Alto Ingredients Inc (ALTO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol second 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 conference call is being recorded. I would now like to turn the conference over to your host, Ms. Becky Herrick of LHA. You may begin.

Thank you, operator. Thank you, everyone, for joining us today for the Pacific Ethanol second 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. 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 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 August 21, 2012, the details of which are included in today's press release. The webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today, August 14, 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 Company's 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 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 a leading marketer and producer of low carbon renewable fuels in the Western United States, the ability of Pacific Ethanol to improve any outcomes of various aspects of its business, including margins, profitability, costs, yields, risk management, raw material supplies, and debt structure at the operating plant level, expected improvements in commodity margins and commodity and ethanol demand, the success and effects of Pacific Ethanol's implementation of corn oil separation, any increase of success of higher ethanol blends are all forward-looking statements and considerations that involve a number of risk 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 form 10-Q, to be filed with the Securities and Exchange Commission today, August 14, 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, in fair value adjustment. To support the Company's review of non-GAAP information later in this call, a reconciling table is included in the press release the Company issued this afternoon. It's now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thanks, Becky, and thank you all for joining us today to discuss our quarterly results. During the second quarter, we made significant progress in our efforts to position Pacific Ethanol as an industry leader in the production and marketing of ethanol and its co-products. We achieved several of the 2012 strategic objectives we laid out at the beginning of the year. First, on July 3, we completed a public equity offering for $11.3 million of net proceeds to finance the purchase of additional ownership interests in the Pacific Ethanol plants, and provide additional working capital. Then on July 13, we increased our ownership in the plants by 33%, at attractive valuations compared with replacement costs and market valuations, and at a discount to our last purchase price. Now, our combined 67% ownership in the plants provides us with more control over the strategic direction of the plants. We believe the long-term outlook for ethanol fundamentally supports our consolidation of plant ownership.

Also on July 13, we amended the credit agreement at the plant level. The amendment gives us a more favorable terms on a portion of our plant debt, and provides additional liquidity for plant operations. Looking ahead, we are evaluating additional opportunities to improve the terms of the remaining plant debt. As announced in early June, we further diversified our revenue stream in our production business. We contracted for the implementation of corn oil separation at our Magic Valley plant. Corn oil is a high value co-product. The Magic Valley plant is expected to produce approximately 12 million pounds of corn oil per year, which at current prices would contribute as much as $4.5 million or $0.07 per gallon of operating income annually. Equipment procurement and construction are underway, and we anticipate corn oil separation will begin generating revenue in the first quarter of 2013. In addition, we are currently in discussions with vendors to implement corn oil separation at our remaining three plants, which we expect to complete by the end of the first quarter of next year.

These are all positive developments for the Company during what has been a very challenging market environment for the first half of 2012. We are disappointed with the overall financial performance, both for the quarter and the first six months of the year. With the depressed production margins, the ethanol industry has already reduced production by approximately 15% from the December 2011 peak of 14.7 billion gallons, on an annualized basis. We too have operated the Pacific Ethanol plants at less than full production during this period, as we calibrate production levels to optimize efficiencies and meet our customers' needs. We are currently seeing signs of improvement as ethanol achieves a better supply and demand balance. As ethanol inventories return to a more balanced level, we believe production margins will improve, and we expect better results in the third and fourth quarters.

The industry has also been challenged by volatile and high corn prices, reflective of tight supplies of corn. This year's corn crop had the promise of being the largest in history, with over 95 million acres planted, 5% larger in acreage from the previous year's crop. However, with the high temperatures and drought conditions affecting the Midwest as the new corn crop was pollinating, the resulting damage to crops across the corn belt has been significant. Last week, the USDA estimated the corn crop to be 10.8 billion bushels, which is approximately a 13% decrease from last year's crop. Demand for corn from all sectors, including domestic feed, ethanol production, and export, will continue to be matched to the actual corn supply. Market forces will ration demand to appropriate levels.

In these situations, our geographic location, risk management strategies, and supply guarantees show their value. Our position as a West Coast producer of ethanol affords us the unique ability to access corn from a variety of markets in the Midwest, local producers near our production facilities, and even from overseas. We have contracts with suppliers that guarantee the delivery of corn, even in the most tight supply conditions. The locations of our plants near multiple rail lines provide options on where to source our corn. The quality and supply of local corn near our plants are not impacted by the drought in the Midwest. We also have access to, and have recently procured alternative feedstocks to corn such as Milo. Our proximity to the western ports provide us the opportunity to procure imported feedstock, and West Coast markets for ethanol tend to trade stronger premiums to Midwest markets as supplies tighten.

