Alto Ingredients Inc (ALTO) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol Second Quarter 2014 Financial Results Conference Call.

At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time.

If anyone should require assistance during today's conference, please press star then zero on your touch tone telephone.

As a reminder, this conference is being recorded.

I would now like to introduce the host of today's conference, Monica Chang of LHA.

Ma'am, you may begin.

Thank you, Operator. And thank you all for joining us all today for the Pacific Ethanol Second Quarter 2014 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. Brian will provide a summary of the financial and operating results. And then Neil will return to discuss the company'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 web site 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 August 7th, the details of which are included in yesterday's earnings press release. A webcast replay will also be available at Pacific Ethanol's web site.

Please note that information in this call speaks only as of today, July 31st. And, therefore, you are advised that time-sensitive information may no longer be accurate at the time of replay.

Please refer to the company's safe harbor statement on slide two 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 uncertainty.

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, risks and other factors previously and from time to time disclosed in Pacific Ethanol's filings with the SEC.

Except as required by applicable law, the company assumes no obligation to update any forward-looking statement.

Also, please note that the company uses financial ledgers not in accordance with generally accepted accounting principles, commonly known as GAPs, to monitor the financial performance of operations.

Non-GAP financial measures should be viewed in addition to, and not as an alternative for, the reported financial results as determined in accordance with GAPs.

The company defines adjusted net income loss as a not (inaudible) earnings before fair value adjustments and warrant inducements and gain loss on extinguishment of debt.

Adjusted EBITDA is defined by the company as an audited earnings before interest, provision for income taxes, depreciation and amortization, fair value adjustments, and [warrant] inducements, and non-cash gain loss on extinguishments of debt.

To support the company's review of non-GAP information later in this call, reconciling tables are included in yesterday's press release.

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

Neil?

Thanks, Monica. And thank you all for joining us today.

Pacific Ethanol continues to perform exceptionally well. The plants are operating at excellent margins. Our marketing business continues to grow in both gallons sold and overall margin contribution. And we are reinvesting capital in our core production business to further reinforce our market position.

Our second quarter performance was solid. Net sales increased 37 percent over last year's second quarter. Total gallons sold grew to a record 132 million gallons.

We restarted our Madera Plant. Net income was $15 million, or 68 cents per share. Adjusted net income was $17 million, or 77 cents per share.

Our adjusted EBITDA was $28 million.

Our cash position as of June 30th, 2014 was $26 million, and as of July 29th, was $48 million after approximately $20 million of a [warrant] exercises in July.

We eliminated all debt at the parent level, and our consolidated third-party plant debt was reduced to $17 million.

Industry dynamics in the first six months of 2014 were positive, as sound market fundamentals drove strong demand for our products and favorable production margins.

Overall ethanol demand remains at expected levels in the U.S., while exports provide overall balancing support to the industry.

This year's corn [trough] is on track to be a record harvest. And we expect global supply and demand for ethanol to provide continued underlying support for strong ethanol margins.

Ethanol continues to trade at a significant discount to gasoline, currently close to $1 per gallon on the forward curve. And corn prices are traded at nearly half the price they were two years ago.

The USDA projects the carryout from the 2014-2015 crop to be one of the largest levels in many years.

During the period of rebuilding from the industry loads of 2012 and through drought-induced high corn prices of 2013, we have remained focused on reducing debt, improving our production operating efficiencies, developing incremental revenue streams, reducing overhead expenses, and strengthening our position as the leading low-cost, low-carbon renewable fuel producer in the Western United States.

With the market's sustained recovery, we have the opportunity and resources to reinvest in our plant assets and pursue strategic growth initiatives.

Our current focus is to fortify our existing assets to drive the long-term growth and profitability of the company. The demand for low-carbon solutions is growing, bolstered by regulatory mandates such as the California low-carbon fuel standard, which require refineries to make further reductions in the carbon intensity of fuels over time.

This represents a great opportunity for Pacific Ethanol to provide the additional product and services demanded in our markets. We are working on a number of capital projects at our plants to add differentiated revenue streams, introduce new technologies that offer incremental benefit to the bottom line, and that combined, represent a meaningful contribution to the company's profitability.

We continue to invest in corn oil separation technology. The investments at our Stockton and Magic Valley facilities provide a meaningful contribution to operating income today.

We are working on final plans to install corn oil separation technology at our Madera and Columbia plants with the goal to begin producing corn oil at these plants in early 2015.

We now have advanced grinding technologies installed at our Magic Valley and Stockton plants. We will continue to invest in these and other technologies at all of our plants that provide near-term investment returns, low-carbon technologies, and value-added processes.

