Alto Ingredients Inc (ALTO) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Pacific Ethanol fourth quarter and full year 2014 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to Becky Herrick at LHA. Please go ahead.

Thank you, Nicholas and thank you all for joining us today for the Pacific Ethanol fourth quarter and full year 2014 financial 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 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's available on the Company's website at pacificethanol.com.

If you have any questions please call LHA at 415-433-3777. A telephone replay of today's call be available through March 12, 2015, the details of which are included in yesterday's earnings press 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, March 5, 2015 and therefore you're advised that time sensitive information longer be accurate at the time of 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 the 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 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 net earnings as unaudited earnings before fair value adjustments and warrant inducements and gain or lost on extinguishment's of debt. Adjusted EBITDA is defined by the Company as unaudited earnings before interest, provision for income taxes, depreciation and amortization, fair value adjustments and warrant inducements, and non-cash gain or loss on extinguishments of debt.

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's now my pleasure to introduce Neil Koehler, President and CEO. Neil.

Thank you, Becky and thank you all for joining us today. For the fourth quarter of 2014 we reported net sales of $256.2 million a 19% increase over the fourth quarter of 2013. We also reported record total gallons sold of 134.6 million. Gross profit of $18.4 million, operating income of $13.6 million, and adjusted EBITDA of $16.3 million.

2014 was a pivotal year for Pacific Ethanol with a record $1.1 billion in sales, a record 513.2 million gallons of ethanol sold, $108 million in gross profit, $91 million in operating income, and $95 million in adjusted EBITDA. We achieved tremendous results on our operating efficiency and debt reduction initiatives put in place over the past few years.

For 2014 these initiatives combined with strong market fundamentals to produce excellent production margin, improve net income and cash flow and a solid balance sheet ending the year with $62 million of cash and total working capital of $114 million. We are pleased to have met or surpassed all of our goals for 2014.

In the second quarter, we successfully restarted our Madera plant. After having been off-line for more than five years, we achieved efficient operations quickly at Madera and it has operated very well since. We committed $16 million of capital to invest in the operating plans to improve plant efficiencies and increase yields. Many of these projects are complete and some are still underway.

With these projects we have reduced our cost of production and increased revenue generating opportunities at each of our facilities positioning the plants to be even more competitive. Our plan to install corn oil separation technology at the remaining two plants is expected to be completed the end of the first quarter for Madera and in the beginning of the second quarter for Boardman.

We plan to sell CO2 generated from our Boardman plant starting at the end of the first quarter as Kodiak Carbonic is finalizing construction of the CO2 liquefaction and dry ice facility. In January, we announce we will install a 3.5 megawatt co-generation system with gradual oxidizer at our Stockton plant. The co-generation system will displace purchased electricity by converting waste gas from ethanol production and natural gas into electricity and steam. With this technology the plant will have among the lowest air admissions in the ethanol industry and will reduce our energy costs by an estimated $3 million to $4 million per year.

In the fall of 2014 we were awarded a $3 million grant from the California Energy Commission to develop grain sorghum as a long-term feedstock alternative for our California plants. And at each of our facilities we have installed a variety of new equipment and technologies that have reduced our operating costs and the carbon intensity of our production. All of our efforts through 2014 and into 2015 have enabled Pacific Ethanol to reinvest in the business, increase the value of our products to our customers, lower the carbon intensity of the fuel we produce, and strengthen our balance sheet to allow for continued growth.

In addition, we significantly reduce our overall debt balances eliminating all debt at the parent Company and all but $17 million of our plant debt. This significantly reduced our cost of borrowing and enhanced our liquidity. Including our revolving debt as of December 31, 2014 we had a consolidated debt position of $35 million and $62 million cash balance.

We also ended the year with plant ownership of 96% up from 91% from the prior-year. On December 31, 2014, we announced an agreement for a stock for stock merger with Aventine Renewable Energy Holdings, a midwest-based ethanol production company with an operating capacity of 315 million gallons per year.

