Alto Ingredients Inc (ALTO) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol fourth quarter and year to date 2013 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). I would like to remind everyone that this conference call is being recorded. At this time, I will now turn the call over to Becky Herrick. Please proceed.

Thank you, operator, and thank you all for joining us for the Pacific Ethanol fourth quarter and full year 2013 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. Bryon will provide a summary of the financial and operating results, and then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing details of the Company's quarterly results. The Company also prepared a presentation for today's call that is available 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 through March 6, the details of which are included in yesterday's earnings release. A webcast replay will also be available at Pacific Ethanol's website. Please note that information in this call speaks only as of today, February 27, and, therefore, you are advised that time-sensitive information may no longer be accurate at the time of 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 and considerations that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, events, risk, and other factors previously and from time to time disclosed with the Pacific Ethanol filings with the SEC. Except as required by applicable law, the Company assumes no obligation to update any forward-looking statements.

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; non-cash gain or loss on extinguishments of debt; and fair value adjustments and warrant inducements. To support the Company's review of non-GAAP information later in this call, a reconciling table is included in yesterday's press release. It is now my pleasure to produce Neil Koehler, President and CEO. Neil?

Thank you, Becky, and thank you all very much for joining us this morning. Our fourth quarter 2013 results cap off a year of strong performance and progress for Pacific Ethanol, as evidenced by several record-setting financial results for both the fourth quarter and full-year 2013. For the fourth quarter, we established records in gross profit at $21.6 million and an adjusted EBITDA, which improved to a record $18.3 million.

For the full year 2013, net sales were a record $908.4 million, operating income was a record $18.9 million, and adjusted EBITDA was a record $28.6 million. We also paid down $23.7 million of parent and plant debt since the beginning of the fourth quarter, further strengthening our balance sheet.

During 2013, we diversified our feedstocks with sorghum, beet sugar, and waste wine. We added new revenue streams with corn oil separation, and we continued to drive cost efficiencies at the plants. These efforts and a strong market for ethanol translated into significant improvements in revenue, margins, operating income, and adjusted EBITDA on a year-over-year basis.

The ethanol industry as a whole is supported by strong production margins driven by a few key factors: corn prices that remain steady and at lower prices than in previous years. Exports for both distillers' grains and ethanol are very strong. Overall supply and demand in the industry is in balance, and ethanol plants are operating at profitable levels. In fact, so far, in the first quarter of 2014 we have continued to see sustained high production margins.

In light of our progress, we are pleased to announce that we plan to restart production at our Madera, California ethanol facility in the second quarter of 2014. With strong market fundamentals in place, we believe now is the right time to resume production at Madera.

Having maintained the facility in good condition while idle, we are now expediting the restart process. We put into context the contribution we expect from restarting the facility, assuming a $0.30 per gallon EBITDA margin, which is actually lower than in the fourth quarter, we would see a positive EBITDA swing of over $1 million a month between the cost of the plant being idle and the earnings attributable to being in operation.

We also intend to add corn oil and yield enhancement technologies to the Madera facility, with completion of those projects planned toward the latter half of 2014. In addition, the California low carbon fuel standard supports growing demand for the low carbon fuel to be produced at the Madera facility. We are very excited to achieve this important milestone for the Company, and it reflects the significant progress we have made in the last several years to establish a solid business foundation.

We continued to further diversify our revenue in feedstock. We began producing corn oil at our Magic Valley and Stockton facilities in the second and fourth quarters, respectively. Corn oil is a high-value co-product with markets including biodiesel and animal feed, and it represents an important initiative for the Company in diversifying our revenue and generating additional operating income.

During the quarter, we began operating with advanced grinding technology at our Stockton plant, and we will begin doing so at our Magic Valley facility in the second quarter of 2014. The advanced grinding technology increases corn oil production and ethanol yields and also serves as a platform for the potential future production of advanced biofuels.

By diversifying our feedstock we lowered feedstock cost and improved operating margins. We participated in the US Department of Agriculture feedstock flexibility program through two purchases, first in October, and again in November. We procured an aggregate of 270 million pounds of surplus beet sugar at a significant discount to the current and expected cost of delivered corn. The total sugar represents feedstock to produce approximately 20 million gallons of ethanol.

Beet sugar is easily stored and blended with ground corn for use as ethanol feedstock. We are now blending the sugar in our Magic Valley and Columbia facilities, and we expect the blending to continue over the course of 2014. This new feedstock is delivering the benefits we anticipated, resulting in significant savings on feedstock costs. More specifically, in today's corn market, in January alone we saved approximately $700,000 in raw material costs from the use of the sugar.

