Alto Ingredients Inc (ALTO) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc.'s third-quarter 2015 financial results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Becky Herrick of LHA. Please go ahead.

Thank you, Candace. And thank you all for joining us today for the Pacific Ethanol third-quarter 2015 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 summer 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.com. If you have any questions, please call LHA at 415-433-3777.

A telephone replay of today's call will be available through November 12, 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, November 5. 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 states 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, 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 operation. 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, income taxes, depreciation and amortization, and fair value adjustments. To support the Company's reviews of non-GAAP information later in this call, a reconciling table is included in yesterday's press release.

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

Thank you, Becky. And thank you, everyone, for joining us this morning. The third quarter of 2015 was our first quarter of operating our newly-acquired assets in the Midwest. Financially, the quarter was challenging with a compressed margin environment, but we made great strides in integrating the former Aventine assets to build a solid platform for future growth and success.

Our net sales were $380.6 million, up 38% over last year's third quarter. Total gallons sold were a record at 211.6 million gallons, and GAAP net loss was $15 million, which included approximately $8.7 million related to one-time largely non-cash items stemming from our acquisition. Bryon will review these adjustments in more detail in a moment.

Our adjusted net loss for the third quarter was $7.5 million, and adjusted EBITDA was a positive $2.4 million. We believe our continued focus on optimizing our assets, expanding our market share, integrating the newly-acquired production facilities in the Midwest, and continuing to implement plant improvement initiatives, will bolster our financial performance moving forward.

We are now beginning to see the benefits of the acquisition. The added scale from the Midwest assets provides us with eight strategically located biorefineries in the US, with a total of 515 million gallons of annual production, and over 800 million gallons of annual marketing volume. This larger diversified platform yields significant benefits, including enhanced purchasing power, increased revenues, new product sales, projected synergy benefits of over $1 million per month, and an overall strengthened position as a low-cost producer and high-value marketer of ethanol and co-products.

In the quarter, we made significant improvements to the Nebraska operations, which were not performing well when we assumed ownership July 1. In addition, we had a productive yet costly scheduled week-long shutdown at the Pekin wet mill. While these issues had a negative impact on earnings in the quarter, both locations are currently running smoothly and generating positive operating margins.

Our ethanol marketing business performed well during the third quarter. Our third-party gallons sold increased sequentially to a record 102 million gallons, as we have grown our business into a national ethanol production end marketing company.

Now onto a review of the industry. Ethanol demand in the US market is very strong, reaching record levels, as low oil prices have led to higher consumption of transportation fuel. And exports continue to grow, as global markets incorporate the economic, environmental and octane benefits of ethanol. US ethanol capacity has expanded along with ethanol demand, and the industry continues to improve operating efficiencies.

Strong margins in 2014 led to investment in technologies and processes to expand output at existing facilities. While these capacity expansions improved plant performance, they have also led, at times, to excess supply in the market. This was particularly true at the beginning of 2015. As the year has progressed, ethanol demand has increased, ethanol production has moderated, and the ethanol stocks-to-use ratio is near the lowest in a year, contributing to improved production margins.

Turning to a review of the regulatory environment, regarding the renewable fuel standard, by November 30 of this year, the EPA is expected to finalize its volume requirements for 2014 and 2015. We believe there will be an upward adjustment from the proposed rules targets. We also believe stronger RFS is consistent with Congressional intent, and the capacity of the biofuels industry will expedite a move to higher-level ethanol blends and new production of advanced biofuels.

The California Low Carbon Fuel Standard, which requires a 10% reduction in overall carbon emissions by 2020, continues to provide important value to our Company. The program has established a functional carbon market that benefits our low carbon ethanol production. Currently, Pacific Ethanol receives a premium over the Midwest ethanol in each California production gallon sold into the California market.

The program was reauthorized by CARB in September, with a new compliance curve that is resulting in higher values for the carbon credits we generate. Additionally, the Oregon LCFS program begins January 2016, which will extend our low carbon advantage to our Oregon facility.

We have a strong track record of investing in yield and lower carbon projects at our plants, and have several either installed or underdevelopment for each of our eight facilities. We will continue to invest in these assets to improve their performance. Corn oil production is installed and operating at all of the Company's dry mills.

