Alto Ingredients Inc (ALTO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol first-quarter 2012 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 call is being recorded. I would now like to turn the conference over to Becky Herrick of LHA. You may begin.

Thank you, Operator. And thank you, everyone, for joining us today for the Pacific Ethanol first-quarter 2012 results conference call. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of business highlights, 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 this afternoon that provides details of the Company's quarterly 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 LHA at 415-433-3777. A telephone replay of today's call will be available until 11.59 PM Eastern Time on Wednesday, May 16, 2012 -- the details for which are included in today's press release. A webcast replay will also be available on Pacific Ethanol's website. Please note that information in this call speaks only as of today, May 10, 2012; 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 the 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 continue as the leading marketer and producer of low-carbon renewable fuels in the Western United States; the ability of Pacific Ethanol to improve various aspects of its business, including profitability, costs, yields, risk management, raw materials supplies, diversity of revenue streams, debt structure at the operating plant level and plant ownership, expected improvements in commodity margins and ethanol demand; the ability of Pacific Ethanol to leverage its industry expertise and diversified business model to gain market share and position itself for profitable growth; and the ability of Pacific Ethanol to resume production at the remaining idle California plant, which is at the discretion of the third-party plant owner.

These 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 recently filed Form 10-K filed with the Securities and Exchange Commission on March 8, 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, and fair value adjustments. To support the Company's review of non-GAAP information later in this call, a reconciling table is included in the press release that the Company issued this afternoon. It's now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thank you, Becky, and thank you all for joining us on the call today. For the first quarter of 2012, we reported growth of 14% in revenue and 36% in total gallons sold year over year, and a 67% increase in third-party gallons sold over the same time frame. While an unfavorable industry-wide market environment impacted our bottom line this quarter, we are encouraged by signs of improvement, as the ethanol market moves toward a better supply-and-demand balance.

Currently, US ethanol production is down approximately 10% from peak levels of late last year. Ethanol demand is increasing, as we reach the peak summer driving season; and ethanol inventories, while still relatively high, are beginning to decline -- down almost 4% just last week, as reported by the Department of Energy. Consequently, we believe the remainder of 2012 will demonstrate stronger commodity margins. This is a pattern that we have seen for the last number of years, with the first quarter demonstrating the lowest margin of the year, margins then recover in the second quarter, and strengthen in the third and fourth quarters.

We continue to execute on our plan to take advantage of extraordinary opportunities in the growing biofuels industry. And while we, like others in the ethanol industry, were negatively impacted by historically poor margins in the first quarter, our progress to date in growing revenues, improving operating efficiencies, reducing debt, lowering costs, and strengthening liquidity over the past 18 months puts us in a much better financial position to weather the storms in economically challenging times, and prosper and grow the business when market conditions permit. Today, we are more confident than ever that our industry expertise and diversified business model positions Pacific Ethanol for profitable growth and will enable us to gain market share in the markets we serve.

While we are pleased with the progress we have made, we are not finished with the task of fulfilling our mission as the industry leader in the West. To this end, we have set several goals for the Company this year. We are actively evaluating opportunities to increase our ownership interest in the Pacific Ethanol plants at attractive valuations. We are working to implement a more cost-competitive plant debt structure. We are looking to further improve operational efficiencies, to both increase yield and reduce production costs. We are moving to broaden our revenue streams in production through additional co-products, asset management, and marketing and sales of ethanol and feed. And while the current margin environment does not support the restart of Madera at this time, we are continuing to engage with our stakeholders to prepare for returning the plant to full production. We will do so when market conditions support that additional capacity. We are making strong progress on our objectives, and we look forward to updating you in the near term.

The ethanol industry as a whole has been challenged by a difficult market environment during the first quarter of the year. This is mainly caused by reduced gasoline demand, due to seasonal and economic factors, combined with the 10% blending limit of ethanol with gasoline, which we expect will be supplemented by blends of 15% later in the year. Current market limits have created an oversupply of ethanol, which in turn put downward pressure on production margins. During such times, our strategy is to improve operating and financial efficiencies are critically important. We continue cautious but effective risk management practices to secure margins at favorable levels when available, thereby mitigating our exposure to unfavorable market conditions.

With the price volatility and the uncertainty of supply from the corn markets, we benefit from the ability to access corn from a variety of the markets in the Midwest, as well as local producers near our production facilities. This is an advantage unique to our position as a West Coast producer of ethanol. To secure this advantage, we have contracts with suppliers that guarantee the delivery of corn, even in the most tightened supply conditions. We are continuously focused on reducing costs and increasing yields, to ensure the plants run as efficiently as possible. We have introduced new processes and technologies to this end, and we expect to add more, which will provide an overall lower cost of production for the Pacific Ethanol plants. We have introduced different strains of yeast, with a goal of reducing the cost of other ingredients. Additionally, we have reduced our SG&A costs 19% over the first quarter of 2011, and 8% from last quarter, as we focus on expense management at the corporate level.