In addition, our risk management practices are aimed at securing margins at favorable levels, when available, which mitigate some of our exposure to these volatile market conditions. Also, our marketing and asset management businesses are important factors in our ability to maintain consistent operations at the Pacific Ethanol plants during this period of depressed operating margins. The price of feed has strengthened on a relative basis due to price of corn, with corn prices up and supplies down, feed supplies have tightened, which contributes positively to our feed marketing business.

Looking ahead, we remain focused on both returning the operations to profitability, and the longer-term direction of the Company. We are confident that the fundamentals of the industry remain positive for the long-term, and our geographic position as a West Coast marketer and producer of low-carbon renewable fuel provides us with a competitive advantage. The renewable fuels standard continues to support long-term demand for ethanol.

Despite recent articles and commentary, the RFS is probably in place to support the increased use of biofuels in the nation's fuel supply. The RFS reduces the cost of gasoline to consumers, delivers a high octane fuel to blenders, provides nearly 500,000 jobs across the US economy, and reduces our nation's dependence on foreign oil. As discussed, the industry has reduced its demand for corn, and importantly in a drought year, the RFS has mechanisms in place to enable obligated parties to replace physical purchases of renewable fuel with blending credit known as RINs. There are an estimated 2.5 billion to 2.6 billion surplus RINs in the market, and combined with current physical ethanol inventories, provide significant flexibility for refiners to meet their RFS commitments. This is why the ethanol industry has been able to reduce its use of corn by an estimated 500 million bushels this year, taking some needed pressure off the corn market, while still allowing for RFS compliance.

Nevertheless, as market conditions stabilize over the next year, we do expect an increase in the blending of up to 15% ethanol in gasoline as the EPA has approved and permitted blends at that level. Midwest gas stations have begun offering the 15% ethanol blend, beginning a trend that we expect to expand across the country. In PEI, the E15 registration has prepared us to benefit from this meaningful regulation, as it becomes more prevalent in our markets in the months and years ahead.

In summary, we have made significant progress on our strategic objectives for 2012. We increased our ownership in the Pacific Ethanol plants, thereby positioning the Company to benefit more from these valuable assets. We obtained more favorable terms on a portion of our plant debt, we further broadened our income stream by beginning to implement corn oil separation at our plants, we continued the growth of our marketing business, and we performed well in our asset management activities. Despite the adverse market, we have solidified Pacific Ethanol's position as an industry leader in the marketing and production of ethanol and co-products. With that, I will turn the call to Bryon McGregor, our CFO, to review the numbers. Bryon?

Thank you, Neil. For the second quarter of 2012, we reported net sales of $205 million compared to $215 million in the second quarter of 2011. Net sales were down slightly due to the average sales price per gallon decreasing 18% from the same quarter last year. Total gallons sold increased 16% to 117 million gallons in the second quarter of 2012 compared to 101 million gallons in the same quarter in the prior year. Gross loss for the second quarter of 2012 was $4.9 million compared to gross profit of $1.3 million in the second quarter of2011. The decrease in gross profit is attributable to the unfavorable commodity margin environment impacting plant operations and volatile ethanol prices negatively affecting trading activities. As mentioned previously, we reduced production levels to optimize production efficiencies, and have increased hedging activities to minimize price volatility risk.

SG&A expenses were $3.1 million in the second quarter of 2012 compared to $4.1 million in the second quarter of 2011. The year-over-year decrease in SG&A expenses was primarily due to a reduction in stock-based compensation expense and reduced professional fees. In addition, we expect SG&A to decline in future quarters. Our 67% ownership interest in the Pacific Ethanol plants enabled us to further reduce our overhead costs, and more efficiently use our existing staff and resources to manage the plants and reduce overhead redundancies. Loss available to common stockholders for the second quarter of 2012 was $2.9 million or $0.03 per share, compared to income available to common stockholders of $0.4 million or $0.03 per share in the second quarter of 2011. Adjusted EBITDA, which excludes fair value adjustments, was negative $1.5 million in the second quarter of 2012, compared to adjusted EBITDA of positive $1.2 million in the second quarter of 2011.

For the six months ended June 30, 2012, net sales were $403 million, compared to $388 million in the same period of 2011. For the six months of 2012, loss available to common stockholders was $8.2 million compared to income available to common stockholders of $0.1 million in the same period of 2011. For the first six months of 2012, adjusted EBITDA was negative $4.1 million compared to adjusted EBITDA of positive $2.7 million in the same period of 2011.