We continue to develop our plans to produce advanced biofuels at our existing plants. In December we announced an agreement with Sweetwater Energy to supply customized industrial sugars for the production of cellulosic ethanol. And, now that we have the Edeniq Cellunator operating in our Stockton facility, we are preparing for trials to convert corn fiber into cellulosic ethanol.

These efforts move the Company closer to producing next generation renewable fuels and provide additional flexibility in sourcing increasing revenues and enhancing plants' operating margins.

Our Western location continues to benefit our operations, marketing, and profitability in a variety of ways. We benefit from sourcing feedstock from a variety of regions, including near the plants, from the Midwest, and even, from time to time, international markets.

Most recently, during the fourth quarter and continuing now into the first quarter, the ethanol markets we serve are experiencing sustained high basis premiums to ethanol produced in the Midwest. This is due to several factors, including constrained rail logistics due to high volume movements in rail capacity utilization of other products, such as grains for export and crude oil from the Midwest; ethanol railcars being put to let use for oil transport; and severe winter weather in Midwest regions.

These basis premiums have benefited us for several months due to the destination locations in which we operate and market our products. The economics of ethanol continue to drive its long-term demand as a transportation fuel as it is a clean-burning, high octane fuel that continues to trade at a discount to the price of gasoline.

With oil trading around $100 per barrel and corn around $4.50 a bushel, ethanol is the lowest cost transportation fuel commercially available on the planet. This is reflected in significantly growing demand for exports. In 2013 exports exceeded 600 million gallons and the industry is on pace this year to well exceed that amount.

Ethanol's inherent value proposition is its low carbon intensity and its high-octane component. US and international markets are increasingly turning to ethanol to help clean the air caused from exhaust emissions and to provide required octane content in gasoline for full and clean combustion. Ethanol provides low carbon renewable fuels into the transportation fuel supply and stimulates investment in a growing domestic and international biofuels industry that creates jobs, reduces demand for fossil fuels, lowers gas prices, and reduces pollution.

The 2014 rules for the implementation of the renewable fuel standard are currently under review by the EPA, following an extensive comment period where numerous stakeholders articulated the rationale for a blend requirement above the proposed levels. While there remains some uncertainty around the EPA's final decision, which is expected in the next few months, we believe the ethanol industry is in a healthy position from a supply and demand standpoint.

That being said, we strongly believe EPA should maintain its mandates at levels that stimulate new production of low cost, high value, low carbon transportation fuels.

In addition, Pacific Ethanol benefits from the California low carbon fuel standard. On February 10, the California Air Resources Board issued its proposed first update to the Climate Change Scoping Plan that outlines California's approach to reducing greenhouse gases. The proposal calls for an extension of the low carbon fuel standard with more aggressive targets such as a 15% to 20% reduction in the average carbon intensity of fuel below 2010 levels by 2030. This effort demonstrates California's intention to proactively address future climate change by planning beyond the year 2020 and setting important carbon reduction goals for the state.

Low carbon fuel standard continues to benefit Pacific Ethanol, as we produce among the lowest carbon ethanol commercially produced in the United States, resulting today in a $0.04 per gallon premium for ethanol produced and sold into the California market. With British Columbia, Oregon, and Washington joining California as states and regions with low carbon fuel standards, we believe this regional integrated market will drive new investment and economic development opportunities within the region.

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

Thank you, Neil. During the fourth quarter of 2013, we reported net sales of $215.3 million, up $18.3 million compared to $197 million in the fourth quarter of 2012. Gross profit for the fourth quarter of 2013 was a record $21.6 million, a $26 million improvement over the $4.7 million gross loss in the fourth quarter of 2012.

SG&A expenses were $4.4 million. This increased from $2.7 million in the fourth quarter of 2012, reflecting in part year-end compensation expense driven by higher margins and Company profitability. Going forward, we expect a quarterly SG&A run rate of approximately $3.5 million (technical difficulty) -- $4.6 million improvement over an operating loss of $7.4 million for the same period last year.

Interest expense remained flat at [$3.7 million] when compared to the fourth quarter of 2012. Loss on extinguishments of debt was $1.2 million, due to the remaining convertible debt conversions during the quarter.

Fair value adjustments for the quarter resulted in a loss of $2.5 million compared to income of $1.6 million during the period -- prior year quarter. The current charge reflects higher warrant valuations due to our higher closing stock price in the fourth quarter compared to the end of the third quarter.

Consolidated net income was $9.7 million compared to a loss of $9.6 million in the fourth quarter of 2012, a $19.3 million improvement. Income available to common stockholders was approximately $8.3 million or $0.54 per diluted share compared to a net loss of $5.8 million last year. And adjusted EBITDA was a record at $18.3 million, a $20.8 million improvement over the fourth quarter of 2012.