Finally, we look to further diversify our revenue streams with additional co-products. We are currently evaluating opportunities for implementing corn oil separation at the plants, installing combined heat and power for co-generation, and developing additional assets for the production of advanced biofuels as an integrated operation within the existing facilities. The outlook for the industry remains positive. Fundamental industry drivers clearly demonstrate the long-term and sustainable opportunity for ethanol production. Ethanol demand is ultimately supported by the National Renewable Fuel Standard. This creates a floor for ethanol demand, currently at 10% of all gasoline, and growing to an equivalent of over 25% by 2022. This increase in blend levels of ethanol and other renewable fuels into the transportation fuel supply will further incent ethanol production.

In addition, the Renewable Fuel Standard reduces the US dependence on foreign oil, stimulates investment in domestic renewable energy, and has reduced the price of gas for consumers. According to several federal and independent sources, the blending of ethanol into gasoline reduced the average American household's gasoline costs by more than $800 in 2010 alone, or nearly $1 per gallon. And still, ethanol prices continue to trade at a discount to gasoline. Increasing ethanol blends, as supported by the Renewable Fuel Standard, is a practical and immediate solution to reducing gas prices at the pump for all consumers. Significant progress has been made by the EPA for blending up to 15% ethanol in gasoline. While only a nominal amount will be blended in 2012, we expect increasing amounts in 2013 and beyond, much like the way the country moved to blending 10% ethanol over the last several years. In addition, our application for E15 registration has recently been approved by the EPA, enabling us to further benefit from this meaningful regulation. Overall, we continue to believe underlying supply and demand is generally well balanced on an annualized basis, and will support positive industry-wide performance.

Pacific Ethanol has a unique business model, in that we are located in the West and produce ethanol and feed products locally. Because of this, we are able to differentiate ourselves from other producers in the Midwest who ship to other locations. As to our production business, in addition to our strategy to cut costs and improve efficiencies, we have also reduced plant production levels to adjust for the lower ethanol demand, as a result of challenging market conditions. As I mentioned earlier, we are seeing some improvement in the market, and expect ethanol demand and margins to increase, as gas demand builds ahead of the peak summer driving season.

Our ethanol marketing business continues its solid performance of trading and marketing ethanol from other production facilities. This business is not subject to the same margin environment of production, and provides a diversified earnings stream. Also, our feed marketing business has increased its contribution to production economics with stronger co-product returns. We expect both Kinergy and Pacific Ag Products to continue to deliver steady and sustainable earnings to our bottom line.

In our asset management business, we provide operational and maintenance services to the four Pacific Ethanol plants, as well as ZeaChem's cellulosic refinery in Boardman, Oregon. These agreements make significant contributions to the parent Company's cash flow, and are also insulated from commodity volatility. In summary, we have taken several significant steps to position Pacific Ethanol as an industry leader in the production and marketing of ethanol and co-products, and we will continue to make further progress. With that, I will turn the call over to Bryon McGregor, our CFO, to review the numbers. Bryon?

Thank you, Neil. For the first quarter of 2012, we reported net sales of $198 million, which grew 14% compared to $173 million for the first quarter of 2011. However, net sales were down 18% sequentially, due to the average sales price per gallon decreasing 16% from last quarter. Total gallons sold increased 36%, to 115 million gallons in the first quarter of 2012, compared to 85 million gallons in the prior year's quarter. Gross loss for the first quarter of 2012 was $7.5 million, compared to gross profit of $2.6 million for the first quarter of 2011. The decrease in gross profit was attributable to the unfavorable commodity margin environment.

SG&A expenses, including professional fees, were $3.4 million in the first quarter of 2012, compared to $4.2 million for the first quarter of 2011. Net loss available to common stockholders for the first quarter of 2012 was $5.3 million, or $0.06 per share; compared to a net loss of $294,000, or $0.02 per share, for the first quarter of 2011. Adjusted EBITDA, which excludes fair value adjustments, was negative $2.5 million for the first quarter of 2012, compared to a positive $1.5 million in the first quarter of 2011.

Turning to our balance sheet -- working capital was $46 million at March 31, compared to $58 million at December 31, 2011. This decrease in working capital is attributable to a reduction in cash and inventories, which in turn stem from poor margins and reductions in plant production. Although the cash impact was unfavorable, the Company's overall liquidity position remained strong, with cash and excess working capital [line] availability totaling approximately $27 million as of March 31.

In addition, we recently announced improvements in the financial terms of our line of credit for Kinergy, which effectively increases the total amount of credit facility from $35 million to $40 million, including a $10 million accordion feature; extends the term by two additional years, to the end of 2015; and folds in Pacific Ag Products' accounts receivable as an additional component to the borrowing base. In addition to demonstrating the confidence our lenders have in Pacific Ethanol's business plan, the changes in the credit facility improve our liquidity and borrowing costs, and provide low cost capital to fund future growth. As for the plants, it is our near-term goal to evaluate opportunities to strengthen their balance sheet by refinancing the existing plant debt and reducing the associated costs of capital. To that end, we are reviewing a number of strategic alternatives to further increase our ownership in the Pacific Ethanol plants, and refinance the debt on terms favorable to Pacific Ethanol and our shareholders. With that, I would like to return the call to Neil.

