Alto Ingredients Inc (ALTO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol fourth quarter and year-end 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 may be recorded. I would now like to introduce your host for today's conference Becky Herrick. Ma'am, you may begin.

Thank you, Sam, and thank you everyone for joining us today for the Pacific Ethanol fourth-quarter and year-end 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 the business highlights and then Bryon will provide details on the Company's financial and operating results. Neil will return to the discuss Pacific Ethanol's outlook and open the call for questions.

Before we get underway, let me first inform you that Pacific Ethanol issued a press release on March 27 that provides details of the Company's quarterly results. The Company also prepared a presentation for today's conference called that is available for download on the Company's website at 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 April 9, the details of which are included in the press release issued on the 27th. A webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today April 2, 2013 and, therefore, you are advised that any time-sensitive information may no longer be accurate at the time that any replay. Please refer to the Company's Safe Harbor statement on slide 2 of the presentation available online, which says that some of the comments in this presentation constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, Company performance, and financial results.

Forward-looking statements are based on many assumptions and factors. Any changes in such assumptions or factors could produce significantly different results. Information about potential factors that could affect the Company's financial results are available in the Company's Risk Factors section, as updated in the Company's SEC filings.

To the extent permitted under applicable laws the Company assumes no obligation to update any forward-looking statements as a result of new information or future events. 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 the Company issued on March 27.

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

Thank you, Becky, and thank you all for joining us this morning.

The ethanol industry in 2012 suffered through historically low production margins. As supply exceeded demand, several plants across the industry suspended operations and corn prices were at historic highs due to drought conditions in the Midwest. These factors had a negative impact on Pacific Ethanol as well as the rest of the industry.

While we were disappointed with our financial results, we are proud of our accomplishments as we achieved significant financial and operational milestones, positioning the Company well for 2013 and beyond.

We refinanced nearly all the remaining plant that debt at levels and terms that provide long-term stability for the operations of these assets, and strengthen our corporate balance sheet to provide for growth in 2013. Since the beginning of 2012, we have increased our ownership interest in the plants from 34% to 83%, at favorable valuations compared to both market and replacement value. We reduced operating costs, increased efficiencies at the plants, and moderated production when necessary to offset unfavorable margins, while meeting our customer commitments in the fuel and feed markets and preserving the overall enterprise value of the Company.

In fact, with our integrated production and marketing platform we sold a record number of gallons in 2012. By executing on these goals we established at the beginning of last year, we are a better, stronger and leaner Company, well-positioned to return to profitability as the overall market conditions improve.

During the first quarter we have seen improvements in production margins as supply and demand in the industry are better balance. Most recently corn prices have fallen almost $1 per bushel or 15% since the USDA last Thursday reported larger than expected corn inventories and projected record production for this year's corn crop, which is providing a reduction in our cost of production.

We remain focused on diversifying our revenues in feedstocks. We are well on our way in implementing corn oil separation in each of our production facilities, which provides a high value coproduct to the feed and bio-diesel markets and significantly improves our operating margins. We are in startup mode for production of corn oil at our Magic Valley facility, and we're in the midst of construction at our Stockton plant and expect to be in production at both plants during the second quarter.

Both in 2012 and in 2013 we have procured grain sorghum from local, Midwest, and international markets, providing a lower cost alternative to corn. In February of 2013 we signed a multiyear agreement with Chromatin, a leading provider of innovative crop breeding technology for the production, delivery and use of California-grown sorghum in ethanol production.

The use of sorghum enables us to reduce feedstock costs and improve our carbon footprint, and puts us on a path to produce advanced biofuel within our existing facilities. During 2013 we will work to gain advanced biofuel producer eligibility with the EPA.

We are also working with technology partners to integrate cellulosic and other advanced biofuels within existing operations. While these are longer-term initiatives we remain convinced that our plants will produce ethanol from a variety of feedstocks as the technology to produce transportation fuels improves, both from a technical and economic perspective.

Improving yields and driving cost efficiencies at the plants continues as one of our most important objectives. We have introduced new processes and technologies at the plants and we expect to add more, which are intended to lower our cost of production.

In January 2013 we announced the installation of an improved corn grinding technology with Edeniq, an advanced biofuel technology company which is expected to enhance yields and operations at our Stockton plant. The Edeniq Cellunator also laid the foundation for the conversion of the cellulosic fraction of the corn kernel to ethanol, which enables a conventional plant to potentially produce cellulosic ethanol. This represents another pathway for eventual advanced biofuel production at our facilities.