We were granted early termination of the Hart-Scott-Rodino Act waiting period and are working diligently with the SEC and its review of our S-4 registration statement. And we remain on track to close in the second quarter of this year. This transaction supports and would extend Pacific Ethanol's production and marketing positions in the ethanol industry. We view the merger as a great benefit for both companies with compelling strategic attributes.

The merger will strengthen our unique production and marketing advantages by connecting origin and destination markets to allow for more efficient supply chains and to take advantage of price dislocations, common in these markets. It would diversify our geography, technology, and product platforms to include a wet mill, an array of valuable co-products, and strategic access to new national and international markets.

It would more than double our annual production capacity to 515 million gallons and marketing volume to over 800 million gallons and establish the combined company as the fifth largest producer and marketer of ethanol in the United States. And with the merger we will bring on an experienced and seasoned operating team that will integrate well into our existing business.

We also expect to realize significant synergies through expanding our access to customers and into new markets, broadening our co-product mix, refinancing debt terms to bring down costs while maintaining a conservative debt load on the entire platform of assets. Realizing efficiencies through combining shared functions and resources, and benefiting from expected returns by making investments in plant and logistical assets.

We expect the combined company to have a greater financial strength and flexibility with improved cash flow and liquidity, as well as an enhanced ability to withstand cyclical downturns. Industry margins have been under some pressure in early 2015 as record levels of industry production have resulted in high ethanol inventory levels.

While gasoline demand is up about 5% year over year, the winter months are the lowest demand season. With gasoline demand now beginning its seasonal increases ethanol exports remaining strong while industry production levels moderating recently, we expect margins to improve. And in fact, have seen a pickup in the last week.

Pacific Ethanol along with others in the industry has reduced production rates in the first quarter to better match current supply and demand. This week's EIA report showed an annualized run rate of 14.3 billion gallons of ethanol, down from a high of a 15.2 billion gallon run rate reported in December.

Lower oil prices have resulted in increased demand for gasoline and therefore higher demand for ethanol as virtually every gallon of gas sold in the United States contains 10% ethanol. For example, the 5% increase in US gasoline demand in 2015 would translate into an increase in US ethanol demand of approximately 700 million gallons.

As I mentioned the demand for ethanol in the export market remains strong. In 2014 the US exported 836 million gallons of ethanol, an increase of 35% compared to 2013. We expect international demand to continue to support domestic ethanol production. We remain confident in the growing long-term demand for ethanol as it remains the cheapest source of octane and oxygenate on the planet.

In addition, co-product values have rebounded in the first quarter of 2015 as China has eased import restrictions for distillers grain reopening a very lucrative market for this co-product. Corn oil also contributes approximately $0.05 per gallon of incremental gross profit. The continued strength of co-product markets proves to be an ongoing and increasingly valuable contributor to the Company.

Underpinning the long-term demand for ethanol is California's low carbon fuel standard. The low carbon fuel standard has been a successful mechanism for reducing carbon emissions and driving demand for lower carbon biofuels. It has also spawned similar regulations in the neighboring states of Oregon and Washington and into the province of British Columbia. Combined, this region represented very large segment of the overall demand for transportation fuels in the US.

Over the last year, the California Air Resources Board, or CARB, has engaged in a comprehensive process to re-adopt the low carbon fuel standard, which requires fuel suppliers to reduce the carbon intensity of transportation fuels to 10% below 2010 levels, by 2020. Earlier this month CARB staff had a public hearing on the proposed for final role. The rule is expected to be formally approved this summer and the revised program is expected to begin January 1, 2016. This is beneficial to Pacific Ethanol as we produce among the lowest carbon intensity ethanol commercially available. And we receive a premium for the fuel we sell into the California markets, which we expect to increase as the compliance curve steepens beginning in 2016.

With that I'd like to turn the call over to our CFO, Bryon McGregor to review our fourth quarter and full year financial results. Then I'll return to discuss our 2015 priorities. Bryon?

Thank you Neil. Our solid fourth quarter results closed out a record year for Pacific Ethanol. In the fourth quarter we reported net sales of $256 million, up 19% compared to $215 million in the fourth quarter of 2013.

