Alto Ingredients Inc (ALTO) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, a welcome to the Pacific Ethanol Incorporated fourth-quarter 2015 financial results conference call.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your first speaker today, Becky Herrick of LHA.

You have the floor, ma'am.

Thank you, Andrew.

Thank you all for joining us today for the Pacific Ethanol fourth-quarter and year-end 2015 results conference call.

On the call today are Neil Kohler, President and CEO; and Bryon McGregor, CFO.

Neil will begin with a review of business highlights.

Bryon will provide a summary of the financial and operating results.

And then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing the details of the Company's quarterly and annual 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 will be available through March 17, the details of which are included in yesterday's 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 10, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay.

Please refer to the Company's Safe Harbor statement on slide 2 of the presentation, available online, which says that some of the comments in the presentation constitute forward-looking statements and considerations and 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 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 reported financial results as determined in accordance with GAAP.

The Company defines adjusted net income or loss as unaudited net income or loss available to common stockholders before fair value adjustments and warrant inducements, asset impairment, purchase accounting adjustments and loss on extinguishment of debt.

The Company defines adjusted EBITDA as unaudited net income or loss attributed to Pacific Ethanol before interest, provision of benefit for income taxes, asset impairment, purchase accounting adjustments, fair value adjustments and warrant inducements, and depreciation and amortization.

To support the Company's review of non-GAAP information later in the call, a reconciling table is included in yesterday's press release.

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

Please go ahead, Neil.

Thank you very much, Becky.

Thank you all for joining us today.

For the fourth quarter of 2015, we reported net sales of $376.8 million, up 47% from the previous year and a record 213.5 million total gallons sold.

We also reported a gross profit of $9.5 million, GAAP net loss of $1.1 million, adjusted net income of $700,000 and adjusted EBITDA of $11 million.

We also maintained a strong cash position of $52.7 million at year-end.

Over the past several years, we have focused on building a strong foundation to support our future growth.

We have steadily and deliberately reinvested in our production assets to increase operating efficiencies, enhance yields, improve carbon scores and reduce operating costs.

We have implemented multiple capital improvement projects at each of our Western production facilities, all with near-term paybacks.

We have reduced our debt and most recently paid off $17 million of our Pacific Ethanol West debt.

Our 4 Western ethanol plants are now completely debt-free.

And last summer, we acquired the Aurora, Nebraska, and Pekin, Illinois ethanol plants, which contribute to our platform.

The addition of these strategically located biorefineries expands our overall footprint, now totaling 515 million gallons of annual production capacity and over 800 million gallons of annual marketing volume.

Our diversification of geography, technology, feedstock and products has strengthened the Company and improves our ability to optimize our performance across margin cycles.

As we continue the integration of the Midwestern assets, we are yielding significant benefits including synergistic savings of approximately $9 million annually.

For 2015 as a whole, we generated a record $1.2 billion in net sales, a record 701.5 million total gallons sold, gross profit of $7.4 million, and net loss of $20.1 million and adjusted EBITDA of $16.1 million.

These results reflect challenging market conditions during much of 2015, impacted by an overall supply and demand imbalance in the ethanol industry.

For the full year 2015, we committed $26 million of capital to plant improvement initiatives.

In 2016, we are focusing on projects that improve plant performance and reduce carbon emissions.

We believe these projects represent the highest near-term potential value to the Company.

For example, in February we entered into a technology license and purchase agreement for our Madera facility for an industrial scale membrane system that separates water from ethanol in the plant's dehydration process.

This technology will increase operating efficiencies and lower production costs.

It will also reduce the carbon intensity of ethanol produced at our Madera facility, for which we expect to obtain the premium pricing supported by California's low carbon fuel standard.

In December, we began producing cellulosic ethanol at our Stockton facility.

This is an important step in our strategy to increase production yields and convert starch and cellulosic components from corn to low-carbon fuel.

The Stockton plant is expected to produce up to 1 million gallons of cellulosic ethanol annually.

We are awaiting approval from the Environmental Protection Agency to qualify these gallons for generating D3 cellulosic RINs, which carry a premium over conventional D6 RINs.

These gallons also qualify for a $1.01-per-gallon cellulose ethanol producer tax credit.

We are on track for the installation of cogeneration technology at our Stockton facility.

This technology converts processed waste gas and natural gas into electricity and steam, which lowers air emissions and reduces operating costs.

We expect to be in commercial production in the second half of 2016.

We have a successful history of making capital investments into our plants that result in lower operating costs, reduced energy demand and increased yields.

As we have done with our Western plants, we expect to continue making investments into our Midwest plants that further differentiate our products, add value and lower cost.