For the 12-month period ending December 31, 2013, net sales were a record $908.4 million, up $92.4 million compared to $816 million for the same period in 2012. Gross profit was a record $32.9 million compared to a gross loss of $19.5 million for 2012. Operating income was a record $18.9 million compared to an operating loss of $31.7 million for the full year of 2012, representing an improvement of over $50 million year-over-year.

Net loss available to common stockholders was $2 million, which improved by $18.3 million compared to a net loss of $20.3 million for the same period in 2012. This improvement was muted by $3 million in loss on extinguishment of debt. And adjusted EBITDA for the first 12 months of 2013 was a record $28.6 million, which improved by over $36 million compared to the negative $7.5 million last year.

Now turning to our balance sheet, cash and cash equivalents were $5 million at December 31, 2013. Our working capital increased to approximately $51.2 million from $44 million at September 30, 2013, and $45 million at the end of 2012.

To shed further light on our working capital and debt capitalization, we have provided a summary in our slide presentation. As you will note, we have $33.8 million in corporate debt that consists largely of an asset-based line of credit secured by the Company's inventory and receivables and senior unsecured debt.

In addition, our plant debt outstanding at the end of 2013 totaled $67 million and, as of February 21, 2014, $56.7 million, excluding $27.1 million of debt owned by the parent. The $56.7 million of debt consists of revolvers and term loans secured by plant assets.

The weighted average borrowing costs of the legacy plant debt is on a fully funded basis approximately 12.5%. Given the high cost of borrowing at the plant debt, it is important on a daily basis that we efficiently manage our cash liquidity needs with our outstanding revolver balances, and going forward, to refinance the legacy debt to the extent available at lower rates and longer maturities. To this end, we are currently in discussions with our lenders and other parties to explore refinancing options and opportunities.

During the fourth quarter, we retired a total of $5.5 million in current debt, including the remaining $2.5 million of our $14 million senior convertible notes. In addition, we paid down $7.8 million in plant debt from plant operating cash flows. Through last week, February 21st, we have paid down a further $10.4 million in plant debt from our continued operating cash flows, resulting from current production margins.

Further adding to our net income for the quarter, in December we purchased an additional 6% ownership interest in the Pacific Ethanol plants at an attractive valuation, which brought our total ownership interest to 91%. Looking ahead, we expect to fund the restart of Madera with existing resources. We currently expect startup costs to total approximately $7 million to cover capital improvements, restart expenses, and working capital needs.

With that, I would like to return the call to Neil.

Thanks, Bryon. Over the last 18 months, we have focused on fortifying our business by implementing plant efficiencies, diversifying our revenue and feedstock, purchasing plant ownership, and improving our balance sheet. Throughout 2013, production margins vastly improved, and our efforts to recapitalize the Company and to increase ownership of the plants to 91% resulted in record profitability in 2013.

In 2014, we are focused on the following goals: successfully restarting production at our Madera facility, lowering our cost of capital and reducing debt, installing corn oil separation and yield enhancement technologies at our remaining plants, and working with technology partners and regulators to obtain low carbon pathways to produce advanced biofuels.

As always, we will remain focused on improving operating efficiencies at the plants, diversifying revenue in feedstock, and reducing the carbon intensity of our ethanol to support sustained profitable growth. Our improved balance sheet provides us with a strong foundation from which to build our market share in this growing market.

I would like now to open the call for questions. Nicholas, would you please begin the Q&A session?

(Operator Instructions) [Jim McCleary, Chardon Capital].

Can you talk a little bit about the Madera startup and the cost? I know that you said it is $7 million, but how much of that goes through the income statement? And then, and I know you also said it starts up in Q2, but when would you expect it to be at full-ish capacity?

Thanks, Jim. Of that $7 million, about half of that would be working capital; half of that would be capitalized expenditures.

And, in terms of startup, what we have said in the past that it takes from go, which we are at, 60 to 90 days to start these plants up, and we have been able to start the plants up, shutting them down, starting them back up. We have a pretty good track record and know what it takes, and we are able to ramp up to operating capacity relatively quickly after startup. That is why we are very comfortable saying in Q2 and, hopefully, on the earlier end of that than the later.

Great. The co-product return was very high this quarter relative to prior quarters. Is that a new level or is there something one-time-ish in that?

Well, it is definitely a trend. There's two components to that. One is corn oil, so we are aggregating all of our co-product return. So we have added corn oil.

And that clearly, you're diverting some material that sells at one value as distillers grains to a higher value as corn oil. So directionally, with two of the plants producing corn oil, that definitely increases the co-product return.

The other factor is a market dynamic that, with the very high demand for distillers grains and strong exports to China and elsewhere, we are seeing distillers grains on a relative value to corn improve. We do think that is a trend that will be with us for some time.

