyone for joining us today for the Pacific Ethanol fourth-quarter and year-end 2011 financial results conference call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with an overview review of business highlights and then Bryan will provide details on the Company's quarterly and annual financial and operating results. Then Neil will return to discuss the Pacific Ethanol's vision and open the call for questions.

Before we get underlay to me first inform you that Pacific Ethanol issued a press release this afternoon that provides details of the Company's quarterly and annual financial and operating results. The Company also prepared a presentation for today's conference call available for download on the Company's website, at www.PacificEthanol.net. If you have any questions please call [Ellie Chey] at 415-433-3777. A telephone replay of today's call will be available until 11.59 PM Eastern time on Wednesday February 29, 2012, the details for which are included in today's press release. A webcast replay will also be available at Pacific Ethanol's website.

Please note information in this call speaks only as of today February 27, 2012. You are therefore advised that time-sensitive information may no longer be accurate as of the time of any reply.

Before I 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 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; that the strength of Pacific Ethanol's business model has laid the foundation for profitable growth in 2012; that the ethanol margin environment will improve as blend economics, renewable fuel standard requirements and seasonal swings of supply and demand drive higher capacity utilization rates 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 it recently filed Form S1A, filed with the Securities and Exchange Commission on February 1, 2012.

Also please note that the Company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the reported financial results as determined in accordance with GAAP. The Company defines adjusted EBITDA as unaudited earnings before interest, taxes, depreciation and amortization, faith value adjustment, (inaudible) investment in Front Range 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.

Thank you, Becky, and thank you all for joining us today on the call. 2011 was a year of accomplishment for Pacific Ethanol demonstrated by 174% growth in annual net sales, a strong gross profit of $19.4 million and growth of 56% in total gallons sold compared to 2010. Adjusted EBITDA also improved significantly from a negative $10.1 million in 2010 to a positive $5.3 million in 2011. With three of the four Pacific Ethanol plants running at capacity and improved average margins, we generated strong operating income during the year and delivered net income to common shareholders of $1.8 million.

For the fourth quarter of 2011, net sales grew 80% in total gallons sold grew 53% compared to the fourth quarter of 2010. Both production and third-party gallons sold increased as well as the average sales price per gallon. When compared to last year, we significantly grew gross profit and operating income.

In December of 2011, the industry was impacted by a drop in domestic gasoline and ethanol demand coupled with record high ethanol production rates which resulted in a significant and historic decline in ethanol prices as compared to November. The market dynamics in December negatively impacted our business, substantially reducing production margins and exposing our marketing business to high price volatility over only a few weeks' time. While this presented an end of the year challenge for 2011, we believe the margin environment as well as gasoline and ethanol demand will improve during the first and second quarters of 2012 as the seasonal swings typical of the industry do affect pricing.

Further, and for the longer-term view, underlying supply and demand is generally well-balanced on an annualized basis and will support positive industry-wide performance.

Looking back at the full year, many of the strategic events of 2011 further solidified our business model and set the stage for continued growth in 2012. During the fourth quarter, we retired in full our $35 million in senior convertible notes. We increased our ownership interest in the Pacific Ethanol plants from 20% to 34% and we diligently managed costs and operational efficiencies in all aspects of our business to sustain our growth going forward.

In 2012, we intend to build on the successes of 2011 and on our consistent mission to be the leading producer and marketer of low-carbon fuel in the Western United States. We expect to do this by expanding our revenue streams in all areas of our business, further strengthening our balance sheet by improving the terms of our plant indebtedness, further increasing our ownership in ethanol production facilities at favorable valuations and returning the Pacific Ethanol Madera plant to full production when market conditions permit.

We believe that these core business initiatives will strengthen the value of our diversified business model. In 2011, all three business areas -- production, marketing and asset management -- contributed to our growth in operating profitability. In production, most notably in the quarter we increased our ownership interest in the Pacific Ethanol plants at attractive valuations when compared to both replacement costs and the cost of our initial 20% interest. Increase in our ownership interest further positions the Company to gain from the long-term value of the assets. In 2012, we will look to increase the Company's ownership in these facilities to enable us to further benefit from the enduring value of the assets and their contribution to the Company's profitability.

We focus on achieving high plant efficiencies, reducing costs and evaluating and implementing technologies intended to improve plant operating performance and profitability. In 2011, we introduced new operating processes that have reduced costs and improved plant performance. We are working on projects to leverage our existing production assets to create new revenue streams. Examples would include implement in corn oil separation at the plants, installing combined heat and power for cogeneration and developing additional assets for the production of advanced biofuels as an integrated operation within the existing facilities.