Gross profit was $18.4 million this quarter which compares to $21.6 million in the fourth quarter of 2013. The decline in gross profit was due to particularly strong production margins in the fourth quarter of 2013.

SG&A expenses were $4.7 million compared to $4.4 million in the fourth quarter of last year. This includes approximately $1 million in increased spending related to the Aventine merger. This quarter's operating income was $13.7 million compared to $17 million in the prior-year period.

We recorded income of $2.2 million in fair value adjustments for the quarter compared to an expense of $2.5 million in the prior-year period. Today we have approximately 800,000 warrants outstanding at a weighted average exercised price of approximately $8 per share. Just over half of these warrants expire this September and have an exercise price of approximately $9 per share.

Interest expense was $1.1 million, this compares to $3.7 million in interest expense in the fourth quarter of 2013, reflecting the significant strides we made in reducing our overall debt balances. Our provisions for income taxes was $1.5 million.

During the quarter we finalize our estimate of NOLs available for use in 2014 and future years, resulting in a higher NOL utilization than previous estimated. Going forward, we expect to have an effective tax rate of 35% to 40%. In 2015 we expect to use approximately $3 million of NOLs and an $8 million refund from a 2014 overpayment to fund a portion of our tax obligations.

Net income available to common stockholders was $12.2 million or $0.50 per diluted share. This compares to $8.3 million or $0.54 per share in the year ago period.

Adjusted net earnings, which excludes the impact of fair value adjustments and warrant inducements and gain or loss on extinguishment of debt, was $10 million or $0.41 per diluted share compared to an adjusted net earnings of $12 million or $0.79 per diluted share in last year's fourth quarter.

Adjusted EBITDA was $16.3 million compared to adjusted EBITDA of $18.3 million in the fourth quarter 2013. For the 12 months ending December 31, 2004, net sales were a record $1.1 billion or up 22% compared to $908 million last year. Net income available to common stockholders was $20 million or $0.88 per diluted share compared to a net loss of $2.2 million or $0.17 per share in 2013.

Adjusted net earnings was $59.9 million or $2.64 per diluted share compared to $2 million or $0.16 per diluted share last year. And adjusted EBITDA grew by $66 million to a record $95 million for the year, which compares to adjusted EBITDA of $29 million for 2013.

Turning to our balance sheet, cash and cash equivalents were $62 million at December 31, 2014 compared to $5 million at December 31, 2013. Including the $17 million in remaining plant debt, we have a consolidated debt position of only $35 million. And with respect to our Kinergy line of credit we extended the maturity date another year to 2016, while reducing our interest rate by 50 basis points and relaxing certain compliance loan covenants.

We also repaid all remaining accrued but unpaid preferred dividends during the fourth quarter. Our working capital increased to approximately $114 million at the end of 2014 from $51 million at December 31, 2013.

In terms of capital expenditures on our second quarter 2014 call, we discussed our plans to invest up to $16 million in plant improvement projects to further reinforce our market position. These initiatives are focused on improving efficiencies, diversifying feedstock, and expanding our advanced biofuel projects.

Of the $16 million, we spent $4.5 million in 2014, of which $2.8 million was in the fourth quarter. In 2015 we expect to spend approximately $30 million in capital expenditures. This includes our previously announced co-generation project investment of approximately $11 million. We also have $11.5 million remaining of our initial $16 million budget that we expect to spend on additional CapEx opportunities currently underway. This also includes our maintenance CapEx budget, which typically runs approximately $1 million per plant per year.

As previously mentioned we believe the initiatives begun in 2014 will lead to an annual EBITDA improvement of approximately $0.05 to $0.06 per gallon, representing a contribution of approximately $10 million to $12 million to our annual operating income at current production margins and volumes. And as Neil previously mentioned, when completed our co-generation project is expected to contribute $3 million to $4 million in annual cost savings.

With that I'd like to return the call back to Neil.