Feedstocks are very tight. Protein is particularly tight throughout the world. And it is hard to predict these commodity markets, but we do see that they are -- there is an improvement improving relationship between distillers grain and corn, and it is appropriate since the value of distillers grain really is a premium value to corn.

And, historically, as the industry has expanded so rapidly, the clearer the markets, it sold at a discount. What we are seeing now is that it is selling at and a premium to corn.

But even if the market warrants favorable, the fact that you are moving to corn oil at the other plants would suggest that the co-product return stays high. Is that right?

That is correct. It would stay directionally higher, yes.

Right. The inventory increase -- that was a function of the beet sugar purchases. Is that right?

That is correct.

Okay. Great. And then my last one -- the average basis has obviously come down sharply. Is there more room for that to decline or are we kind of at a stable level here?

Well, that is an interesting question. Nothing seems very stable in these commodity markets. But, yes, we are seeing a basis level, as you can see from our disclosure, something that is closer to normal. Frankly, it is still higher than normal.

And I do think it is important to note that, while we are seeing some excessively high ethanol bases and making a very nice premium on that, in the recent market we have seen some corn basis come back into our cost in that the freight movements are constrained on all products, including grain. The good news is we have had no problem sourcing corn. We have of late been paying a bit more in freight premiums, given the very tight logistics, but that has been more than offset by our higher price of ethanol.

Right. Okay. Fantastic. Congratulations on an impressive quarter.

Nathan Weiss, Unit Economics.

Congratulations on a strong quarter. Looks like you covered the cost side pretty well. We are seeing corn prices tick up a little bit here. But it sounds like for the most part things are relatively flat.

On the ethanol side, in terms of product sales price, we have seen -- we look at the LA benchmark quite a bit, which moves from $2.32 a gallon, pretty much in line with what you received in Q4, to $2.96 a gallon today. And we are actually seeing on the screen some $3, $3-plus gallons in kind of the upper West Coast.

Can you give us any type of guidance just on kind of where you see those prices today? And, I know you don't give formal guidance, but if you can say anything about quarter to date or current margins, and then perhaps what you think is driving it?

Sure. I mean, clearly, the margins in the industry generally are strong and continue to be strong. The supply and demand is very tight. We really have not done much to build inventory, so given the volume of ethanol that we are selling domestically and internationally, there are relatively low inventory levels. And, until those inventory levels can be built in a material way, I think we have a very strong fundamental for sustained production margins -- profitable production margins in the industry.

We are getting anecdotal evidence of exports that are being booked all the way through Q2 and, even now, into Q3 and that has been a real game changer for the industry. To support those exports and to support the markets where we market out West, and we are seeing the same thing on the East Coast and down into the Gulf, with the very constrained rail logistics, we are seeing these basis premiums.

And so, if you look year to date -- in a more normalized market, our ethanol price -- and we feel we are very cost competitive in an environment where the West Coast ethanol prices are $0.20 to $0.25 higher than Chicago. We saw higher numbers than that in Q4. In 2014 thus far, we have been averaging closer to $0.50.

And yesterday, as you noted, a very strong number close to $3 on the West Coast and the East Coast, and that represented a $0.75 premium to Chicago. That is a peak. It has never been that high. So, peak margins are called peak for a reason.

And so I would think that that will moderate. Logistics will be moderated and optimized, but I think that, given the inventory levels, given what is a not just a weather issue with the railroad, there definitely, with the demand for all products so strong, the railroads are really struggling to keep up. And this is definitely showing a very strong hand in our model, because we are there in those local markets with feed and fuel, when competitive product is having a very difficult time getting to these markets.

So we do anticipate, for the foreseeable future, that there will be better than what we would call more an historically normal basis spread to our markets.

Excellent. A couple other housekeeping questions. You had a $4.3 million SG&A Q4 and I guess you guys -- that is going to come back down to roughly a $3.5 million run rate. How will that be impacted by Madera once the restart is up and fully operational?

I would say that very little. So we have explained that the one-time change in SG&A. But what we have done is built an organization and really worked very hard over the last number of years to be very efficient in what we do, and gear up in SG&A that can handle the startup of Madera without any significant addition in SG&A other than, obviously, the addition of plant personnel and the management of the plant that all runs through the plant economics.

So that is a real benefit here is that, from the marketing organizations, our back office, where we need to add a little bit in terms of keeping up with new billing, sure. But it is going to be on really an immaterial increase in SG&A, and that is a very positive aspect of the Madera startup.

Yes. Very positive. And last question, so looking at on your gallon throughput or what you can realize on the income statement, so for the first quarter you're going to show the effects of increasing from 85% ownership to 91%?

That is correct.

And then, with the Madera restart, do you imagine it will be running close to that 40 million gallon rate -- level, pretty much right away?