Through these and other investments, and with our talented and dedicated operating personnel, we believe we can maintain a low-cost and high-value operating platform.

While markets are challenging now, we believe we are well-positioned for profitable growth.

Looking ahead, we continue to moderate production levels to match supply with demand.

We are currently running our production assets at approximately 85% of capacity.

Collectively, the industry needs to reduce overall inventory levels, and we are doing our part.

As we move to higher ethanol demand from the summer driving season and continue to see strong exports, we can expect to see a better supply and demand balance.

As the EIA reported last Friday, January ethanol exports were 87 million gallons, which was 27% higher than January 2015 and the largest single month of exports since November 2014.

We remain confident in the long-term demand for ethanol, driven by ethanol's underlying economic fundamentals as a high-octane, low-carbon and job-creating fuel.

We expect future growth from increased demand for ethanol as a low-cost, high-octane fuel component in gasoline.

We believe higher-octane fuels will be necessary to drive the more fuel-efficient, higher-compression engines that will be manufactured by the auto companies to meet higher mileage standards.

As ethanol is the cheapest source of octane available today, this represents a significant opportunity for the industry.

While ethanol is currently trading at higher prices than gasoline, its inherent octane value supports premium pricing as competing components such as toluene and alkylate are priced well above gasoline levels.

In addition, we expect these values will also bolster new export opportunities as the world market is increasingly octane-short.

With that, I will turn the call over to Bryon for a review of the financials.

Bryon?

Thank you, Neil.

In the fourth quarter we reported net sales of $376.8 million, up 47% compared to $256.2 million in the fourth quarter of 2014.

Cost of goods sold was $367.2 million, compared to $237.8 million in the same quarter last year.

Gross profit was $9.5 million, which compares to a gross profit of $18.4 million in the fourth quarter of 2014, largely the result of lower ethanol margins.

SG&A expenses were $7.1 million and in line with our run rate guidance.

This compares to SG&A expense of $4.7 million in the fourth quarter of 2014.

Although this represents an increase in absolute dollars when measured on a per-gallon basis, it instead represents a decrease quarter over quarter and demonstrates the benefits we are beginning to see from our efforts to lower relative costs and extract scale and the synergy benefits from the acquisition.

Operating income was $500,000, compared to $13.6 million in the prior-year period.

Interest expense was $5.4 million, compared to $1.1 million in the fourth quarter of 2014.

This increase is attributable to the term debt we assumed with the acquisition of Aventine.

Provision for income taxes for the fourth quarter of 2015 was a benefit of $3.9 million as a result of losses incurred in 2015 and finalizing our provision for the year, bringing our 2015 tax rate to 35%.

To the extent we have taxable income in 2016, we would expect a similar normalized tax rate of 35% to 40%.

During the fourth quarter, we recorded a non-cash $2 million asset impairment charge as certain investments made in the accounting and information technology systems were determined to be of no use after the integration of our acquisition.

Net loss available to common stockholders was $1.1 million, $0.03 per share, including the aforementioned $2 million asset impairment charge.

This compares to a net income of $11.9 million, or $0.48 per share, in the year-ago period.

Adjusted net income was $700,000, or $0.02 per share, which excludes the aforementioned $2 million asset impairment charge.

This compares to the adjusted net income of $9.7 million, or $0.39 per share, in the year-ago period.

Adjusted EBITDA was $11 million, compared to $16.3 million in the fourth quarter of 2014.

For the full year 2015, net sales were $1.2 billion, compared to $1.1 billion in the prior year.

Gross profit was $7.4 million, compared to $180.5 million in 2014.

Similar to the quarter, this decline in gross profit is largely attributable to lower ethanol margins year over year.

SG&A was $23.4 million, compared to $17.1 million in the prior year.

Net loss available to common stockholders was $20.1 million, or $0.60 per share, compared to net income of $19.4 million, or $0.86 per diluted share, in 2014.

Adjusted net loss was $11 million, or $0.33 per share, compared to adjusted net income of [$59.3 million], or $2.62 per diluted share, in the prior year.

And adjusted EBITDA was $16.1 million, compared to $95 million in the prior year.

Turning to synergistic benefits from our acquisition last year, we have achieved over three quarters of the anticipated $1 million per month to date.

More specifically, we have experienced savings of $2 million per year related to staff reductions; increased efficiencies in accounting, IT and professional services.

We expect to see further improvements as we complete the integration of IT and accounting systems this year.

We have removed over $3 million annually in interest and banking fees through the prepayment of our term debt and the consolidation of refinancing -- and refinancing of our revolving line of credit.

And we remain focused on reducing our cost of borrow by 300 basis points or another $3 million annually through the refinancing of our remaining $145 million in acquired long-term debt.