Our investment in our plants is driven by the underlying economics of our business. Each 1 percent improvement in production yield results in about a $3 million increase in gross margin annually when operating at our full production capacity of 200 million gallons.

In fact, we have approved an additional capital expenditure budget to reinvest up to $16 million in our plants over the next six months to improve efficiencies, diversify feed stock, and develop our advanced biofuels initiatives.

Our target is to invest in our plants to achieve approximately a 5 cent to 6 cent per gallon in annual EBITDA improvement, representing a contribution of between $10 million and $12 million to the company's annual profitability.

We continue to supply our plants with a diverse variety of low-cost feed stock. In the second quarter, we blended surplus sugar at our Magic Valley and Columbia facilities at rates consistent with the previous quarter. This resulted in savings of approximately $1.7 million during the second quarter.

Pacific Ethanol was recently awarded a $3 million matching grant from the California Energy Commission to fund the in-state sorghum program to demonstrate demand and encourage production for grain sorghum.

Pacific Ethanol and partner ethanol producers in California, in collaboration with [Crometin] and California State University Fresno, seek to expand the production of low-carbon ethanol from locally grown sorghum.

This program will support an increase in processing sorghum to ethanol at our Madera and Stockton facilities, provide marketing and education for the development of sorghum as a reliable and robust feed stock for the industry, and help develop a path for Pacific Ethanol to advance biofuels.

We continue to believe that integrating production of advanced biofuels to our existing facilities is the greatest value lowest risk means of producing even higher-value products to meet the demand for low-carbon transportation fuel. To this end, our joint effort -- development effort with Sweetwater Energy is in the product development phase. As previously announced, we expect to purchase cellulosic industrial sugars from Sweetwater at a production facility adjacent to our facilities.

Our Madera site is now the likely location for the initial project, which will take a couple of years to commercialize.

Recently, the U.S. Environmental Protection Agency qualified corn kernel fiber as a cellulosic feed stock under the renewable fuel standard. This complements our work with Edeniq, whose cellunator technology enables the release of cellulosic sugars from corn kernel fiber.

We are working to complete supply arrangements on an appropriate enzyme for commercial production. This will allow us to produce cellulosic ethanol for up to 2 percent of our overall production at a plant.

We are running a pilot program for anaerobic digestion from our Stockton facility's product streams to substitute bio gas for natural gas for the integrative production of advanced biofuels.

The Magic Valley plant lends itself to green field development of additional production capacity from wheat straw. We are evaluating the feasibility of a [bolt] on cellulosic project at this facility.

And finally, we are analyzing various configurations of co-generation, particularly at our California plants, where electricity prices are high, and we receive a low-carbon premium.

These are all examples of our investment opportunities to actively improve the current and future performance of our strategic assets.

The first six months of 2014 demonstrated how our Western United States proximity and access to local markets provides us with advantages in the marketplace. With constrained rail logistics and moving competing ethanol to Western markets, our local production and timely truck-delivered service to our customers is highly valued, affording us a clear competitive advantage versus Midwest suppliers, which has resulted in both a strong margin performance and an increase in our overall market share.

In addition, as our ethanol is among the lowest carbon-rated ethanol commercially produced in the U.S., we received a low-carbon premium for the ethanol we sell into the California market, which we expect to improve over time with both higher-carbon credit pricing and lower-carbon production from our new plant investment initiatives.

Overall, we believe 2014 will continue to be a very positive year for the industry and or company, supported by the long-term demand for renewable fuels and our efforts to enhance profitability.

In addition to the capital improvement projects I just profiled, we continue to evaluate other potential growth opportunities to further integrate our production and marketing supply chains, leverage our core competencies and differentiated advantages, grow our market share, and return value to our shareholders.

I'd now like to turn the call over to Bryon to review the financials.

Bryon?

Thank you, Neil.

Our strong operating performance for the second quarter of 2014 demonstrates our focus on building plant efficiencies and profitably strengthening our market share.

During the second quarter of 2014, we reported net sales of $321 million, up 37 percent, compared to $234 million in the second quarter of 2013. This increase was primarily driven by increases in total gallons sold, which were a record 132 million gallons in the quarter. This represents a 31 percent increase from the same quarter last year, and a 17 percent increase over last quarter.

We continue to benefit from both improved ethanol margins and ongoing plant efficiency initiatives. This is reflected in our gross profit of $34 million this quarter, which compares to $7 million in the second quarter of last year.

SG&A expenses were $4 million, compared to $3 million in the second quarter of 2013. The increase in SG&A is primarily due to an increase in compensation cost tied to our continued profitable results and an increase in professional freeze from increased corporate activity.