Thanks Bryon. We're extremely pleased with the progress made in 2014. The health of the industry supported strong production margins and enhanced cash flow, which allowed us to reinvest in the business and set the foundation for continued profitable growth.

I want to thank our team for their valuable contributions in executing on our Company goals and helping Pacific Ethanol build the strong foundation it stands on today. Looking ahead to 2015, we expect to experience a significant evolution in our business with the planned merger with Aventine. The combination of the two companies will expand our production and marketing, diversify our technologies, broaden our co-product mix, and establish Pacific Ethanol as the fifth largest producer and marketer of ethanol in the United States.

We are impressed with the skilled and experienced employees who operate the Aventine business and we look forward to integrating our two teams and introducing our combined company to the market. For 2015 our goals are to close the Aventine merger and efficiently integrate our businesses. Continue reinvesting in our production business through initiatives focused on improving efficiencies, diversifying feedstock, creating new revenue streams, and furthering our advanced biofuels initiatives. We believe we are very well situated to expand our share of the renewable fuels market and deliver long-term profitable growth.

Nicholas we are now ready to begin the Q&A session.

(Operator Instructions)

Eric Stine, Craig Hallum.

Hello, Neil. Hello, Bryon. Nice quarter.

Thank you.

I just wanted to start with ethanol prices and I know this maybe a little tough to answer, but RBOB has rebounded pretty nicely since early February. Just thoughts when you think ethanol prices could follow suit? And just maybe a shot at what your thoughts are on prices throughout 2015, factoring in seasonality of the driving season and things like that?

Yes, Eric that is a difficult question to answer.

I will say to your point, RBOB has gotten more expensive. You look at the forward curve, particularly for the driving season, we're looking at about $1.90 on RBOB, yet the forward curve on ethanol's closer to $1.50. We're where we consistently trend as a nice discount to gasoline. That being said, the value of ethanol is higher than the value of gasoline and the erosion in ethanol prices, in our view, has really been more of a function of the supply and demand issues around ethanol, not really the lower oil prices and gasoline prices.

But what these prices have certainly done is kept the pump primed on exports. We've seen very strong exports already this year. We expect that to continue. And we have seen a -- just really in the last few days, an uptick in ethanol prices. And we expect the values to continue to strengthen as we move into the driving season. And we would expect to see some closing of that current discount to gasoline.

Got it. Okay.

And maybe just thoughts on how we should think about your utilization at the plant level, just given that right now margins are pretty tight in the industry as you kind of work that supply/demand picture.

Yes. As I mentioned in the prepared remarks, we and others in the industry have reduced production. Our own production rates are running about 90% right now, so we're about 10% down. We were running right at the operating capacity in the fourth quarter. So that represents a meaningful decline.

And then you can see in the aggregate numbers for the industry, from the 15.2 billion gallon run rate, which was a record run rate for the month of December, this last week's numbers were down for the second week in a row and showing an annualized rate of 14.3 billion gallons. 14.3 billion gallons, when you get into the driving season, is about the demand we'll see on an annualized rate in those summer months. And we expect exports to be in and around where they were last year, pushing on 1 billion gallons.

So you can see, with those two numbers we would be bringing inventories down. Inventories are at about a 2-plus year high, and they do need to come down to support better margins in the business and that is the trend that we are seeing.

Okay; and so 90%, obviously you can move that pretty quickly, but 90% would seem to be a decent assumption as we look out going forward. Knowing that we can obviously see --

Eric, that's a decent assumption for the first quarter. I mean, this is, as you point out, we can move that quickly. We will move that in response to market conditions. And right now, market conditions are suggesting that the industry as a whole should be running at rates that are closer to 90% of capacity to bring the aggregate inventory levels down.

Last question for me, just on corn basis. That was another good number. A source of the strength in the quarter. Just curious on how you're seeing that directionally? Have you been able to or are you able to lock some of that in at these levels going forward?

Sure. We're always managing our positions. Sometimes very short and sometimes a little further out. And to achieve the lowest possible basis, we have locked some amount of that as we move forward. I would say that using the spots corn basis is still the best proxy for analyzing our business, and that today is running at about $1 a bushel over the CBOT, so it's actually lower than we saw in the fourth quarter. Freight has become more reasonable; in fact it sells in the market at a slight discount, freight to our western markets.