In marketing, at both Kinergy and Pacific Ag Products, we remain focused on further expanding our relationships with our customers and other ethanol producers to grow our market share and improve profitability. Kinergy demonstrated increasing sales volume in 2011 and continues to be the leading marketer of ethanol in the Western United States. Kinergy markets all of the corn ethanol produced in California and maintains a strong third-party marketing business. It has a balanced portfolio of marketing agreements and third-party purchases and sales, and as such is well-positioned to continue its contribution to the profitability of the Company.

In asset management, in addition to the Pacific Ethanol plants, early in the fourth quarter we entered into an agreement with ZeaChem to provide operations, maintenance and accounting services for its advanced biofuel facility located next to the Pacific Ethanol Columbia plant in Boardman, Oregon. We recently entered the second phase of the agreement to provide full staffing and back-office management services. This expansion of our asset management business leverages our existing business, adds incremental earnings and applies our core capabilities to ZeaChem's leading technology for producing advanced biofuels. In 2012, we will continue to look for opportunities to leverage our asset management expertise.

We continue to carefully manage the commodity pricing exposure risks as they relate to our production and marketing business. In addition we are focused on managing our supply chains to lock in margins to the extent possible. Through risk management we partially mitigated the impact of the rapidly falling ethanol prices we experienced in December. Corn continues to be in high demand across all sectors, including feed and export.

While ethanol prices and margins have been under pressure in recent months, it is important to note that ethanol still trades at a steep discount to the price of gasoline. With high gasoline prices and volatility, ethanol remains the cheapest transportation fuel on the planet. In addition, ethanol producers, including Pacific Ethanol, have begun to moderate production rates at their facilities to address the current ethanol supply and demand imbalance. We continue to evaluate our production levels and will calibrate them according to changing market conditions.

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

Thank you Neil. For the fourth quarter of 2011, we reported net sales of $241.8 million, which compares to $134.2 million for the fourth quarter of 2010. The increase in net sales was primarily driven by operations at the Stockton plant which was idled during the fourth quarter of 2010. In addition, our average sales price per gallon increased 20% over the same period. Total gallons sold increased 53% to 116.3 million gallons in the fourth quarter of 2011 compared to 76 million gallons in the prior year's quarter. However, total gallon sold were down 5% sequentially from the third quarter of 2011. This decline is mostly from fewer third-party gallons sold due to reduced demand in December.

Gross profit for the fourth quarter of 2011 was $7.4 million compared to $1 million for the fourth quarter of 2010. The increase in gross profit was attributable to both an overall improved commodity margin environment in the early part of the fourth quarter of 2011 and the contribution from the Stockton plant operating in 2011. SG&A expenses, including professional fees, totaled $3.7 million in the fourth quarter of 2011 compared to $3.9 million for the fourth quarter of 2010. Operating income for the fourth quarter of 2011 was $3.7 million compared to a loss of $3 million for the same period of 2010.

During the fourth quarter of 2011, we recorded aggregate non-cash gains of $600,000 for the quarterly fair value adjustments on our convertible notes and warrants.

Net loss available to common stockholders for the fourth quarter of 2011 totaled $2.4 million, or $0.03 per share compared to a net loss of $12.1 million or $1 per share for the fourth quarter of 2010.

Adjusted EBITDA, which excludes the fair value adjustments, was negative $300,000 for the fourth quarter of 2011 compared to a positive $2.2 million for the fourth quarter of 2010. The decline was mostly attributable to a significant and sudden drop in the price of ethanol in the last half of the quarter. From mid-November to mid-December, the West Coast ethanol price dropped from $0.89 -- prices dropped by $0.89, or almost 30%. As we purchase third-party gallons in the Midwest for delivery to the West Coast, the price drop significantly impacted sales margins on our third-party business and resulted in the quarter-on-quarter drop in EBITDA.

For the full year of 2011, net sales were $901.2 million compared to $328.3 million in 2010. The net sales growth was related to a 56% increase in total gallons sold and an $0.83 or 42% increase in the average sales price per gallon of ethanol compared to last year. Net income available to common stockholders was $1.8 million compared to $71 million for the full year 2010 which included a non-cash gain from bankruptcy exit of $119.4 million. Diluted earnings per share were $0.05 compared to $5.57 per share for 2010. Adjusted EBITDA for the full year 2011 was $5.3 million and excluded fair value adjustments. This represents a $15.4 million improvement over our adjusted EBITDA loss of $10.1 million reported for the full year 2010 which excludes fair value adjustments lost from our investment in Front Range and gain from bankruptcy exit.

Turning to our balance sheet, working capital was $57.8 million at December 31 compared to $53.7 million at September 30. Also during the quarter, we reduced our debt by $19 million, including the retirement of $11 million of our remaining senior convertible notes. In December we closed an $8 million private placement transaction, the proceeds of which was used to purchase additional plan interest, and provided additional funds to meet general corporate needs.