At current levels of operation, we would expect our SG&A run rate through year end to approximate $4 million quarterly.

This quarter's operating income was $29 million. We increased operating income by $25 million on a year-over-year basis.

Interest expense debt was $3 million, and included a $1 million one-time expense related to the accelerated amortization of deferred financing fees and discounts on early retired debt. This compares to $4 million in interest expense net in the second quarter of 2013.

The year-over-year decrease resulted from our reduced debt balances. We would expect, with current balances remaining constant, a quarterly interest expense going forward of less than $1.5 million.

Loss on extinguishment of debt was $2 million and reflects the premium we paid to redeem debt from a third-party lender. We retired a total of almost $15 million in debt during the second quarter.

Net income available to common stock holders was $15 million, or 68 cents per diluted share. This includes an income tax provision of $7 million. This compares to net income of $700,000, or 7 cents per share, in the year ago period.

We are finalizing our analysis of various deferred tax assets and liabilities, including NOLs. And unless our current estimates are significantly different, we'd expect an effective tax rate to be between 30 percent and 40 percent going forward.

Adjusted net income, which excludes the impact of fair value adjustments and [warrant] inducements and gain or loss on extinguishment of debts was $17 million, or 77 -- 77 cents per diluted share, compared to an adjusted net loss of $700,000, or 5 cents per diluted share in last year's second quarter.

Adjusted EBITDA was $28 million, an increase of $21 million, compared to adjusted EBITDA of $7 million in the second quarter of 2013.

Among our highlights for the six months ended June 30th, 2014, net sales were $576 million, up 25 percent compared to $459 million last year.

Net income available to common stock holders was $4 million, or 20 cents per diluted share, compared to a net loss of $5 million, or 48 cents per share in the first half of 2013.

Adjusted net income was $42 million, or $2.04 per diluted share, compared to a loss of $7 million, or 63 cents per diluted share in the same period of last year.

An adjusted EBITDA grew by $56 million to $63 million for the first six months of 2014, which compares to adjusted EBITDA of $7 million in the first half of 2013.

Turning to our balance sheet, cash and cash equivalent were $26 million at June 30th, 2014, compared to $5 million at December 31st, 2013. In addition, our working capital increased to approximately $79 million from $51 million at December 31st, 2013.

We raised net proceeds of approximately $26 million through an underwritten public offering, eliminating all indebtedness at the parent company level. And we reduced our net consolidated third-party plant term debt to $17 million.

We continue to process cash warrant exercises. Since June 30th, warrants were exercised for approximately 2.5 million shares of common stock for $20 million in cash. As a result, we now have outstanding warrants to purchase a total of 1.6 million shares of common stock, down from 4 million shares at the end of June, and down 7 million shares from the beginning of the year.

In addition to providing the parent increased liquidity, these exercises will also reduce GAP earnings volatility in future quarters as the amount of warrants being marked to fair value continues to -- continues to decline.

As of today, we have approximately $48 million in cash and 24 million common shares outstanding. It is important to note that the cash balances at the plant level now equals a debt owed to third parties, thus making us effectively debt-free.

As a remaining third-party, plant debt is subject to costly interest make-whole requirement if prepaid. We continue to work with our lenders and others to evaluate options to further reduce the cost of our remaining debt.

I'd like to now return the call to Neil.

Thanks, Bryon.

Our efforts over the past couple of years have been set firmly on establishing a stronger company. We strengthened our balance sheet, reestablished a 91 percent ownership interest in our plants, and maintained those assets to position us for growth when the markets improve.

Our differentiated business model has returned exceptionally good results for our shareholders in the first half of 2014. And the outlook for the industry and the company remain strong.

As we look ahead, we are committed to reinvest in capital and our plant assets through projects aimed at improving efficiencies, diversifying feed stock, creating new products, and furthering our advanced biofuels production initiatives.

We remain focused on maintaining our strong cash position and disciplined investment strategy.

We believe we are well situated to improve our long-term profitability and expand our share of the renewable fuels market.

[Teria], we are now ready to take any questions.

Certainly. Ladies and gentlemen, at this time, if you have a question, please press star, then 1. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

And, once again, to ask a question, please press star, then 1.

We'll give them one moment for questions.

And our first question comes from the line of Nathan Weiss of Unit Economics. Your line is now open.

Good morning.

Hi, Nathan.

Congratulations on the net debt-free, too. That's a huge milestone for the company.

Thank you. We agree.

A couple quick questions.

So, you've given your disclosure of your cash balances, you know, as we approach the end of July. You know, as well as warrants still outstanding and, you know, still a pretty favorable margin environment.