Corn basis in the country and in the Midwest is running small discounts in the areas we pull from to the Chicago Board. We do actually see with numbers at the end of March, which we anticipate will show some pretty good strong corn planting intentions, we think there's a good opportunity for the overall corn price to come off the current in and around $3.80 a bushel, and that we could also see some additional relief on the basis as well.

So it sounds like you think that, even though $1.35 in Q4, that actually you could see improvement in that number in Q1?

We could see some marginal improvement in that in Q1. Yes.

Okay. Thank you very much.

Thank you, Eric.

Craig Irwin, ROTH Capital Partners.

Craig?

Craig, your phone may be on mute.

Sorry about that. Good morning; congratulations on a strong quarter.

Thanks, Craig.

Neil, the pleasant surprise for me in the numbers was the production volumes -- operating over 100%. Utilization across your plants is always an impressive accomplishment. Given that you've got a lot going on, everything from your co-gen project that you did more recently announce, to corn oil, to some of your advanced biofuel initiatives, a little bit of a surprise that you had such strong volumes.

Was there anything that went particularly well for you on the production side? Or is this something where you have the ability to flex upwards in the future? And I guess the second part of the question is, in the past I think you mentioned the Boardman facility had [runnable] production capacity above nameplate. Is that something that might factor in as far as your potential production capacity over the next several quarters?

Sure. Our plants are very well dialed in. A lot of credit goes to our team for -- over the last couple of years, they're really fine-tuning these plants so that they are capable of comfortably running at operating capacity and in some cases even above that for periods of time. We've been able to manage all of our capital projects in ways that we'll do major tie-ins when we have our typical 24 hour, sometimes 48 hour, shutdowns, which are a scheduled part of our program throughout the year. And so we have been able to implement those projects without disrupting production.

So it is a market-related fact that we look at in terms of, do we want to run our plants at capacity, or do we want to push them a bit above operating capacity, or do we want to, as we are today, run them at some rate that is less than operating capacity. But very comfortable with the ability of our plants to perform reliably and consistently.

Great. My next question was similar.

So you mentioned a slowdown of roughly 10% in first quarter relative to the fourth quarter. Does this include the typical one- or two-week turnaround that most operators do with their plants when the snow breaks? I know snow is not a huge issue for you. But is this turnaround-driven? Or is this driven by the opportunity to maybe furlough on margin and still meet commitments?

It's the latter and that's where meeting commitments in our Kinergy marketing company we can always buy in ethanol. As you know we do sell a lot of third-party volumes. So we have the ability to flex our own production up and down and have that a seamless event vis-a-vis our marketing and our customer commitments.

This really has been a market-driven event. We did anticipate, frankly, even though 2014 was one of the best years that the industry has ever had, we saw a period of negative margins in early January. It's not uncommon this time of year to see a bit of a pinch on margins. So we did schedule some more significant work in our Boardman, Oregon, plant that we were going to do in the fourth quarter; and we deferred that to the first quarter and that was a good market call that we made.

Our own plants don't do one- to two-week turnarounds. The way our plants are designed, we typically every five, six, seven, eight weeks, depending on how the plants are performing, will go down for a 24-hour period. Like I said, in the first quarter we have some outages that were longer than that, taking advantage of the market opportunity to slow down and to do some additional work.

Great. My next question is about co-product return rates.

So other producers out there have expressed optimism that they will be able to capture some of the benefit from China stepping into the market buying our distiller screens again. Is this something that you think will benefit your co-product return rates in 2015? Or do you have a component of your co-products that are locked in pre-existing sales agreements?

We have a very small amount that is locked in pre-existing sales agreements. We do manage that more on a spot basis. We'll have weekly, monthly pricing, typically; for the bulk of our volume it doesn't go out much beyond that. Our wet distillers grain is tied fairly directly to the movement in dry distillers grain pricing. So the Chinese benefit is benefiting our plants as well, and we are seeing an uplift in our co-product return. As an industry, not quite to some of the lofty levels we saw in early and middle 2014, but certainly up from what we saw in the fourth quarter.