Turning to our balance sheet, cash and cash equivalents were $5.7 million at June 30, 2012, compared to $5 million at March 31, 2012. We continue to focus on improving our cash balances and maximizing liquidity. As Neil mentioned, we raised $11.3 million in net proceeds from a public equity offering that closed on July 3. Approximately $10 million was used to purchase the additional 33% ownership interest in the plants, and we intend to use the remainder of the net proceeds for dealer-related costs and general corporate purposes. On June 30, our current liabilities increased $39 million from last quarter, which primarily reflects the reclassification of $40 million of plant-level debt from non-current to current as it becomes due in June 2013 under the terms of the original loan agreement.

As noted earlier in July, we extended $47 million of the plant debt by three years, with our objective to refinance the remaining now-current portion over the next 12 months. As part of the plant debt refinancing, we increased the amount of the financed revolving credit facility by $5 million to a total of $40 million, to provide additional immediate liquidity for the plant's operations. We also negotiated the ability to capitalize about half of the future monthly interest payments through June 2013. As of June 30, we had total unused lines of credit of nearly $32 million, with immediate access to $13 million in availability.

In terms of plant debt, we intend to continue working on the remaining current balance over the coming year. Given the volatility in the industry and the market, we have found it more advantageous to address the debt in phases, rather than on a lump-sum basis. For the next 12 months, we will diligently manage current cash balances and seek improved terms for the remaining plant debt, to secure a future foundation of stability to our balance sheet. With that, I would like to return the call to Neil.

Thanks, Bryon. Pacific Ethanol and the ethanol industry have experienced historically low margins in this last quarter. Although the poor market conditions have negatively impacted the Company, the actions we have taken over the past two years in strengthening the balance sheet, reducing costs, expanding and improving liquidity, and reinvesting in core assets has allowed us to weather this storm, and provided a means to take advantage of improving margins. We believe in the future of the ethanol industry and we continue to execute on our goals despite the near-term challenges.

We remain committed to implementing plant improvements that increase yields, reduce costs, and increase revenue. Evaluating strategies to reduce our carbon intensity and to produce advanced biofuels, using local feedstocks, within our existing facilities. Our well-established ethanol and feed marketing businesses, which enhance our ability to maintain consistent operations at the Pacific Ethanol plants during periods of depressed operating margins. And realizing the value of our asset management business, which continues to provide steady cash flow to the parent company, and is mostly insulated from depressed operating margins and commodity price volatility.

We believe the actions we have undertaken have improved our ability to benefit from our forecasted recovery in the market during the third and fourth quarters. We are focused on executing on objectives that will benefit the Company and our shareholders in the long-term. We look forward to keeping you updated on our progress. With that, Mimi, I would like to open the call for questions.

(Operator Instructions)

And our first question comes from Ian Gilson of Zacks Investments, your line is open.

Could you go through again for me your comments about the 12 million-gallons per year of corn oil? Is that on total plants or just on the one plant you are going to open?

That would be on the one plant.

Okay.

But it would be as we implemented the other plants, based on the size of those facilities, in Stockton, it will be comparable. In the 40 million-gallon plants, it will be proportionally lower.

How much corn oil do you get out of a bushel of corn?

We are using relatively conservative numbers in and around 0.5 pounds per bushel. We are seeing in the industry numbers that are achieving 0.6, even a little bit higher than that. That a good conservative number to use is 0.5 pounds of oil per bushel.

Looking at the mix between internally-generated ethanol and your third-party revenue, I presume that is primarily the Kinergy revenue?

Yes. Kinergy markets all of the ethanol, and it sources that ethanol from a combination of the Pacific Ethanol plants, other marketing agreements, three in particular, and then a trading business, purchasing ethanol primarily from the Midwest and railcars.

Given the fact that industry there are plants that are closing, do you have an assured supply to maintain that level of third-party gallons?

We do. This is a fairly liquid market, and yes, production has declined as well as the demand for ethanol, in response to the corn situation. We are certainly proud of the fact we have been able to maintain and even grow our sales, even with what been a declining market. We have many ways to source that third-party ethanol, and feel we have a very resilient, diverse system for providing ethanol to our markets.

Okay. You are still back some production for the second-quarter levels at the moment?

Yes, we did. In the second quarter, if you look at our publicly-available numbers on a sales basis we were about 7% less than capacity of the three operating plants. If you throw in the Madera plant that is not operating on our full 200-million gallons of capacity, we are running at about a 75% level of capacity.

Are you running Madera on any capacity?

Madera is currently not running.

That's what I thought. So what do you do if corn stays at the current price level? I presume you are paying close to the market? Possibly some future hedging, but I can't see there is much cash flow out of a bushel of corn at the current price relationships?