How do you think about balance sheet yet again? And, in particular, you know, when I look at working capital, you know, defined as receivables, inventories will be paid inventories, you know, minus payables.

There's about $60 million that could potentially be unlocked through some -- some sort of line of credit. You know, at arguably very favorable interest rates. How do you think about that structure, going forward?

Well, certainly, that's a great question. And we are always evaluating ways to maximize our balance sheet, and obviously, made a lot of progress in that regard. Looking at potential opportunities to bring in some -- you know, really refinance the remaining debt with a much lower interest rate in a way that could free up some additional cash.

We certainly just outlined a pretty aggressive investment strategy that becomes a source of -- a use of many of those funds. And we also believe to -- to stay well positioned for opportunistic growth, and to have a solid foundation that maintaining a pretty large cash balance is not a bad thing in today's environment.

But we continue to evaluate all opportunities to -- you know, to optimize the -- the use of cash to the benefit of the company and its shareholders.

And I know you've been, you know, largely capital constrained the last few years. So, I imagine you have some pretty attractive potential projects. But can you give any insight, you know, either in kind of aggregate dollar amounts or a couple examples of projects you'd like to do and what they'd cost? And, in particular, what kind of paybacks -- you know, how many years you think you're going to see paybacks in some of these investments?

Sure. If you look at what we -- we talked about -- and, you know, certainly, the $16 million -- you know, a good part of that is the two corn oil projects. Looking at other, you know, fine grind opportunities in the two other plants. Making some piping and configuration changes on some of the process equipment that improve efficiencies, as well. And if you -- you know, you look at those projects that we generally outlined in aggregate of $16 million and, you know, six to nine months to complete all those projects, and improving our EBITDA five cents to six cents per gallon -- you know, running that math shows a very quick return of less than two years.

Excellent. Well, congratulations on being that debt-free, and look forward to next quarter.

Thank you, Nathan.

Thank you. And once again, ladies and gentlemen, if you have a question at this time, please press star, then one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

And one moment.

Our next question comes from the line of Craig Irwin of Wedbush Securities. Your line is now open.

Craig, please check your mute button.

Thank you.

Good morning, and congratulations on the nice quarter there.

Thank you.

So, Neil, over the course of '14, we've seen some fairly significant changes to the futures curve. And spot profitability has done some very nice things. Can you comment -- you know, today, where we sit in the third quarter, have you seen some of the strengthening benefit -- your [P&L] to date? And do you -- do you subscribe to the view that was shared by one of your competitors recently that, you know, the fourth quarter could continue to see strengthening from we're at now, given the corn dynamic and this continued strong export demand?

Yes, we're very optimistic about the future. We are seeing a much stronger forward margin curve. It's always an inverse. There's less of a margin out forward, given the -- you know, frankly, still the lack of liquidity in that -- that futures market. But this is some of the fast-forward margin on paper that we've really ever seen in the business. And the -- the spot margins continue to be stronger than that.

So, it is a -- a very good margin environment today, and we do anticipate that really, not just through the fourth quarter, but into 2015, we expect continued strength.

You have a fundamental value proposition between the cost of corn and the cost of crude oil, where ethanol can generate nice profitability for producers and still be sold into the market at a very significant discount to gasoline for a product that also provides needed octane here in the United States, and increasingly around the world.

So, we are seeing the export market support that. We actually just very recently haven't seen a lot of activity on booking to exports for the fourth quarter and into the first. And that bodes very well for this continued strength in the margin environment.

Yeah. Thank you for that.

Second question I wanted to ask was, the proposed tankers regs out there look like they could slow down the -- the rail cars that carry ethanol around our country -- would create an artificial change to the, I guess, overall inventories is one way to think about it. But given that you transport all your ethanol by truck, do you see this as something that would -- would advantage Pacific Ethanol if it's as -- if it's implemented as written today?

Quite definitely. We -- we do believe that, you know, given that the issues that have been out there on rail safety and the accidents that these regs will be implemented -- there could be changes to the proposed rule, but something will be implemented that will impact ethanol and will raise the cost of shipping ethanol by rail.

As you accurately pointed out, we don't ship any of our produced ethanol by rail. It all sold locally by trucks. So, you know, we've already seen a competitive advantage, given the -- the rail logistics constraints out there. It has raised the -- the ethanol basis from Chicago to our markets out West, as those costs are being pushed through the market. And so, that has, in 2014, been a significant advantage for us. And longer-term, as we see these new rail car regulations implemented, that will sustain a continued advantage for us not having to ship our product in rail cars.

Thank you.