Great. And then last question if I may before I hop back into the queue.

Corn oil -- I may have missed this, but last quarter you shared with us a number for corn oil. Can you share that number if you have it handy? And maybe if you could share with us what you've learned from operating the corn oil upon your existing facilities and how that's progressing relative to your expectations.

Sure, Craig, and when you say number are you meaning the contribution to our operating income number? Is that what you are looking for?

Revenue and operating income would be great, but I'll take either.

Sure. It contributes for the plants that are running about $0.05 a gallon to our operating income gross profit contribution. We have learned how to operate the corn oil systems better. Our yields have increased over time. We're getting, in some cases and some weeks and days, as high as 0.8, 0.9 pounds of corn oil per bushel. And certainly our overall averages are better than they've been -- probably closer to that 0.6,0.7 range.

So that market is more stable in pricing than either the ethanol or distillers grain. It's a very high valuable feed product as well as a good feedstock for biodiesel. And it obviously has been an important part of our strategy and the industry's strategy to continue to diversify the revenue streams and create a little more strength in the economic foundation of the business.

Great. Congratulations again on the strong results and thanks for taking my questions.

All right; thank you, Craig.

Jeff Osborne, Cowen and Company.

Great. Congratulations from me as well on the strong results.

I might have missed this in response to the basis question, but is there a rough breakout that you can give us, Neil, on the basis? In particular, how much is related to freight that you highlighted some of the improvement in?

Sure. The freight component -- again, it depends on the plant -- but it's, on average the freight is about $1.10 per bushel. So where we saw basis in the fourth quarter that was over $1.10, that was a combination of, in some cases we saw a basis in the Midwest that was over Chicago, as well as particularly in the early part of the quarter, when we were having the harvest, we saw the freight trading at a premium. So that made that all-in freight number actually higher than $1.10. But that was in a market where the freight is balanced. Right now it actually is trading at a small discount. That's a good number to keep in mind -- about $1.10 per bushel of the freight component.

Got you. And then just a couple of other quick ones for me.

Where are we now, and maybe in the fourth quarter, but more importantly for the plans for 2015 and 2016 on the yields that you have on a gallon yield per bushel metric. Are you slightly below 2.8 in the winter months, and then that will be slightly above, early in the year? Or just remind us of seasonality. And then any efficiency improvements that you have in place for this year and next would be helpful.

Yes. There's not so much seasonality that is predictable in yield. It does become impacted by the quality of the corn. We certainly saw in past years, when the corn inventories were quite low and we were drawing off items of bottoms of bins in the older supplies of corn, we did see a negative impact; and that would've been in the fall timeframe. Not really this last year, where there were larger inventories, but in past years. And then just depending on the growing seasons year to year, you can see a difference in the average starch content, which is what's going to drive the yield in the market.

That 2.8 is a reasonable number. We are always working to make incremental improvements on that. And believe that the initiatives that we are implementing will get us above those levels as we move forward. Very small increases in yield can have a very material and positive impact on the bottom line.

Got you. And then two other quick ones.

The CapEx of $50 million -- Bryon, should that be evenly spread out through the year? Or more inclined to the summer months? Is there any kind of rhythm to how you think about spending that?

Yes, it was actually $30 million that we quoted. So the $4 million of normal CapEx for the four plants will be spread out throughout the year. As you can imagine, some of the $11.4 million that was carry over from the $16 million is going to be related to corn oil. So those will have some -- as we mentioned, we expect to have the final two corn oil facilities up and running within the next month or two. And so those would have final payments on those. I think what we indicated to the Street was, in total those would be about $8 million. So --

They may be a little front-end loaded?

Yes, so maybe a little bit more front-end loaded, and then you start to add more payments on the co-generation, which we expect to be completed in the first half of 2016. So I think it's, as we review those numbers it's probably a good assumption that we spread it out pretty evenly throughout the year.