Thank you, Bryon. Our outlook for 2012 remains positive. As I mentioned in my opening remarks, there are signs of improvement in ethanol demand and stronger commodity margins in the second half of 2012. In addition, we are particularly encouraged by the most recent USDA report on the upcoming corn crop, issued just this morning, projecting the largest corn crop in history this year of 14.8 billion bushels, which is 1.7 billion bushels higher than the previous record of 13.1 billion bushels in 2009.

We remain focused on our vision to leverage our industry expertise, logistical advantage, and strategy for growth to build our market share in the Western United States and position the business for profitable growth. We are making strong progress on our objectives, and we look forward to updating you in the near future. With that, LaToya, I would like to open the call up for any questions.

Thank you.

(Operator Instructions)

Ian Gilson, Zacks Investment.

It's actually Giles Haycock calling on behalf of Ian from Zacks Investment Research. Can you just put some of your thoughts into the impact of the absence of a subsidy going into the future?

The impact of the loss of the subsidy was really quite temporal in nature. What it did do was accelerated ethanol blending before the expiration at the end of last year. So, we saw anywhere from 150 million to 200 million gallons of ethanol demand that really, naturally, both on a domestic use and export basis, naturally would have occurred in 2012, which occurred in 2011. So, that took what was already a challenging first quarter, given that gasoline demand is historically at its lowest point in the first quarter, and dropped the ethanol demand portion of that even further.

So, while the first quarter's margins typically, as I mentioned, are the lowest that we see in a year, that impact -- that fairly temporary impact, made them even worse than they might have been otherwise. Given that oil continues to trade in and around $100 a barrel, and given that we are seeing, frankly, some moderation in corn prices, the value proposition between the cost of making ethanol without the subsidy and selling it into a gasoline market are still very attractive without that tax credit.

That is why today we are selling ethanol at close to $1 a gallon less than gasoline. We could be selling it at $0.50 less than gasoline, be making very strong profits as ethanol producers, and still offering a very competitive priced product to the marketplace. So, we think, frankly, that the tax credit was a distraction -- political distraction last year, and that given the current price relationship between corn and gasoline, that the industry is well-positioned to continue to prosper without that tax credit.

Lovely, thank you. Another question on the other side -- what is the status of the lawsuit on the low-carbon initiative?

Well, as you are aware, and most people are aware of, the Low-Carbon Fuel Standard -- there was a federal court decision at the end of last year, very end of last year, that determined, on a preliminary decision, that the Low-Carbon Fuel Standard was unconstitutional on an interstate Commerce Clause. The State of California, which feels very strongly about defending and implementing this program, immediately filed an appeal.

As part of the original case, the federal judge granted an injunction from the California Air Resources Board in implementing -- actually enforcing that program. What happened with the most recent decision from the -- and CAR then asked the Ninth Circuit, where the appeal was filed, to stay that injunction. And that is what happened a couple of weeks ago, was that the court agreed with California and said -- we are going to stay the injunction while we continue to review the case on appeal.

That could take literally a number of years, and what that does is puts the program firmly back in place. There was confusion, obviously, in the first quarter, on whether there was going to be a program or not. Now, there is certainty that until the appeal is decided, that the Low-Carbon Fuel Standard is in place, being enforced; and that has a very positive impact for Pacific Ethanol, given that we produce the lowest carbon ethanol in the United States, and our product with that program is in high demand.

Fantastic. Thank you very much for your input.

(Operator Instructions) Paul Resnik, Uncommon Equities.

Zacks asked a couple of my questions, but I have a couple more -- on corn oil, do you feel that you will be -- there is a chance you will be producing corn oil before the end of this year?

That is our intention. We are very focused on that, and are trying to put in place the right pathway to make that a reality at one or more of our plants this year. The advantages of doing that are very strong, particularly in our markets, where corn oil has even higher value than it does in the Midwest. It can have a very significant beneficial impact to our financial performance, and we are very focused on implementing that this year.

And do you have handy your gallons per bushel that you achieved during the quarter?

I don't have that exact number, but they are in and around that same 2.75 to 2.8 range that is average in the industry. We are achieving -- at the current moment, we believe we are achieving a bit above average, and that is clearly our objective. We have a tremendous focus on making sure that we are not at average conversion efficiencies, but above average.

Okay. And lastly, in the current market environment, did you reduce production at any of the facilities?

We did. As we referenced in our comments and mentioned at the end of last year, that as a part of trying to do our share to balance supply and demand, given that we have been in an overproduction position as an industry, we have been running our plants in the first quarter, and continuing into the second, at roughly 90% of operating capacity. So, we have been running them at about 10% less than capacity.

Thank you very much.

Thank you. There are no further questions at this time. I will turn the call back over to Neil Koehler for closing remarks.

Thank you, LaToya, and thank you all for listening in to the call today. And we look forward to updating you on our next call. Have a good day.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.