And my last question, if I may -- there's been a lot of discussion about the Brazilians increasing their blend rate from 25 to 27 and a half -- maybe 26, but that's still positive. And then the potential for the Brazilians to remove price controls on their gasolines -- something that would be stimulative also for economic switching, given that the higher cost of a -- of a gasoline molecule than an ethanol molecule.

Can -- can you comment whether or not these would be incremental to the -- the outlook in '15? Or if you think we face a robust '15 market, even in the absence of potential changes in Brazil that would be more supportive of increasing exports?

You know, our current view -- again, if you do not see any major changes in the relationship between corn and oil, our outlet for -- outlook for 2015 is very positive. I would agree that incrementally, what you outlined as occurring in Brazil could add further strength to what already is a strong forward outlook.

I would also add to your comments that they continue to fight weather situations. It's very dry down there. They are not having great cane crops. And they're having to -- even before they increase the blend rates, they're having a difficult time keeping up with their own domestic demand, which is why Brazil is the second largest export market for the U.S. producers.

Great. Thank you for taking my questions. And congratulations on the strong quarter.

Thank you.

Thank you. Our next question comes from the line of Paul Resnik of Uncommon Equities. Your line is now open.

Thank you.

Well, I'll -- I'll add my congratulations, as well.

Thank you, Paul.

On DD -- on dry distiller grain prices have struggled lately, perhaps reflecting China's new restrictions. Now, you don't sell DDGs, you sell wet distiller grains. How is that market holding up?

It is holding up or not holding up, just as the dry distillers grains markets. We -- we generally peg our WDG pricing on a moisture-adjusted basis to dried distillered grain pricing. And, as you pointed out, we've seen tremendous weakness in that market. And it is primarily due to the Chinese currently making it very difficult to import -- export DGs to -- to that country. We think that over time, they will again open that market up. This is a repeated cycle with the Chinese to -- to buy a tremendous amount of our distillers grains, which is very stimulative to the overall price, then to back off, see prices drop, and to step back in.

So, it -- it has -- it has had significant impact. We as an industry -- we're selling dried distillers grains at pretty good and historically high premiums to foreign. It now is tending to be sold at a discount to corn as it clears the market to get back into domestic rations in -- in the poultry and swine, and also to incentivize other countries to become buyers of our distillers grains.

That being said, the margin has not -- you know, the margin profile has changed. Whereas corn prices have come down so rapidly, ethanol has not fallen with corn. And even with the large drops in distillers grain, margins continue to be strong because it's been made up on the ethanol side.

Great.

Can you give me what the -- just an estimate of what the current premium that's been -- is currently being provided by your low-carbon footprint on a, you know, per-gallon basis?

It's currently about two cents a gallon.

Mm-hmm.

It's been as recently as six months ago was quite a bit higher than that. As the Air Resources Board, California -- Air Resources Board is reauthorizing that program. There's been a pause in the program. It doesn't increase in terms of the -- the percent reduction in carbon intensity now until 2016. So, that has created somewhat of a lull in that market.

We anticipate as -- as the state makes their plans for reauthorization quite clear over the next number of months that we will again see an increase in carbon credit pricing.

Okay.

And a couple of questions about what's going on in Washington. The much-delayed EPA decision on RFS is now expected in August. Does that seem -- do you think we're finally getting there?

Well, certainly, the -- the EPA has redefined the word "soon." And so, I can't really tell you whether we're getting there or not. But, you know, we hear the same things you hear. And, frankly, I'd probably put that closer to September.

The proposal has not yet gone to the OMB. And it's probably 30 days after that. So, I think we're now probably looking at September.

You know, clearly, given the dynamics in the market, it's immaterial to the current market environment. It becomes material for the longer-term future of advanced biofuels. And we are cautiously optimistic that the -- the final rule will be more supportive of all forms of renewable fuels than the -- the proposed rule.

And one last question. You certainly have found a very worthwhile use for $16 million, but that still leaves $32 million, and -- and rising, as far as your cash position. In addition to plant improvements, could you envision some areas where acquisition would make sense?

Sure. We -- we do believe that this industry will continue to rationalize and consolidate. And we view our position in the market as strong enough to be some -- a company that is in the M&A arena. So, we certainly would -- would advise you if anything material comes up in that regard. But we are open to opportunities.

Very good. Once again, congratulations.

Thank you, Paul.

Thank you.

At this time, I'm showing no further participants in the queue.

I would like to turn the call back over to Neil Koehler for any closing remarks.

Again, thank you all very much for joining us today. This was a great quarter. We have a very positive outlook on our results and performance going forward as a company and an industry. We really appreciate everyone's support of the company. And we will talk to you next quarter.

Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect.

Everyone have a great day.