Perfect. I appreciate the detail. Thanks.

Katja Jancic, Sidoti & Company.

Hello; thank you for taking my call.

First, regarding the CapEx -- the $11.5 million, is that just the corn oil? Or are there additional projects included in that?

No, there's additional projects. So of the $16 million, $8 million was the corn oil. So there were other investments and improvements there.

Can you talk a little bit more about those? What can we expect from them?

I think, consistent with the corn oil, we would expect them to be contributing, part of that contributory factor that I indicated in the prepared remarks with regards to that $10 million to $12 million of annual contribution.

Okay. And I know, Neil, you were mentioning you see a strong export market right now. Can you talk a bit more about how much of ethanol has already been exported to other markets?

Well, we'll see -- I believe it's Friday we'll see the first government report in 2015 for January. And market expectations are that we saw somewhere between 70 million and 80 million gallons exported in January. And so we'll see.

We don't, right now, certainly after the integration of Aventine, we would be looking at export markets; but our current model of, we don't export out of the country. All of our sales are local, so we don't have a lot of personal visibility on that other than just talking to the trade. And it's very clear that, with the ethanol prices flexing with gasoline, the product continues to be very competitive and in demand throughout the world. And that the exports have been strong and continue to be strong. We've heard from some other reporting companies that they booked exports into the second quarter and we're now hearing of exports being booked in third and even some in fourth.

So there's -- Brazil has been a good market. They just announced yesterday that as of March 16 they are moving to the 27% blend level. That could create some new opportunities. Canada continues to be very consistent and the largest destination for ethanol exports. And continue to see interest in Asia and other parts of the world as well.

Lastly, regarding Aventine. Can you provide any information as to how they did in the fourth quarter?

No. Unfortunately, Katja, until this integration and the deal is finally closed, they are a private company. And we can't comment on their financial results. I would draw your attention to the S-4 that we filed. It did provide some summary financial information for Aventine through the third quarter. And I would assume that as we amend our S-4 and respond to questions from the SEC that there may be an opportunity to see some fourth-quarter results as well.

Okay. Thank you so much.

You're welcome.

Matt Farwell, Imperial Capital. Your line is now open.

Hey, good morning. Congratulations on a great quarter.

Just wanted to talk about the current margin environment. I did join late, so you may have already discussed this, but looking back to the first quarter of last year, the West Coast ethanol inventories were a little bit tighter than they are now. Is that probably the best way of determining the premium price for ethanol on the West Coast relative to CBOT that could eventually benefit your margins in the second quarter? And did you give an idea of where margins, what kind of margins, you're seeing today?

No we didn't give any specific guidance on that, other than to say that they've been under pressure for the whole industry. And that we do see that, with the production levels having declined fairly significantly from the record run rates in December, from 15.2 billion run rate in December to what was reported this week at a 14.3 billion. The key is that we have inventory levels over 21,000 barrels. We need to see -- I'm sorry 21 million barrels. We need to see that number come down to really support higher margins, more typical of what we saw last year. And we anticipate that we will see some draw on inventories as we are moving into the higher-demand season and exports continue to be strong, combined with some moderation in industry production levels.

On our model, you're right to look at the spread from Chicago to the West Coast. We did see some very high basis numbers last year at this time. A lot of that was weather-related and just logistical constraints on rail. We've seen less of those problems this year. The weather's been better. A little bit of pressure taken off of the rails from the slowdown in the movement of crude.

So we're seeing more historically normal levels in and around $0.20 premiums over Chicago, which -- that works for us. With a normal corn basis and the premiums we get for the ethanol and the distillers grain, that puts us in a very solid competitive environment. We have seen a little bit, with some of the weather on the East Coast and Midwest, we've actually seen a little flexing up of that basis over the last few days. And that could continue to be the case over the next period of time. So we're certainly taking advantage of that when the market presents that opportunity.