We are on schedule and budget for the installation of cogeneration technology in our Stockton facility. By using a gradual oxidizer, we will convert process waste gas and natural gas into electricity and steam with lower air emissions and at reduced operating costs. We expect to begin commercial operations by the end of the second quarter of 2016. We are exploring the feasibility of duplicating this effort at our Madera, California facility.

We have also begun production in sales of CO2 at our Colombia facility. And with the ongoing production of CO2 at our Pekin facility, we expect this to contribute incremental operating income for the Company going forward. We sell close to 1 million gallons a month of industrial grade ethanol from Pekin, and we expect demand for this product to increase. Due to its higher quality, we sell the product at a premium to chemical companies.

We have completed a trial at our Madera facility with Whitefox to implement technology that lowers the carbon intensity of our ethanol and increases throughput capacity in distillation. We are planning to implement this technology on a commercial scale. We have completed trials and are commercially producing cellulosic ethanol at our Stockton facility with the Edeniq pathway process.

Together, with the cellunator technology already installed at the Stockton facility, the pathway process converts cellulosic fibers in the corn into ethanol. We are working with Edeniq and the EPA to qualify these gallons for generating D3 cellulosic RINs, which carry a premium over conventional ethanol.

These are just some examples of the initiatives we are currently working on to improve yields, lower carbon intensity, diversify revenue streams, and produce advanced biofuels. Across our production platform, we continue to maintain a disciplined approach to calibrate production levels, to optimize yield and match supply with demand in both fuel and feed markets. We have made material progress in operating our plants more efficiently over the last several years, and we believe this positions us well for profitable growth.

With that, I'd like to turn the call over to Bryon for a review of the financials. Bryon?

Thank you, Neil. As a reminder, our financial results for the third quarter of 2015 reflect the addition of the recently acquired Midwest assets. In the third quarter, we reported net sales of $380.6 million, compared to $275.6 million in the third quarter of 2014.

As Neil previously noted, net sales were impacted by the one-week shutdown of our Pekin wet mill facility for major maintenance and upgrades. The shutdown reduced production by 2 million gallons, lowering revenues and increasing cost of goods sold by approximately $2 million in the form of additional repair and maintenance expenses.

Also, during the third quarter of 2015, we recorded purchase accounting adjustments that further increased cost of goods sold by approximately $8.7 million. The one-time largely non-cash items resulted from required mark-to-market adjustments on acquired inventory and commodity contracts on the acquisition date that happened to be at or near the highest commodity prices in the quarter.

Since the inventory was sold and contracts fulfilled in the third quarter, our cost of goods sold was negatively impacted by the higher basis cost. Gross loss was $7.4 million this quarter, which compared to a gross profit of $18 million in the third quarter of 2014. SG&A expenses were $7.4 million and included approximately $3 million of SG&A related to Aventine's operations.

This compares to $8.9 million in the third quarter of 2014 on a pro forma combined Company basis, or $4.4 million for the Company prior to the merger and $4.5 million for the acquired assets on a standalone basis. This represents a $1.5 million reduction year-over-year. We are targeting a $7 million quarterly run rate in SG&A through the remainder of the year and throughout 2016.

This quarter, operating losses was $14.8 million compared to an operating income of $13.6 million in the prior-year period. Interest expense was $5.2 million compared to $1.1 million in interest expense in the third quarter of 2014. In addition to the normal interest and fees paid on our loan and lease commitments, this line item also now includes approximately $300,000 in non-cash debt discount amortization related to the $145 million in acquired term debt.

Our effective tax rate for the third quarter of 2015 was 21% compared to 40% for the third quarter of 2014. As the losses generated by the Midwest plants cannot be carried back, we received less benefit to the provision on a pretax basis, resulting in a reduced tax rate. For the fourth quarter, we expect the rate to be in the range -- in the 25% to 35% range. That loss available to common stockholders was $15 million or $0.36 per share compared to net income of $3.7 million or $0.15 per share in the year-ago period.

Adjusted net loss was $7.5 million or $0.18 per share compared to adjusted net income of $8.1 million or $0.33 per share in the year-ago period. Adjusted EBITDA was $2.4 million compared to $15.5 million in the third quarter of 2014. For the nine months ending September 30, 2015, net sales were $814.4 million compared to $851.3 million in the same period last year.