Yes. I mean, I will just caveat that with, this is a plant that has been down for now about five years, and we have maintained it in great shape and feel very confident of the startup. We will ease into the production and to the markets to make sure that we optimize efficiencies and optimize values. But, as I said earlier, we have found the ability over a month or two to get pretty close to those operating numbers. So that is our expectation.

Okay. And I should -- so the resulting increase should be another 7% or so, or sorry; another 25% or so effective output once it is fully operational?

Yes. I mean, it is -- $160 million is the operating capacity today, so it adds 40 million to that to get us to that $200 million level. And so we would expect that once we have fully implemented the startup, particularly at this margin environment, we will be pushing these plants hard and that we will be running at that operating capacity.

Excellent. Thank you.

Katja Jancic, Sidoti and Company.

You mentioned that you will add corn oil production capacity to the remaining facilities. Do you have any timeframe as to when you are planning to do that?

Not a specific timeframe. We are doing a competitive process now to make sure that we are choosing the right and the best approach, best cost to that. And, as I said earlier, that is a 2014 objective for both plants that don't have corn oil today.

Now, regarding the beet sugar, will this be kind of a constant part of your feedstock? Is there an opportunity to buy more of it?

Well, that is really a decision that the federal government will make in terms of new auctions for that sugar. So what we have done with the 270 million pounds that we have procured, and running that at the rates we are, that is a steady diet of the sugar through 2014. Beyond that, remains to be seen.

I would speculate that I would not be surprised, given the current sugar markets, that we would see some additional auctioning of surplus sugar. But that is just mere speculation on my part.

Are there any other feedstocks that you could use that would further benefit you?

Well, we have been -- when the spreads are right, we use grain sorghum. We are working with farmers in the Midwest, but also out here in California to get more of that grown. It both has a potential cost advantage and a lower carbon footprint. So we are definitely focused on that.

I did mention as well that we have a pretty steady stream, albeit small, of waste wine that comes into our Stockton, California facility from time to time. But we are getting calls on other residual materials [gain] in these large urban areas. There are various forms of waste alcohol in sugar and other fermentable streams that we can access, and we actually have a real focus on making sure that folks know that we are open for business in that regard, and that we are trying to continue to expand the base.

So we do see additional opportunities, albeit relatively small on total volume, but every increment helps.

James Medvedeff, Cowen and Company.

I am in for Rob, who is traveling. Have you disclosed how much the enhancements at Magic Valley should be able to increase the capacity at that plant?

We talked generally, and there is pretty good public knowledge out there on what these technologies can do. So, in a sort of a ballpark arena, the yield-enhancing technologies that we are employing both in Stockton and in Magic Valley, we expect to give us about a 2% increase in yield and then, also, potentially a 10% to 15% increase in corn oil yield.

Right. Okay. The other question that I have is the target levels for debt reduction. Do you have some goals in mind? Or is it just kind of use whatever cash doesn't go into working capital goes into debt reduction? Is that the plan?

James, that is really it. We have, of the plant debt, approximately $25 million outstanding in revolver debt. So that is available to pay down without penalty and so you would see that continue to be reduced with excess cash flows.

From there, again, as I mentioned in our prepared comments, that you would -- our focus is in working and speaking with lenders and other parties to see what is available and what can be done in the marketplace. And if we can do that at a lower cost and extend the maturities, we are going to do that.

Understood. Understood. The final question is, could you have any high-level comments on the RINs market?

Well, it is --

As to in the RIN situation.

We think the RIN market is a key component to driving innovation in this industry and think that there has been a lot of misconceptions that high RIN prices mean high gas prices, which they don't. For every seller of a RIN, there is a buyer of a RIN. We generate a free RIN with every gallon of ethanol that we produce and move to our contracted customers.

And you do need a price of RINs, particularly when you get to the advanced biofuel component that it is going to be sufficient to drive new investments with a longer-term investment horizon on technologies that, today, are more expensive than our conventional corn ethanol production. So the RIN market is a critical component. It is working effectively.

Today, RINs are modestly priced in and around $0.50 a gallon. We think that for advanced biofuels, they will need to increase in value to drive that investment in a way that is going to not only provide new economic development, but deliver lots of environmental benefits and energy security benefits. So, it is a critical component of the whole RFS program, and, unfortunately, commonly misunderstood by the mainstream media.

All right. And then, finally, on your cellulosic ethanol efforts, given what you just said about the advanced RINs and the B-RINs, I assume go along with that -- and C-RINs, how much are you investing in cellulosic? How far are you along and what sort of timeframe do you think we might actually see commercial volumes in something like that?

We have taken an approach -- a couple-pronged approach. One is to, in a more immediate way, get at the cellulose within the corn fiber. So our partnership with Edeniq in California, they have what they call a pathway enzyme. We mentioned in our remarks that we will be trialing that this spring.