At December 31 we had a total cash balance of $8.9 million compared to a cash balance of $16.8 million at September 30, 2011. The decline in cash reflects approximately $9 million of payments net of borrowings on our working capital lines and other debt, and $9 million used to acquire the additional 14% ownership interest in the Pacific Ethanol plants. These payments were partially offset by approximately $7 million in net proceeds from our equity raised in December and $4 million in cash flow from operations on a consolidated basis.

Looking ahead, we will evaluate opportunities to strengthen our balance sheet by restructuring our existing plant debt and reducing our interest costs. We will also look to further increase our ownership in the Pacific Ethanol plants at terms favorable to Pacific Ethanol and our shareholders. With that I'd like to return the call to Neil.

Thanks Bryon. As I mentioned earlier, the price of ethanol continues to trade at a very significant discount to the price of gasoline which establishes ethanol as the cheapest form of transportation fuel available and increases the economic incentive to boost ethanol blend levels. The National Renewable Fuel Standard also drives demand for ethanol production by requiring increasing amounts of renewable fuels in the gasoline supply through 2022, firmly supporting ethanol as an important and rapidly growing fuel source. We believe the National Renewable Fuel Standard is the only meaningful long-term national security measure in place to reduce our dependence on foreign oil as it ensures that an increasing amount of the nation's fuel supply is produced within the United States.

Refiners today are blending below the levels mandated and consistent with cyclical trends they will need to increase blend levels for the remainder of the year to be in compliance with the 2012 blending requirements.

In addition, the EPA recently certified E15. While there is a step or two more in the process we are encouraged by the progress in bringing E15 to the marketplace in 2012 as it will incrementally increase ethanol demand. As ethanol prices continue to trade at a discount to gasoline prices, higher ethanol blends such as E15 become more attractive, increasing the value proposition for purchasing ethanol and helping to moderate gasoline prices at the pump for the consumer.

We believe 2011 was an illustration of the power of our business model. We successfully built our market share in the Western United States, further diversified our revenue streams, increased our ownership interest in the Pacific Ethanol plants and diligently managed costs to position us for profitable growth. As I stated earlier, our objectives in 2012 are to further expand our revenue streams in production, asset management and marketing, implementing more cost-competitive plant debt structure, increase our ownership interest in the Pacific Ethanol plants to further benefit from these valuable assets, and to return the Pacific Ethanol Madera plant to full production.

We believe that strategic actions undertaken in 2011 lay a very strong foundation for our future success and our execution on our 2012 objectives will further solidify our position as 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. Please begin the Q&A session.

(Operator Instructions). Paul Resnick, Resnick Asset Management.

Good afternoon (multiple speakers) considering what's going on in the ethanol market, an incredible quarter. California is kind of an interesting state in a couple of ways when it comes to ethanol. I was wondering a couple questions here, whether you are in line or have received any support payments based on -- the laws in California that kind of provide a backup profitability.

I think you referring to the see that, the CPIP, the California Producer Incentive Program. That program does still exist. It has not been funded for 2012. We did receive $2 million of payments last year from the startup of the Stockton facility on that program. Given the current budgetary climate in California, it has not been re-upped, but it could be in the future and we are certainly looking on that. And I think the current margin environment show the benefit of that program to support new production and ties us into driving down the carbon intensity even lower at our facilities by receiving those payments, and we continue to believe it's a very solid program and hope that it does get refunded. But today it's not funded.

Thank you. And with regard to the CARB regulations, as far as -- where do they stand? I know there was hearings and reviews and what have you.

So the low carbon fuel standard, which was challenged in a court of law and a federal judge deemed on an initial ruling for the low carbon fuel standard to be unconstitutional on the basis of the dormant commerce clause. That ruling has been appealed by the state of California.

It is business as usual. The refiners continue to implement their obligations under that program, even though there has been an injunction that was also granted by the same federal judge. CARB has also appealed the District Court in San Francisco for a stay of that injunction and we should know in a couple of weeks whether they are successful.

There is uncertainty around that program. Our general view is that the low carbon fuel standard is a very important program for the state of California. There's a lot at stake as it relates to their overall climate change initiatives, and frankly their whole framework of fuel regulations, and they will work very hard to maintain the integrity of that program even if it means reworking the regulations in such a way that they can address the legal concerns. So it is business as usual today. There is some risk around the legal process, but we continue to receive a premium for the ethanol gallons that we produce in California and elsewhere that have a very low carbon store and believe that we will continue to benefit.

Thank you, a few more questions real quick here. First, generally in the industry, and I think you alluded to it, there in an effort to bring down the overhang of ethanol supply, there has been some cutback in production. So can we expect first-quarter production at your plants to be below fourth quarter?

That is quite possible. We have slowed down the plants to be responsive to the supply-demand imbalance. Others in the industry are doing so as well. We have seen a 5%-plus reduction in overall industry production. We've slowed our plants down a bit more than that and we just look at overall supply-demand in January and early February and saw that the industry was producing 15%-plus more product than the market was demanding. That was really an overhang from some fairly peak margins and record high production levels in the fourth quarter. So, yes, you can expect that our production based on the progress to date in Q1 will be a bit less than the fourth quarter.