SG&A was $16.3 million compared to $12.4 million in SG&A in the nine months ending September 30, 2014 for Pacific Ethanol standalone, and $29.1 million on a pro forma combined basis. Net loss available to common stockholders was $19 million or $0.63 per share compared to net income of $7.8 million or $0.35 per diluted share in the same period in 2014.

Adjusted net loss was $11.7 million or $0.39 per share compared to adjusted net income of $49.9 million or $2.26 per diluted share in the same period in 2014. And adjusted EBITDA was $5.1 million compared to $78.7 million for the 2014 period.

With regards to our previously stated benefits we expect to see from the synergies of the acquisition, we are already experiencing savings related to reductions in redundant staff, and increased efficiencies in accounting, IT and professional services. We expect this to continue as we complete the integration of the IT and accounting systems. We have removed over 300 basis points in interest spread by consolidating and refinancing our revolving line of credit, while at the same time extending and improving terms.

We are making significant progress on leveraging our marketing practices across all of our production facilities, as we transition sales from third-party marketers to refiners and other end-users, improving our realized ethanol prices. We continue to see progress in coordinating any best practices throughout all operations. The anticipated benefits that include improved safety practices, better inventory management, and greater stability and production, will bear fruit in the coming months and years.

Now turning to our balance sheet. Cash and cash equivalents were $53.1 million in September 30, 2015 compared to $62.1 million in December 31, 2014. Our working capital was approximately $107.3 million at September 30, 2015 compared to $114.1 million at December 31, 2014.

Our total liquidity position, including cash and excess lines of credit, subject to availability, remains solid at $100 million as of quarter-end. In addition, we have been prudent with our capital spending in light of the lower margin environment. Planned capital expenditures for the third quarter was approximately $7.7 million, $2.3 million below forecast.

For Q4 2014, we have reduced our anticipated expenditure from $10 million to $5 million. Further, we're using the opportunity to take a fresh look at our capital projects and make adjustments to optimize our use of cash on projects with the highest return on investment. We expect to provide more insight into our 2016 capital budget on our 2015 fourth-quarter earnings call.

With that, I will turn the call back to Neil.

Thank you, Bryon. With the long-term growing demand for ethanol and co-products supporting ongoing investment in the industry, we remain very confident in the future prospects for Pacific Ethanol.

We remain committed to our growth initiatives, which include maximizing the synergies from our recent acquisition; optimizing all Pacific Ethanol's assets through implementing plant improvement efforts aimed at increasing efficiencies and profitability; developing advanced biofuels initiatives; and leveraging our state-of-the-art, strategically-located ethanol production facilities to expand our market share.

Candace, with that, we are ready for questions.

(Operator Instructions). Eric Stine, Craig-Hallum.

Just wondering could you just maybe starting on industry production, I know it's remained stubbornly high, and I know this week, the EIA numbers saw a pretty decent uptick week-over-week. Just curious, do you think that is something that is in advance of exports picking up here in the fourth quarter? Or I mean, do you attribute that to something else?

Well, if you look at the numbers, yes, the weekly number was up, but if you look at the -- more of a, say, a 10-week trend, we are running at about a [$14.5 billion, 14.6 billion] rate. We have gasoline demand on an annualized basis over 140 billion gallons. We are on track to probably be up 6% from last year on exports to something that is approaching 900 million gallons, almost 1 billion. So that the run rate over the last 10 weeks is actually less than that annualized demand.

So what we have seen really over the last number of months is, albeit maybe more gradually than some of us would have liked to have seen, but a reduction in inventories, to where, as I mentioned in my prepared remarks, the stocks-to-use ratio is about the lowest it's been in a year. And if you look back to when the stocks-to-use ratio on ethanol was where it is today, we had much higher margins than we are seeing today. So we are actually cautiously optimistic on the margin environment.

We do see a pickup of exports in the -- certainly, the inner harvest is when Brazil is in a position to bring in more product. That typically starts hitting at the end of the year and very strong in the first quarter. And given the ethanol demand up so significantly in Brazil, and the very competitive nature of US ethanol not only to Brazil but to other markets, we do anticipate continued strength and even growth in exports.