In summary, all of these strategies bring us closer to our ultimate goals to reduce expenses, grow market share in the production and marketing of low carbon fuels and increase overall profitability.

We continue to benefit from our geographic location for our operations and marketing. Our Western location provides us with a variety of procurement options while also keeping our transportation costs down.

As the entire country has suffered from tight and dislocated corn supplies caused by last summer's drought, we have been able to source corn from a variety of locations, not being dependent upon any one area for sourcing our corn. This has allowed us to focus our attention on quality and price.

Our plants produce among the lowest carbon fuel in the country, and our ethanol marketing company, Kinergy, is able to capture value through its extensive relationships and networks in the industry to deliver carbon-specific products to our customers. With the continued implementation of the California Low Carbon Fuel Standard, we have seen an increase in the premium value we receive for our low carbon products and expect to see this trend continue in 2013.

I would like to now turn the call over to our CFO, Bryon McGregor, to review the numbers. Bryon?

Thank you, Neil. For the fourth quarter of 2012 we reported net sales of $197 million compared to $242 million in the fourth quarter of 2011. Net sales were down due to a decline in both total gallons sold and average price per gallon of ethanol sold. The reduction in gallons sold is attributable to our efforts to moderate gallons produced so as to limit the negative impact of poor production margins.

Gross loss for the fourth quarter of 2012 was $4.7 million compared to gross profit of $7.4 million in the fourth quarter of 2011.

SG&A expenses were $2.7 million in the fourth quarter of 2012 compared to $3.7 million in the fourth quarter of 2011. The year-over-year decrease in SG&A expenses was related to lower professional fees and lower overhead costs associated with New PE Holdco.

Loss available to common stockholders for the fourth quarter of 2012 was $5.8 million or $0.04 per share compared to a loss of $2.4 million or $0.03 per share in the fourth quarter of 2011. Adjusted EBITDA, which excludes fair value adjustments, was negative $2.6 million in the fourth quarter of 2012 compared to a negative $300,000 in the fourth quarter of 2011.

For the full year ended December 31, 2012, net sales were $816 million compared to $901 million for 2011. Although total gallons sold were up year-over-year, the decline in net sales is attributable to both lower ethanol prices and our efforts to moderate production to minimize negative margin impacts while honoring our feed and fuel contractual obligations.

For the full year 2012, loss available to common stockholders was $20.3 million compared to income available to common stockholders of $1.8 million in 2011. For the full year 2012 adjusted EBITDA was negative $7.5 million compared to adjusted EBITDA of positive $5.3 million in 2011.

Turning to our balance sheet, cash and cash equivalents were $7.6 million at December 31, 2012, compared to $18.7 million at September 30, 2012. In comparing balances, it is important to remember that we raised $11 million in gross proceeds from a public equity offering that closed on September 26 and is reflected in the reported September-ending cash balances.

In early October we used the $10 million of the proceeds to fully repay senior unsecured notes due in April of 2013, with the remaining proceeds contributing to working capital. As of December 31, we had total unused lines of credit of over $11 million with immediate access to $4 million in availability.

We remain committed to improving our debt position, to strengthening our balance sheet and operations. In this regard, and as Neil mentioned, we completed several transactions over the past nine months that restructure the plant debt, improve the terms and extend the maturities.

During 2012 we completed two public equity offerings. The first was for $12 million and closed on July 3. With this we increased our ownership and the Pacific Ethanol plants from 34% to 67%, gaining the strategic control needed to improve operations and lower cost at purchased values well below market and replacement costs. And, now, with the closing of our recent transaction, we will be at over 83%.

The second was the public offering for $11 million previously mentioned that closed on September 26.

During the fourth quarter we attained a $10 million line of credit from -- for the Pacific Ethanol plants from one of our existing lenders, Credit Suisse, which provided necessary liquidity during the challenging margin environment of last year.

In January 2013 we purchased approximately $22 million of secured debt at the Pacific Ethanol plants and extended the maturity date from June 2013 to June 2016. In addition, we extended the maturity of the plant's $10 million secured revolving credit facility from June 2013 to June 2015.