The elegance of that is the enzymes can be expensive, but you pretty much use your existing capital infrastructure. The Cellunators that we have in place not only improve corn ethanol yield on the starch, but liberate the fibers for conversion of that cellulose, which there is up to 10% fiber in the corn. If we can get 2%, 3% of that, we will be producing cellulose ethanol and generating D-3 RINs.

It is our expectation that we will be doing that this year. We are trialing it and that we would hope that we would have some increment of commercial production in 2014, again, albeit relatively modest, but a very important start.

We also announced recently our agreement with Sweetwater, which is larger scale, starting with an additional 3.6 million gallons where essentially it would be a bolt-on unit. In that case, they are responsible for the financing of that product and we will purchase the sugar from them.

We are looking at some other potential initiatives, have other potential partners and conversations that would potentially require some additional capital investment on our part. So we are trying to take a very prudent, but a proactive and focused approach to this in a way that is relatively capital investment light on the front end and will expand as time goes on.

Fantastic. Congratulations on the quarter. Thank you.

(Operator Instructions) Eric Cole, Cole Capital.

Again, congratulations in how things have improved in the past year or two. Obviously, required a lot of work in the process. Question number one about the exports, just -- direct your attention to slide 9 of your presentation.

Exports have clearly taken off in the US (technical difficulty) [plus months] and I am trying to get your input on how much of it is being driven by potentially regulatory changes in countries like India, China, Brazil, where they have increased their blending mandates and, therefore, the demand of ethanol has improved dramatically. And, to what degree are exports very strong in the US because we are now the low-cost producer of ethanol in the world, allowing us obviously to ship overseas and deliver ethanol at prices that are lower than the ethanol which is produced in those local regions?

Right. I think it is a combination of both. So certainly there have been regulatory initiatives, certainly the Philippines that has a mandate, other countries; India has an M&A mandate to use ethanol. But what we are also seeing is some of the new countries -- Tunisia, for example -- that became a destination in 2013, are seeing it just for its economic value.

And it is not just that the US is the lowest cost exporter of ethanol, which is true. We are the lowest cost exporter of transportation fuels, period. So if you look at the economics of gasoline, and even before you consider the octane value of the ethanol, ethanol is at such a discount to the global price for oil and gasoline that it is driving its inclusion rates just as a matter of pure economics.

Brazil has typically been more the exporter to the world, but their own demand has grown significantly. They are actually now considering moving up to a 27% inclusion rate. They have had some of their own weather issues and that looks like it in the current cost structure, and what is an arbitrage is completely close to import Brazilian ethanol to the US, but also in limiting its exports to the rest of the world.

That bodes very well for continued strength in the export of US ethanol to global markets and it is very much a focus of our industry, trade missions and the like to continue to expand those markets, which, in some large markets like China, they are still relatively untapped. That would be the sleeping giant, if China were to start importing a significant amount of ethanol, like they are doing, which is still experienced today.

Can you kind of just clarify your comments regarding Brazil? What is the current blend -- average blend rate that is used with gasoline in Brazil? And you were alluding to the fact that it might be moving even higher towards 27%.

Yes. It is 25% today, based upon their own economics of both the sugarcane industry down there, and their oil and refining businesses. They moved that and they have been as low as -- in the last few years, I think, went to below 18%.

25% is the current high and there is some discussion of moving that up. That is the minimum in all of the gasoline. And then what you have is over 95% of the new cars sold in Brazil are flex fueled, that in all of the pumps, this is really a vision for what the US will become, where you pull into a gasoline station and you can buy gasoline that has a blend of ethanol -- in our case, 10% moving to 15%; in the case of Brazil, 25%, maybe moving to 27%. Or you can buy pure ethanol and -- depending on the economics you choose.

And in the last number of months, what they call hydrous ethanol down there, the pure form has been less expensive than the gasoline. And so what you really see is that the actual average consumption of ethanol is higher than that 25% when you layer in the cars that are running on pure ethanol. So it is not a formal decision they have made to increase the blend rate, but there are discussions under way right now to move in that direction.

Great. Thank you. And then, just one follow-up on the capital expenditures and free cash flow. What is your expected capital expenditures for 2014?

That's a good question. Our normal run rate is around $3 million to $4 million. That includes for the plants.

As Neil had mentioned, if you include additional corn oil and enhanced yield recovery type technology, then you would increase that. It is running somewhere around, call it, $3 million to $5 million, depending on the size and the types of technology we are using; $3 million to $5 million for each corn oil facility. And then the enhanced yield recovery is another $2 million to $3 million per facility.

The total number, you think, would be about $3 million to $5 million for this year?

Yes. For an ongoing basis and then, again, you would look for -- we look to finance the purchase of the corn oil technology.