So, overall, we actually see a more balanced market than maybe the margin environment would suggest. And we do see improvement going forward.

Okay. And then on exports, so you touched on it, but you're -- so you're seeing some pickup, but you would expect that to continue or maybe even accelerate a little bit into early next year, based on Brazil as the main factor?

Well, we are seeing growth in a lot of markets. Certainly, in Asia, India, even China has been starting to rumble and bring some ethanol in; typical markets of Canada, Philippines, Korea, some in the Middle East. So we are seeing growth, frankly, in all of the export areas.

What you do see on a seasonal basis is that, when they are in that inner harvest period, Brazil can swing to be a very large importer of ethanol. And while it's hard to predict, we would anticipate that Q1 will be a very strong quarter, as it historically normally is, for ethanol exports from the US.

Okay, got it. Maybe just turning to the Low Carbon Fuel Standard in California, now that that's been re-upped, I think, if I am right, you're kind of getting that $0.04 to $0.05 premium. Maybe just to confirm that. But given how it's set to roll out, I mean, where do you think -- with the carbon price, what kind of premium would that imply for you, if you play this out to 2018, 2019, 2020?

Well, it's a very good question and a very important part of our value proposition. So what you've seen, even anticipation of the change of the program and the compliance curve going from a 1% reduction to a 2% reduction, then ramping fairly aggressively up to that 10% by 2020, is a significant increase in the carbon values.

So, yesterday, the value of the carbon credits on a metric ton basis cleared $100 for the first time. That is close to [9/10-of-a-cent] per point. And so if you look at the Opus publish 90.1, which is what contracts are based on, 90.1 CI number, our currency I score is 80.7. So roughly a 10 point advantage over that base line. And that is closer to a $0.08 or $0.09 premium that we get on our contracts against that baseline.

I would caution that with it to also say that there is a lot of ethanol now coming from Midwest that's lower than that 90.1, so relative to our competitors, your $0.04 or $0.05 a gallon is probably more appropriate. But we just see that carbon value continuing to improve.

It's why we are spending significant capital. And we anticipate very quick returns, because we think $100 may be cheap come 2017, and that this program could run closer to the cap of $200 fairly quickly.

So we are looking at initiatives to significantly lower our carbon score, given the advantage we have by being in the state of California, our other Western plants that are approximate, the Oregon plant with that program starting to ramp up. So we think that, on a sustained basis, we can see a $0.05 to $0.10 advantage over the ethanol that we produce in these low carbon markets.

Okay. And then is it fair to say longer-term, if you play out a number of years, and it's closer to that cap, that it could be higher than that? I mean, it's a long time to see --

Correct.

-- but it potentially could be. Okay.

Yes, it could.

All right. Maybe just last one from me, just more model-related, but on corn prices, your average corn costs that you quote was lower than would have thought based on the C-bought price. So maybe if you can share anything there, was that related to just better buying power now with the Aventine assets? Were there pre-buys in the quarter? I mean, just how should we think about that number going forward?

Well, the -- with the Midwest assets, our basis obviously is lower because that's typical of the Midwest model, is that you get less for your products but you also pay less for your corn. So, we did have a lower basis at those plants.

We also did pretty well with some basis positions out West, where we were able to do historically better, where we run in that $0.90 to $1.00 range, and in some of these past years where we've seen a very tight market, the basis has even been higher. At our plants, we were under $0.90 for the Western plants, and then closer to option at the Midwest plants.

Okay, thanks a lot.

Jeff Osborne, Cowen & Co.

A couple questions on my end as well. Thanks for all the detail on the call. Have you guys started any of the hedging activities on ethanol or corn with the Midwest plant? I know that was something you talked about. And if not, when do you expect that to begin?

Well, we are -- it's an ongoing process. So, we have taken some positions very modest. It's really no different than the market has been for some time, really many years, which is there is a carry in the corn market. And while there actually today is a small carry in the ethanol market, it's pretty flat.

And so it continues to be our belief that the best margin is the spot margin. And if we are to lock out future positions financially, we are -- particularly in a low margin environment today, you are at a very uninspiring single-digit to breakeven, and even further out in the curve, potentially a negative margin. So I think where would we look at that is we saw a nice run in margins that rippled all the way through, even though we might leave something on the table out in the third or fourth quarter, that's when we would look at locking something.