To fund these transactions we issued $22.2 million of senior unsecured notes and warrants. By so doing, we reduce our cost of borrowing on this debt from 13.25% to 5%, an annualized interest expense savings of almost $1.8 million.

Finally, and most recently, on March 28 we entered into agreements to issue up to $14 million of subordinated convertible notes, with the first tranche of $6 million closing on March 28 and the second tranche conditional upon stockholder approval by June of this year.

The proceeds will be used to purchase newly extended plant debt of $6.6 million; to purchase and retire additional plant debt of $3.5 million; to provide $5 million in additional liquidity to the plants; and to provide a $2 million cash reserve at the parent. In addition, and as I mentioned previously, we secured an additional 3% ownership interest in the Pacific Ethanol plants, bringing our total ownership to 83%.

Upon the closing of both tranches, we will no longer have any plant debt due in 2013, thereby providing a stable capital structure for the long-term. Similar to the transactions completed earlier this year, by issuing subordinated convertible debt at lower borrowing rates we will further reduce the Company's cash interest payments by over $700,000 on an annualized basis.

In summary, this series of financial transactions we have undertaken in 2012 and 2013 have enabled us to increase our ownership interest in the Pacific Ethanol plants sufficient to provide us control over the future of the assets, reduce costs and implement strategies to improve profitability at the plants. In addition, the extra liquidity provided by the 2012 transactions afforded us the ability to continue plant operations even during an environment worse than that of 2009 when the plants went through a restructuring.

We are pleased we were able to secure better terms and structure for these facilities during extremely the different difficult financial environment and an industry largely avoided by traditional banks and investors since the recession. We believe our strategy to service specific Company debt obligations through the use of equity and equity-linked financial instruments, albeit dilutive, has been both necessary and in the best interest of all shareholders.

We are pleased with the progress we made in 2012 and are confident that the steps taken to date have put us on strong footing for profitable growth as the markets improve. With that I would like to return the call to Neil.

Thanks, Bryon. The Renewable Fuel Standard, or RFS, provides the long-term support for the sustained growth in biofuel demand. The RFS lessens our dependence on oil, lowers gasoline costs, diversifies our energy sources and reduces greenhouse gas emissions from transportation fuels.

Since the passage of the RFS in 2007, refiners have been aware of the increasing requirements for renewable fuels inclusion. In 2009 the EPA was petitioned to allow for ethanol blends of 15% and granted this for vehicles with model years 2001 and newer, representing over two-thirds of the cars on the road today. While refiners have resisted blending to 15% levels, the fact is that E15 is the most tested fuel in motor vehicle history, and all cars can run effectively on blends of 15% ethanol.

Another fact is that for 30 years Brazil has run cars on between 20% and 25% ethanol blends. Ethanol trades at a $0.50 to $0.70 discount to gasoline on a wholesale basis and provides valuable, clean volume and octane. We are confident that the RFS and market dynamics will successfully deliver higher inclusion rates of ethanol and other renewable fuels into our national fuel supply.

It is time for consumers to be given true choice at the pump of the fuels they purchase. The RFS and the migration toward higher levels of ethanol blending is a right step in this direction. We are working proactively with our national trade organizations, state and local governments, and our customers to facilitate the increased blending of low carbon, low cost, clean-burning fuels into gasoline.

We are optimistic about 2013. With the financing transactions Bryon just reviewed, increased efficiencies at the plants, a strong marketing Company with Kinergy and improving market conditions in general, we feel we are well-positioned to return to profitability as overall market conditions improve.

Looking ahead, our primary goals this year are to continue to improve operating efficiencies at the plants, diversify our revenue and feedstock, increase product values by further reducing the carbon intensity of our ethanol, and return the Company to profitability.

We look forward to keeping you updated on our progress. With that, Sam, I would like to open the call for any questions.

(Operator Instructions). Paul Resnik, Uncommon Equities.

Corn prices have been pretty dramatic in the past few days, and understanding two days of market acts is not a guaranteed predictor of where corn is going to be on a sustained basis, right now given corn prices, given ethanol prices, and where the crush spread is, we talk about returning to profitability. But how close to profitability -- profitable ethanol operations are we, with today's crush spread?

Caveat anything I say with your own opening remark on the volatility, and we expect to continue to see volatility in these commodity markets -- corn and ethanol -- this year as we clarify what the new corn crop looks like, how we resolve issues on E15, et cetera.