So I guess the first quarter of last year may have been a bit of an aberration due to the rail constraints. But certainly in the second and third quarters, given the production levels and the levels of export that industry seems to be very confident in, we should see a significant improvement in demand. I think the numbers on the inventory should start looking a lot better come summertime.

That is certainly when we run our projections and look at the balance sheet numbers we would agree with that. And in a market that is tighter on supply/demand, we do tend to see those basis numbers to our markets increase, as you would expect. As logistics to get trains down for export and overall increase in demand even without weather impacts, we've seen where that can support the pricing out in our destination markets.

From what I'm looking at, the Midwest margins seem attractive. Will you get any benefit from that when the transaction with Aventine is closed?

Absolutely. It's -- what we have indicated is that these are very volatile markets, both the corn basis, ethanol basis, distillers grain basis -- all of these things move around quite a bit, both domestically and internationally. And there are times when our margins -- we saw it any number of times last year -- were significantly better in the Midwest. We see times when they're the same; we see times when they're not as good.

So, just by diversifying the portfolio with technology and geographically, we're in a better position to essentially hedge those markets and arbitrage the opportunities to flex margins up. And in the case of where we will look and see margins not as good in one area, we could slow down in one area and speed up in another. It definitely gives us more optionality to play the various arbitrage opportunities between the origin and the destination.

And if Aventine generates cash between now and transaction close, that cash eventually flows through to PEIX, correct?

That is correct.

Okay, well great thanks for answering my questions and I'll get back in the queue.

Thank you.

Paul Resnik, Resnik Asset Management.

Good morning and I'll add my congratulations.

Thank you, Paul.

Sure. Just a couple of clean-up questions here.

The Exxon plant explosion and its impact on gasoline prices in California -- how long do think that's going to last?

Well, it's probably better to ask Exxon for that question in terms of the refinery, but that was a major damage to a FCC unit that is a very significant contributor to gasoline production. And it's not -- that is certainly in the time zone of months, is my understanding. But again we have no inside information on that. That, combined with the Tesoro refinery in Northern California being down over a labor dispute, has created a significant impact on gasoline supply in California. We are seeing a very high -- relative to other parts of the country -- prices in California to the tune of $0.30, $0.40 wholesale market basis premiums. And we're obviously seeing it on the street. Gas pricing is above $3 today in California.

Frankly, this just underlines the importance of the industry having access to higher-level blends. Ethanol, certainly relative to RBOB gasoline, but even more certainly related to California gasoline, is a huge advantage. And the market is short liquid fuels and is short octane. And if we could blend 15% ethanol or higher into California gasoline today, we would be helping to relieve the supply situation. We'd be helping to reduce gasoline prices and helping the state to recognize its carbon initiatives by lowering the carbon intensity of the fuel.

Aventine -- I guess your previous comment gives me the feeling that if I ask you what sort of operating rate they're at, that's also not public information?

That is correct, Paul.

Okay. And lastly, long-term rail issues regarding railcar safety in the inclusion of ethanol in that issue -- any update on that? And your thoughts about where that might be going?

Well, we're all waiting for the final rule from the federal government and we do believe that, that rule will include ethanol. Whether there's a differentiation on the rules and regulation between ethanol and crude oil, we, as an industry, think there should be. But we'll have to wait and see. But there will be some impacts that will require some retrofitting of existing cars over time. And new cars that have some additional features as they are being constructed.

So that will to some degree increase the cost of moving ethanol by rail. With the Aventine merger, we will be part of that from the standpoint of those plants. But from the standpoint of our existing facilities that's always been an advantage for us by not putting any of the ethanol that we produce in our Western plants in rail cars.

Once again, fantastic quarter. Great outlook. Well done.

All right. Thanks, Paul.

Thank you. With no further questions in the queue, I'd like to turn the call over to Neil Koehler for closing remarks.

Thank you, Nicholas; and thank you all for joining us today. We obviously are very proud of our result and very optimistic about the future of the industry and our Company. And we really appreciate your continued support of Pacific Ethanol. We'll talk to you soon. Have a good day. Bye-bye.

Ladies and gentleman, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Have a good day everyone.