Two questions about timing. Corn oil production -- roughly what's your time line on introducing corn oil production at your plants?

We have not finalized all of that scoping out exactly how we would do it, and the financing around that, but our expectation that we will be rolling that out in 2012 at least at one of our facilities if not more.

And -- I guess that -- yes. And lastly, E15. I think it was very crucial to roll that out in order to really get the production -- get the use up to the standard. What's your sense of how quickly that is going to be rolled out?

We couldn't agree with you more, and we think the fact that we have cleared virtually all of the hurdles from allowing blenders to start rolling out E15, and given the fact that today is ethanol without its tax incentive having expired at the end of the year is still trading at about $1 a gallon less than gasoline, that offers a very compelling opportunity for E15 to be introduced. We have probably just a number of weeks if not a month or so of final regulatory work, and then it's a matter of producers signing up and blenders signing up to engage in E15 blending. We do expect that in the second half of 2012 we will see modest yet meaningful amounts of E15. Could be upwards of 200 million gallon of ethanol used in that application with a lot more in the years out from there.

Certainly what you see is that when somebody introduces E15 and has lowered the cost of their fuel quite considerably by doing so, that becomes a real competitive incentive for the competitors across the street to do the same. And just as we saw when E10 was rolled out, there was -- it snowballed quite quickly when the economics were as clear as they are today.

So it is a very important part of implementing the renewable fuel standard, E15, and continued support from export markets, given ethanol's and US ethanol in particular's very competitive price on world markets we think will tight the supply-demand balance, given the discipline we're seeing on the production side will meet both the renewable fuel standard and continue to have a strong foundation for margin growth in the business.

That's all I had.

(Operator Instructions). Ian Gilson, Zacks Investment.

In the fourth quarter, basically your production declined versus the third quarter was all in third-party sales, basically, in the sense that you produced internally 38 million gallons in third quarter, 37.8 in the fourth quarter, and that's close enough to flat. Was this a conscious decision, or why was that decline -- why did that decline occur? And as we look into the current year, will the variability in a -- I'm sorry -- variability in sales be on the third party side or on your production side?

You can see some variability on both sides. What we have seen over the last few years is that we have continued to expand all aspects of the business, and that continues to be our objective. What happened in the fourth quarter was that gasoline demand was off very significant. And harking back to Paul's question on E15, we are pretty much captive to gasoline demand at 10% with gasoline demand off maybe even more than is typical of the winter season. And having the nature of our contracts where we meet 100% of many of our customers' needs, our individual contract sales went down with those gasoline sales.

Given that the market was also getting a bit long on product, there was some pricing that we consciously chose not to chase and want to focus more on making sure that what we do sell is done in a profitable manner.

So, principally, it was due to the gasoline demand, which does decline at this time of year, and we expect our sales on both the production side and the third-party to grow back as we see gasoline demand recover, and also as we start introducing E15 and look at other new markets opportunities for us, we expect to see continued expansion. But yes, there will be some variability along with the market dynamics.

Great. Is the current blend rate below the current mandated level, or below the level mandated for the full year?

If you annualize so far in 2012, the amount of ethanol that is being blended, it is at a rate that is less than the minimum 13.2 billion gallons. It's been more a little better than 12 billion gallon rate. Already in the last week or two, we are starting to see gasoline demand pick up and the ethanol blend -- the amount of ethanol blended with that gasoline accordingly. So we will see more blending as the year goes on and gasoline demand recovers and E15 is blended. But the point is that refiners to meet that requirement will have a compelling reason to blend more ethanol than they are today.

But on the numbers I look at, if gasoline consumption is less than a 5% increase 2012 over 2011, the amount of gasoline required -- it's still not enough, even E15, to pull the mandated ethanol production level.

Our view on the numbers is that there was about 137 billion gallon of gasoline sold in the United States in 2011. That number arguably could be actually less in 2012 even if it were 13.4, 13 point -- I mean, 134, 135 billion, that still supports at a 10% blend 13.4 to 13.5 billion with the minimum mandated requirement of 13.2. Most of the areas are now plumb for E10, not all, and that is why we think that E15 is important. But it's really more important as we move into 2013, because at that point with another 600 million gallons of minimum mandated demand and an expectation that we might see flat or possibly even further declines in overall gasoline use, we will need those higher-level blends to meet those requirements.

Thank you.

I'm showing no further questions at this time. I would like to turn the conference over to Mr. Neil Koehler for any closing remarks.

Thank you all for joining us today, we very much appreciate your support and look forward to giving you an update on our first-quarter earnings in a couple of months. Thank you and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.