But what we have seen directionally in -- even before the USDA reported last year quarter-over-quarter an improvement in the board crush margins. This is all publicly available information, so I am not offering any guidance. But what you can see is that your typical ethanol plant today, at the current price of corn and the current value of ethanol, is profitable.

That is incredibly good news. Relative to the cost of sorghum, which just two weeks ago looked a lot cheaper than corn, what is the relative cost of sorghum to corn at the current time?

Sorghum in a historical context, and it is true today, again with volatility that from a short-term basis can mask this, but it trades at a discount to corn. So when we buy sorghum, we actually buy it as we buy our corn as an index to the board.

If we buy it out forward, which we have done on both corn and sorghum, we don't buy it at a fixed price. We buy it as an indexed basis relationship to the board. And sorghum continues to trade at a discount to corn on that basis.

Great. Okay. Given what is going on with the spread, any color on your current thinking regarding Madera?

Our thinking on Madera is the same which it has been, is that when the market has fully clarified itself in terms of needing incremental product for the market, and specifically in our context, the lower carbon ethanol that we can produce from that facility, that we will start it.

What we have done from a balance sheet perspective in these recent transactions has given us the option and the working capital to be able to start Madera. I would say that again, on your volatility point, these are fairly recent developments in terms of the improvement in the crush margin environment. There's still some work to understand exactly what today's corn crop looks like, or next year's corn crop looks like, as well as the increase in market demand with E15 blending.

The available production today is not sufficient to meet the mandated demand, so there is need for incremental ethanol to meet the demand in 2013. So we are optimistic about the future of starting out Madera, but at this point it is too early to tell when that might be.

You did mention continued progress with the Low Carbon Fuel Standard implementation. So could you flex that out a little bit, exactly what the requirements are and how they're being implemented?

Yes. The Low Carbon Fuel Standard requires the obligated parties, the blenders, refiners in the state of California, anyone who is selling gasoline or diesel, to reduce the carbon intensity of their fuel by 2020 by 10%. The compliance schedule of that is a real hockey stick. The first couple of years were fractions of a percent. We're up to 1%. And then in the out years, really 2015 to 2020, most of those reductions kick into place.

We are seeing with the -- now up to a little over 1%, which is a pretty material amount of carbon intensity reduction and the clarity, and I think the recognition in the market, the Low Carbon Fuel Standard is not going to go away. There is more activity in the market to make sure that refiners have sufficient quantities of low carbon fuel.

Low carbon ethanol has provided the lion's share of the compliance in this program and will continue to do so over the next couple of years. And so what that has resulted in, in 2013 over 2012, and 2012 over 2011 when the program began, is a gradual increase in the value of the low carbon ethanol, which is measured in metric tons. And what that means in the marketplace is that for the [80-scored] ethanol we produce compared to your Midwest average of [98], that we have seen in today's market, close to $0.05 a gallon of premium value for the ethanol we produce.

That is equivalent to $40 a metric ton, which is the value of the carbon credits traded in California, and we believe in 2013 that number will move higher.

Great. And, lastly, moving up to Boardman, is it still expected that corn oil production could be introduced to Boardman by year-end?

That is, in fact, our expectation, yes.

Okay. And then just -- I noticed that ZeaChem started ramping up production on March 12. Now, that is a very small marketing contract there. Their eventual -- their immediate target is to have 250,000 gallons a year.

But from the other standpoint, recognizing that they deal with nonfood biomass, is there any technology that might prove helpful to Pacific Ethanol coming out of ZeaChem (multiple speakers) or is it just a conventional, if small, marketing client?

Certainly, it is a very valued partnership that we have with a ZeaChem as we manage the operations of that facility. We think they have excellent technology. They are a -- one of a number of technology companies that we are working with to, in fact, diversify the technology and diversify the feedstocks we used to produce ethanol. So we look forward to future collaborations with ZeaChem in that regard as they prove out their technology.

I think I am monopolizing long enough. Have a good day.

(Operator Instructions). At this time I am not showing any further questions. I would like to turn the call back to Mr. Koehler for any further remarks.

Thank you, Sam, and thank you all for joining us today. I would point out that we are presenting at an online retail conference on Thursday of this week, 10.15 AM Pacific Time. The link is on the investor section of our website and please feel free to tune in.

Very much appreciate your interest and support in Pacific Ethanol and look forward to speaking with you again. Thank you and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.