That is correct. This has been a very challenging margin environment. We have sources of liquidity that have allowed us to operate in this market, and will continue to allow us to operate in this market. That being said, we look at the levels of production against our expected results, and have been calibrating the production levels at the plants accordingly. In the case of dropping back on production a bit, we have been able to source that demand that continues to be in our market by acquiring additional third-party ethanol, and we will continue to do that, as well.

It is our expectation that since this is a condition that certainly has been hurting all ethanol producers, and given that the demand for the product is so strong that ethanol pricing, even with these high input prices, is trading at a very steep discount, about $0.40 a gallon to gasoline, that the market will continue to demand ethanol, albeit less than at some of our peak levels, and that as the inventories have been falling, we expect the margins to improve.

Okay. At your inventories, are they primarily all ethanol, both stored and in transit?

That is correct.

They're about the same level for year-end, aren't they?

I don't find the right number. It could be. We run pretty consistent inventories. (multiple speakers)

At 16.3?

Yes, Ian, one of the things you have to keep in mind is you have to consider inventories both at the plant and inventories that you purchase through third-party for your trading activity. So that would be approximately the same, right? You're fulfilling obligations under the Kinergy trading activity. You saw that volume, that number of gallons sold, continue to be, to grow a little bit, but the plant production is also, we don't split out those two numbers.

So what is prepaid inventory?

That would be product that is purchased, third-party ethanol purchased Midwest that requires pre-payment rather than on terms.

So that was down from 9 to 6?

That's correct.

All right. Fine. Thank you very much.

Our next question comes from Paul Resnik with Uncommon Equities. Your line is open.

I was wondering, what is the cost of implementing the corn oil separation at a plant, roughly? Hello?

Paul, the cost is relatively modest to the pay back, and we've been able to do it on a vendor-financed rate, so that we pay back that cost of that equipment over the sales of the corn oil. We expect a pay back of less than one year.

Excellent. I'm just wondering, interesting things always happen in California. What's the current state of the implementation of the California Low Carbon Fuel Standard?

The Low Carbon Fuel Standard is very much in place. There continues to be some legal activity. But what had been a temporary injunction to not implement the program was stayed, and the program is very much back in force. That continues to provide a couple of cents of premium for our product, and certainly all indications are is that we go into another doubling of that requirement, of carbon reductions next year, and the compliance schedule continues to slope up pretty steeply, that those values will become greater.

Oil companies are taking it very seriously, they have a keen interest in staying aligned with the ethanol that we market, since we market all of the lowest carbon ethanol produced in California through Kinergy, from the Pacific Ethanol plants, and the two other marketing agreements. Opus has recently started to post both a dollars per ton and a cents per carbon point, so we are seeing more prices, more activity around trading of credits. We expect that to ramp up, as well in 2013. We continue to believe the ability of Pacific Ethanol to produce and market the lowest carbon ethanol produced in the United States into California is a key competitive advantage.

Excellent. As I read assembly Bill 523, and how it affects CEPIP, that does not change anything through July 1, 2013. I was wondering whether, that being the case, I was wondering whether CEPIP was really functioning now, and whether that provided any benefit to you?

Currently, it has not. And CEPIP was funded once, and we received support at our Stockton plant, and it was very key in the start up of that facility. I will tell you that theirs was a public hearing, you can look at the record on that at the Energy Commission. We were presenting, as well other corn ethanol companies in California, and advanced biofuels, and academics having a workshop to determine if CEPIP should in fact be refunded. The workshop went very well. It's politics and policy, and we will see how it plays out. But there is certainly in play right now, the possibility that CEPIP would receive some additional funding.

So the law is in place, but the funding isn't.

That's correct.

Got you. Okay. With regard, how long, if you decide to start up the Madera plant, what would a ramp-up period take?

It would take 60 to 90 days.

60 to 90 days. As far as corn oil at the other two facilities, do you have any general idea about when next year that could happen?

As we said in our script, prepared remarks here, we want to have those contracts in place by the beginning of next year and to be implemented soon thereafter. So, it definitely is an initiative for 2013, with an objective to have that be in the first half of the year. So, by the time we are through 2013, we have corn oil at all of our operating facilities.

Very good. Thank you very much.

Thank you, Paul.

(Operator Instructions)

I'm showing no questions in the queue at this time. I'll hand the call back to Neil Koehler for closing remarks.

Thank you. Thank you all for participating on the call. Thank you for your ongoing support of Pacific Ethanol. We will speak with you next quarter. Have a nice afternoon.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.