And you're right, with the Midwest assets and the sales against Chicago, we actually, on an index basis, are looking at selling some product right now all the way through 2016. And that would be a nice position from which we could lock those margins. But today we are being patient; it's a pretty uninteresting opportunity out forward.

Got it. A couple other questions. Just on the Kinergy side, I think gallons at 102 million were up record quarter up about 10%. Is there new geographies with the Midwest assets? Are you hitting the East Coast, Southeast? Or just talk about what the trends were on the Kinergy side would be helpful.

Yes, certainly Kinergy has become the marketer of all the formerly Aventine gallons. But I think the important point. And that's why we wanted to bring that out, the 102 million gallons, is that with those new gallons in Nebraska, many of those gallons ship into markets that we historically are in, it didn't cannibalize any of Kinergy's business.

So we continue to see growth really in the West through Kinergy. And then Kinergy became the marketer with the opportunity to leverage some of our national relationships. We are now looking at the opportunity for Kinergy as a third-party marketer. We are in some terminals, the Magellan system, so we do some third-party marketing there. But now that we have these assets under our wings, I think that there's tremendous opportunity for Kinergy to continue to expand in the Midwest and East. But the growth really continued to be in our historically normal Western region markets.

Got it, good to hear. And then just kind of two modeling questions. One on the co-product side -- how do we think about that as a percentage of overall corn costs? Especially with the new Aventine plants coming on and the accretiveness there, is there a certain ratio that you're looking at, and where that can go over time? Or just any points on that.

And then just Neil, any comments on yields as it relates to the West Coast plants. Obviously you talked about the challenges at Pekin, but maybe just stripping out the one-week shutdown, just how were yields performing at the two plants relative to expectations, would be helpful.

Sure. On the co-product return, you see the published number of 39%, and that was in a quarter when overall co-product returns in the industry were down. There's been some pressure on the feed markets, and yet our co-product return was up. And that is a function of the wet mill.

So if you look at our dry mills in the West and Nebraska, roughly a 30% co-product return. In Pekin, you have a dry mill and a wet mill. The dry mill is very well-positioned, being on the water. The ocean freight is relatively inexpensive. We've been able to position our dry distillers grain for almost exclusively export. The co-product return at the dry mill has been closer to high-30s; and at the wet mill, in excess of 60%. That's one of the significant value propositions of the wet mill, is such a high-value slate of co-products. The -- in terms of you -- so that's -- you can model it that way, certainly --

That's helpful. Appreciate that. Any kind of color would be appreciated.

-- wet mills. Yes. And on yields, we have continued to make significant progress. We think we are certainly in the top echelon of yield performance in the West. There are some opportunities to implement some of those same practices in Nebraska, although those yields have been pretty close to industry standard as well. And the dry mill in Pekin also has a very good yield performance.

The wet mill -- and this is where it's -- if we were to publish all of the yield information, might be little misleading. Because wet mills, by virtue of the other co-products on the ethanol basis, some of that starch ends up in the other products. So a well-performing wet mill will be in that pushing [2.7, 2.6 to 2.7]. We saw some performance before we came in there, it was a bit lower than that.

But that was part of the focus of our weeklong shutdown, was really to clean things out and to modernize, so that we can get up to those higher yields that are possible, even in the wet mill on the ethanol side. And then obviously you have the benefit of all the other valued products.

Got it. I know you're not giving guidance for 2016, you gave some hints on the OpEx side. I assume, Bryon, the tax rate should be consistent in the fourth quarter, that should kind of flow through for 2016 as well?

Yes. I mean, clearly our -- we are going to be a continued taxpayer, so the assumptions around what we have previously indicated. We will give your further clarity, but it wouldn't -- it's probably safe to be assuming somewhere around 35%.

Got it. And then just, Neil, any questions -- there's been some M&A on the space in recent weeks. Any thoughts on additional activity for you folks next year? Or are you kind of content with where you are at now?

Oh, I think this is an industry that needs to continue to consolidate. It was good to see green plants pick up a couple of plants and put that into their well-disciplined platform. We certainly have our hands full integrating what we have, but we are very open to those opportunities and have been certainly looking around.