That -- your $3 million to $5 million, that is really essentially your maintenance capital CapEx, and then all of the other projects will stand on their own. And they look like they have paybacks that are two years or, in some cases, significantly less than that. So we evaluate them on a case-by-case basis and finance them accordingly.

Okay. What I am alluding to is obviously assuming ethanol economics that continue to be robust in the industry, which they certainly are right now, you are going to be able to pay off all your remaining plant and corporate debt quickly. Have you given any thoughts toward what you will be doing when your balance sheet is net/net/net/net, having cash and how you may or may not invest that money going forward?

We are consistently and constantly evaluating opportunities in that regard. So there are some -- I mentioned that, right now, we are taking a capital light approach to the advanced biofuel technologies. Well, that could shift to actually making larger and more direct investments as we become more comfortable and confident with that technology.

We have some opportunities on the downstream side to build out some terminal infrastructure and to augment our marketing business, which is a key component of what we do, the integrated production and marketing model, which we feel has given us a very strong competitive advantage. And then, this is an industry that will continue to consolidate and rationalize, and there will be opportunities on the M&A front, too, that could be become a use of capital.

What portion, in just the gas [part], what portion of the ethanol industry's capacity in the US, would you say, is owned by private holders, farmers, et cetera, who might be more willing sellers than the bigger players?

Well, you can divide it up different ways. And the farmers have done very well in some of the -- that they really were the engine of growth in the ethanol industry in the early years, and many of them have paid off their plants and are quite happy.

So I wouldn't necessarily say that they would be willing sellers, but you probably have a quarter of the industry that is in those sorts of hands. And then you have some of the public companies and the more integrated agricultural processors. And then you still have a spattering of plants that are shut down and, in some cases, some assets that are still held by lenders as we get through the final phases of cleaning up what was a pretty disastrous environment out there for the ethanol industry going back to 2012 and before.

So it is dynamic. There hasn't been a huge amount of M&A activity of late in the industry, but that could change.

Paul Resnik, Uncommon Equities.

It is a delight to ask just a few small questions after so many good questions have already been asked. On the warrants, you don't have anything scheduled for expiration until next March, but have you seen any exercising of warrants before expiration going on?

Again, that is going to be a decision -- there is lots of holders of those warrants. It is a significant amount of warrants that are out there and becomes a good opportunity for capital-raising. We have roughly 7.5 million shares of warrants at an average stock price of $7.50 that are obviously in the money. We have had lots of inquiries from holders of that. We have had a small amount of warrants exercising and we would anticipate to see some additional exercises.

The way these are valued by investors is going to be different -- different cases and, as you point out, a good bulk of them don't expire for a number of years. And so, how the holders of those value them and decide when or when not to exercise those warrants, that is really a decision that we will -- they are there and we will wait for exercises that happen, but certainly, given what has happened with the stock, we would anticipate that we would see some acceleration of warrant exercises.

And this is a question that I bet a lot of people thought would never get asked. Given what is going on with your earnings and prospects for earnings, do you foresee sometime in the not-too-distant future having put together a provision for tax liabilities?

Yes. We evaluate that on a quarterly basis and, while we are not a taxpayer today, that would be a good problem to have.

Okay. So do you think it is conceivable that this could be a line item?

Yes. I mean, Paul, we have got an NOL, but there is only a certain amount that you can use in a period of time. There are restrictions on how much is available, and so we do evaluation on that. You will see more detail on that in the K -- the file.

But, again, we assess that on a quarterly basis. And there is -- I think, yes, to your point, if you would continue to see the kind of numbers that we have seen, that it would be something that we would have to contemplate this year.

Well, fantastic. I rarely say it is fantastic to pay taxes, but it is.

We want to do our share.

On export market, European tariffs, have they been effective in curtailing exports to Europe or--?

They have, to a large degree, but not completely. So, I mean, each country can kind of evaluate how they implement the EU directives in that regard. So it hasn't entirely eliminated exports, but reduced them to a very large degree.

Free trade except when [it's short]. And, lastly, has there been any -- I know you try as best you can to source local corn and sorghum. Given the drought in California, has there been any -- has that created any issues for local supply?

A little early to tell. Interestingly -- and you are right; we do source locally, and Stockton, California is one place we have done the best in that regard. We had between 15% and 20% of our corn supply came from the local markets. And for a six-week period we were entirely on local corn, and that was given the very tightness between old and new crop. And some of the earliest crop was out here in California. It was very helpful.

Where the grain is grown in California, it is in what is called the delta area, just right along the river. And a lot of that land is actually below the level of the river, and it has some of the most well-established water rights in California. So we actually anticipate that there will continue to be a fair amount of grain corn that is grown in the delta region, even with the drought.