It's a little bit frustrating for us, given what we consider to be a very poor valuation relative to our inherent value on the stock. So that currency is a little challenged right now, but we think that will take care of itself as we continue to execute on our plan.

Makes sense. I appreciate it, guys. Thank you.

Katja Jancic, Sidoti & Company.

Can you discuss a little bit of at what production rates are you operating right now? And what's the expectation for fourth quarter?

Yes. In the quarter, so just to go back to the year -- and this shows how we will calibrate to market conditions -- that the year did not start out well from a margin standpoint. We ran first-quarter at about 90%. We saw some improvement in second quarter and our run rates were closer to 95%.

July started out very poorly, saw a little bit of modest improvement, but Q3 was definitely worse than Q2. And our overall operating rates in the quarter were closer to 85%, I think, about 87%, depending on where you look at our sales or our production. Part of that was a conscious effort to again match that production to the market and demand. Part of it was just taking a disciplined approach to the new assets, taking a step back in Nebraska, where we saw some of the most challenging commodity spreads, and lower the production there.

We also had the shutdown, which contributed to that as well. We have -- with the Pekin facility coming out of that shutdown and with pretty good operations, and a better margin environment in Nebraska, we have ramped both of those facilities back up. We are currently running about 90% of our operating capacity, and I think that's probably a reasonable expectation for the fourth quarter.

Okay. Now you previously mentioned about refinancing that. What's the situation with that? Can you give us an update?

Sure. So, clearly it's an important part of our -- not only our cost savings, but as well as our desire to, if you will, improve and strengthen the balance sheet. The markets -- you have to look no further than either the equity markets and the debt markets look a lot the same way. And it's difficult to be a first-time issuer where it doesn't make sense, given the premiums that are being demanded at the moment for not only a company like ours but across the board, whether you're investment grade or not.

And so we have the patience and the ability to wait, and so we're waiting until the market -- where there's signs in the market to be able to go and do that. That being said, as you know, Katja, we have been taking advantage of those opportunities that we can, a refinance of the revolver, and continue to try and balance that accordingly.

Going to the basis, the corn basis for the West Coast, what are you seeing right now?

There's actually been an uptick in basis. It's the farmer is pretty stingy right now with the corn, they don't like the price. And we see a lot of farm storage that has been built over the last couple of years. So we are seeing the basis with what is a very robust corn crop and very anemic experts. I mean, there's plenty of corn and we anticipate this to break.

But the basis which, in the Midwest, particularly in a place like Nebraska, was going historically under the board, and we booked some basis at [10, 15], under the board. It's back up closer to option. So that would put the West Coast back up closer to $1. We did lock some basis at levels that are more attractive than that.

So it's -- it will be interesting to see how that plays out. The farmer is going to need to sell some corn, because there's a lot of it. So we do anticipate that we will see some break back in that basis, but right now it's pretty sticky.

How long do you think they can really hoard the corn? I mean, the export market is not really that good for the US corn. You have pretty decent new crop. What's really -- what are they waiting for?

That's a really good question. Certainly when they get to needing to start planning the next crop, and needing some cash to make that happen and clear some room, we'll start seeing some movement. The corn is out there; they will sell it. But it is a situation that, at this price, at $3.75 a bushel, particularly if you take into consideration land costs, it is not a very attractive financial situation for the farmer.

It is at or, in some cases, below their cost of production. So it's -- but the reality is we have very good practices and yields, and a curve on that that would suggest that we'll have another good corn crop next year. And so I think when that realization hits, you'll start seeing the corn move.

Okay. Thank you very much.

(Operator Instructions). Alex Kayvanfar, Redwood Capital.

Thanks for taking the questions. I had a couple, though. So first, if you look at the industry utilization with an RFS mandate of about 13.4 billion gallons and exports running pretty strong as well, that helped [800 million and 1 billion] gallons versus capacity, people doing numbers, that call it in the low [15s], it looks like utilization for the industry is roughly in the mid-90s. But the earning profile in the ethanol industry isn't very robust at the moment.

Just wondering if you have any comment on that, what usually you think of utilization in the mid-90s. Businesses should be making more money than it looks like people are making in ethanol these days.

Agreed. That's why we are optimistic on the forward curve on margin. It's a situation where the industry is running at that utilization rate. I think what spooked the market a little bit in 2015 was with all the debottlenecking that happened as a result of a very strong margin environment in 2014 and back half of 2013, there was more capacity creep than maybe the market had anticipated.

And I think that not only did result in higher inventories, but a concern that there was excess capacity. We have seen that gradually come down. We've seen more discipline on production levels; we certainly talk about it today how we look at it. And that has resulted in inventories coming down.

As I said earlier, if you look at that run rate compared to the demand and the growing demand, both domestically and exports, we are going to see the need to run these assets even higher. And that should result in higher margins.

I think it's -- the fragmentation in the industry, that's why the consolidation is important. That's why our marketing company, others need to invest in more downstream investments and storage and other distribution. That's one of the fundamental challenges with the ethanol industry, is that as an industry, we control too few days of our inventory. So it can cause very small incremental changes on that supply and demand to have oversized impacts on the price, and consequently, the margin.

And in a commodity business like this, you have to be able to take a little more control of your destiny and have a little more control of that inventory, and say, hey, I'll put it in storage; I don't need to sell it at that price. And that is a trend we are seeing as well, is that there is more professionalism in the approach to how the ethanol is marketing, more development -- just like they've talked about the farmer, has all this on-farm storage -- in the ethanol industry, we need our own on-farm storage of ethanol at our plants and downstream in the markets.

Got it. And assuming that the environment doesn't really change, and ethanol and corn stay pretty much where they are today, in the quarter, you guys did $0.02 per gallon. Just wondering if that -- you think that's representative of the earnings profile of the business? Or if you think if we do stay in this environment, that there were other one-time effects or improvements that you think improve on that $0.02 number?

We absolutely think that we'll improve on that $0.02 number. There were certainly specific to our company, there were those one-time impacts that had a bearing on that. But if you look at it on an overall industry standpoint, we do believe that the demand for ethanol, both domestically and on the global market, is going to continue to increase, where there are going to have to need to be incremental increases and capacity. And you are not going to incent companies like ours to build capacity at $0.02 a gallon.

You need something -- if you look historically, what it's taken to really get this industry to grow on a all-in EBITDA margin. That is more on the $0.20 to $0.25 per gallon range. Last 2014, we saw significant higher than that. We will have another year like 2014; not sure when that would be, we can't predict it. But we do know and are very confident that there will be -- there will need to be margins that are significantly better than what we have seen through most of 2015 to get this industry to respond to the growing demand for ethanol globally.

Assuming the market environment doesn't improve, though, can you give us a sense of what you think this business could do? I know it's something more than that $0.02, but just wondering how much you think you can improve upon it, assuming the environment does not change from what you guys are seeing today?

Well, that's -- I mean, that's a hard question to answer, because, one, we don't give any guidance. Two, it's very, very difficult to predict where these commodities go. So what we have done is outlined the way we see the world, and we see the world in such a way that supply and demand is tight and getting tighter, and then margins will improve.

Got it. Okay. And on the export front, can you give us a sense of the competitiveness of Brazilian ethanol versus the US? Sort of -- you guys have a sense of what level sugar would have to drop down to, to make Brazilian-produced ethanol competitive again with where you guys in the US are able to produce it?

There's a lot of variables involved in that, like currencies. But the simplest way of thinking about it is the cost of sugar recently on world markets at $0.14 a pound, and corn at $4.00, and we are less than that today -- on a sugar equivalent is $0.10 a pound. So the competitiveness of corn versus sugar for ethanol, there's quite a spread. Corn ethanol is far and away the most competitive source of ethanol in world markets. And given that Brazil is having a hard time keeping up with their own demand, we don't see that situation changing certainly for the next 12 to 24 months.

Got it, okay. Thank you very much, guys.

Craig Irwin, ROTH Capital.

First, I apologize. I missed a chunk of the call earlier, so this must have been handled or this might have been handled. I just wanted to make sure it wasn't handled in public. Can you maybe discuss your CapEx priorities for the back end of 2015? And then, 2016, where you expect to spend money? And where you see the most promising opportunities to improve the performance of your overall asset base?