What you will see is that, further south of us, and we are already seeing it, there has been significant restrictions on water. There is going to be some significant impacts on California agriculture, generally. There is really a potential value for us in that we have no issue with water in our plans. We have no wells; we have no city connections. And so, a modest amount of water in overall use in ethanol production -- the larger amount of water is in growing the crops. Most of those crops for us are grown in the Midwest and brought to our facilities, and they are doing just fine -- more than fine with their weather. And so we don't anticipate any disruptions there.

We feed a wet feed product to the dairies in California. And many of them are going to have a hard time growing some of their own alfalfa and corn silage, which is a very significant component of their feed ration. And so we actually believe that the fact that we have this wet distillers grain that we are moving within this 50 to 100 mile radius in our plants is going to be in very strong demand, because we essentially are going to deliver not only high-protein feed, but water to our customers. And they are going to like that this summer.

Very good. Okay. Well, as I said, most of my questions were well asked before I got there, and I will join everybody else in congratulating you on a fantastic quarter.

AJ Strasser, Cooper Creek Partners.

Congrats and thanks for taking my question. Most of them have been asked, but I just had a couple of ones. If you could just -- Neil, maybe just give us a sense here; frame it for us. Obviously, California ethanol is always priced higher than Chicago ethanol, but can you just give us a sense there of looking at the Q4 and maybe Q1, kind of maybe on a pennies per gallon basis, how above norm are we? Is it $0.20, $0.30, and how long do you expect it to last?

It is about $0.20, $0.30. If you look at, on average, we have had about a $0.50 spread in Q1 so far to Chicago, that is about -- close to $0.30 higher than normal. I would say that we have given about $0.10 to $0.15 of that back in paying a premium on freight to get our corn.

So it is important to know that it is not just a net benefit. There is an offset, but we are more than benefited on the ethanol side.

How long it lasts, I really can't answer, other than just to refer to my earlier remarks, which is we do see the logistical constraint on getting -- whether it is ethanol; whether it is feed; whether it is coal, whether it is corn for exports; crude oil from Bakken, I mean, there is such a demand on the rail infrastructure today. And it is not just weather-related. That has clearly exacerbated the problem and has created some of the peak in that basis spread that we have seen.

I really think that this is months to get out from under and, in some cases, the better part of 2014. So our expectation is that we will see a basis premium to our products -- and that is ethanol and feed -- for the foreseeable future.

Yesterday it was $0.75 a gallon. It has never been that high. Will it stay at $0.75 a gallon? No. That will correct itself. But we should see what is a positive basis premium as it relates to our business model.

Right. And then, just on terms of corn cost, just could you kind of -- all the puts and takes, and we are looking kind of Q1 versus Q4, will corn costs be higher or lower, just based on base estimate freight costs that you are planning?

I would say flat. I mean, it is pretty much flat on average, but there is nothing flat about any of these markets. So from a margin environment as an industry, we started taking a nosedive in -- earlier in the year and it moved up, it moved down, it has moved back up again; so, tremendous volatility on all levels of that.

We have seen less volatility on the price moves of the underlying commodity corn, although it has shown some strength of late, but it is trading in a fairly narrow range. We have obviously seen some pretty heavy volatility on the basis spreads on ethanol and on the basis spreads of corn, particularly as it relates to the freight market. But, I think it is more or less been a flat corn price.

The other thing I'd just note, and being as transparent as possible in terms of how we sell ethanol, we do have quite a large volume of ethanol that is sold against these West Coast numbers. We also, particularly as we move further inland into our, say, Idaho plant, we do also sell a fair amount of ethanol against other indices, including Chicago. So it is not as if every gallon we sell is tied to these high margins.

We have a portfolio approach on how we sell our products. And certainly, today, we are being very well-rewarded for this ethanol basis contracts against LA, and less so on those tied to Chicago.

And my last question is on your initiative of using sugar for input. How underway was that process and how much of a benefit did we see in the Q4 quarter from that?

In Q4 quarter, and for some reason we didn't really have a specific numbers around, we did give you a number for January of really showing a $700,000 benefit. And that is what we anticipate in this current relationship between corn and sugar going forward.

We were not fully utilizing the sugar. We had some infrastructure that needed to be put in place to handle it. We also had -- because we purchased, which is one reason our inventories are higher -- we purchased all the sugar in advance, upfront. We also had some storage costs frontloaded as well before we were processing it.

So the impact and the benefit in Q4 was really immaterial, and it's now in 2014 that we are seeing the financial benefits of the sugar program.

Thank you again for taking time and congrats.

Ladies and gentlemen, we are out of time for questions I would like to turn the call back over to Neil for any closing remarks.

Thanks, Nicholas, and thank you, everybody, for joining us today. We really appreciate your interest in Pacific Ethanol, and look forward to speaking with you again soon. Have a great day.

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