Sure. So, Craig, you will recall in June, or in our second quarter call, we indicated we would be spending approximately $20 million through year-end. That was originally based on just the Western assets. We were able to -- because in light of the margins and the opportunities that were -- that availed themselves to us with the acquisition, we've gone through and are still in the process of evaluating, and, if you will, bright-lining those projects that will generate the most -- the highest returns.

That being said, we've been able to take and moderate the spend. And so, we, in my prepared remarks, I think I indicated about $7.7 million spent in Q3 versus the $10 million. And we expect to spend about $5 million through year-end. And the significant -- most significant portion of that is largely going to be around co-gen. Right? We've indicated the start of the co-gen for the Stockton facility in second quarter of this year. And it's expected to be completed and on schedule, on budget in June of next year.

And Craig, what I would add to that is that, in terms of priorities, I mean, it's -- there's some opportunities to improve efficiencies at the assets that we've acquired, more similar to what we have done out West. And that requires some capital. We finished the corn oil, so that no longer requires any capital. We will look at extending co-gen to California's Madera plant; again, similar to Stockton where you have very high electricity rates.

We did talk about, in prepared remarks, with our collaboration with Whitefox to have some interesting technology that reduces carbon intensity through reducing energy use, and also improves capacity and distillation. We are working on some alternative feedstocks, some alternative technologies to completely displace natural gas. We haven't really talked much about that, but looking at anaerobic digestion.

So there, with the price of carbon going to $100 yesterday in California, and the reauthorization of the Low Carbon Fuel Standard, particularly out West, where we have such a competitive advantage, we are very focused on capital that we can deploy to significantly lower the carbon intensities of our ethanol. Because that's where we see a tremendous value proposition for the Company and its shareholders.

Thank you for that, Neil and Bryon. My last question, if I may, in my own analysis, my analysis of the pro forma debt post-acquisition, my numbers were a little bit off. And I was wondering if there was anything maybe you could update us on for changes in debt levels at Aventine that might have happened either during the quarter or over the last several months? And if there are any discrete pieces that you would call out, we all understand the market conditions were challenging. But is there anything maybe we should be looking at more carefully to understand this?

So, a couple of things to note for you, Craig. So, first, with purchase accounting, there's adjustments to be made with regards to -- you have to not only value and mark-to-market your assets, but you also have to mark-to-market your liabilities. So you have to like look at your debt. And you effectively have to make assumptions.

As an example, you have to take Aventine's debt, the term debt, the $145 million, and say what would it cost you if you were to refinance that today on a standalone basis? And you have to adjust it accordingly.

So what you would see if you worked down the details, the amount is still the same, the $145 million in term debt, the $17 million of term debt at Pacific Ethanol. That $17 million that you now see in the current column is the $17 million of term debt on the Pacific Ethanol West assets. That matures in June of 2016; thus, it's now current.

And there is a certain amount of -- given that you would have had to have effectively refinanced that debt at Aventine theoretically at a higher rate, given where markets were at the time July 1, then the price that they are paying, which is 10.5%, you have to make adjustments there. So actually, really the only difference that you're -- there's a little bit of noise around that, but what I largely mention is, is that there was slightly more borrowing under the revolving facilities in the third quarter.

And that was largely to facilitate the changeover from the Aventine revolver to the Wells Fargo revolver. And just the challenges of having to keep funds in two places and manage those balances accordingly. But I think that we have done is historically is we would expect those balances to be around where we have been historically, so somewhere between $25 million and $30 million, with significant excess availability -- again, at these commodity prices. Right?

And then as we continue to take advantage of, if you will, the shared services, bigger balance sheet, the opportunities to obtain terms and give terms, and be more competitive -- which was a bit of a challenge for the Aventine balance sheet -- that those numbers should be about where we have indicated.

Great. Thank you so much. And congratulations on the good execution in what was clearly a difficult operating environment.

Thank you, Craig.

Bryon McGregor&

Thanks, Craig.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Neil Koehler for closing remarks.

Thank you, Candace, and thank you all again for joining us today. We remain very confident with our plan and strategy, and optimistic about the future for Pacific Ethanol and this industry. And we look forward to speaking with you again next quarter. 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.