We are making significant progress in leveraging our marketing practices across all of our production facilities and have seen $0.01- to $0.02-per-gallon improvement in our ethanol netback to Chicago in our Midwest facilities, or approximately $4 million annually, and continue to transition sales from third-party marketers to our own ethanol marketing company.

Finally, we continue to see progress in coordinating and implementing best practices through all operations.

The anticipated benefits that include improved safety practices, better inventory management and greater stability in production will bear fruit in the coming months and years.

Now turning to our balance sheet, cash and cash equivalents were $52.7 million at December 31, 2015, compared to $62.1 million at December 31, 2014.

Our working capital increased to approximately $125 million at December 31, 2015, compared to $112 million at December 31, 2014.

In light of current market conditions, we continue to prudently manage our capital spending, focusing on innovative revenue-enhancing and cost-reducing projects that optimize our use of cash while providing high near-term returns.

Our total CapEx spend was under $3 million in the fourth quarter.

In 2016, we currently intend to limit capital improvement to $24 million, the majority of which we can and will adjust, depending on changes in market conditions and capital resources.

Finally, we recently announced that we retired the remaining $17 million in short-term term debt related to our Western production facilities.

This achievement represents the progress we have made in building a strong balance sheet and overall solid financial foundation.

The payment was made in cash, at par, avoiding over $700,000 in prepayment penalties, interest and fees.

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

Thanks, Bryon.

With the long-term demand for ethanol supporting ongoing investment into the industry, we remain confident in the future success of our business.

In 2015, we expanded our footprint with the acquisition of Aventine, becoming an integrated Company with a national presence.

The benefits of that acquisition are bearing fruit.

The ethanol industry is a commodity business, one that goes through cycles.

2015 saw a contraction in production margins after the year prior, which saw some of the best margins the industry has ever experienced.

With the acquisition last year and strong operational performance at our plants and our ethanol marketing company, we are well-positioned to manage through leaner times while supporting profitable growth in more favorable market conditions.

In 2016, we are focused on several initiatives to support our long-term growth.

First, we are optimizing the integration of the Midwest assets, and we expect to further benefit from financial and operational synergies throughout the year.

Second, we are focused on leveraging our diverse base of production and marketing assets to expand our share of the renewable fuels and coproduct markets.

Third, we will carefully evaluate and execute plant improvement initiatives that provide near-term, meaningful returns.

And fourth, we will work to further lower our carbon score by modifying existing operations and investing in new technologies such as cogeneration, anaerobic digestion and solar power generation.

Current and expected carbon pricing in states with low carbon fuel standards, such as California and Oregon, where we have production assets, helps support the investment case for these technologies.

We believe these strategic initiatives will support our success in the months and years ahead.

Andrew, we are now ready to take any questions.

(Operator Instructions) Eric Stine, Craig-Hallum.

Nice quarter.

Maybe we can just start with the ethanol price premium that you saw in the quarter.

Just judging where West Coast premiums were in the fourth quarter, you came in with a number quite a bit better.

So my sense is that that's in part because of the low carbon fuel standard.

But just more clarity into reasons -- other reasons potentially for that better premium and then whether that type of premium is sustainable.

Sure.

There are two components to that premium.

One is the spread to Chicago on your basic indexed ethanol sold into the state, which has a CI today of 90.

And that spread actually contracted a bit.

I believe it was $0.14 or so in the quarter, and average has been more like 17 to 20.

But where we really picked it up, as you referred to, is in the carbon premium.

So our ethanol runs 10 points better than that index number, and today we are seeing carbon values at approximately $125 a ton.

And that translates into a penny per point of that carbon benefit.

So that adds $0.10 a gallon premium to the -- which we fully monetize in our contracts with the obligated parties in California.

So that gave the ethanol that we produce in California and the ethanol that we market for our partners in California a $0.10 premium on top of that $0.14 commodity spread from Chicago.

So that's a $0.24 premium over Chicago.

Very good number.

We do expect that to continue.

We continue to drive our own carbon scores down so that we can maintain that advantage.

And as overall supply demand gets a little more in balance, as we expect this summer, that tends to support the overall spreads to the coast and into export markets as well.

The California, January one, is the readopted low-carbon fuel standards now firmly in place.

It reiterated the 10% reduction in carbon intensity by 2020, and CARB is already talking about extending the program to 2030.

So, while you could, like in any commodity, see some volatility in the carbon pricing, the overall expectation is that carbon pricing will stay very strong in California and, now with Oregon joining in with its program, tighten up the carbon markets overall.

And with these fairly aggressive targets that these low-carbon fuel standards entail, we expect a price signal to be there to encourage us to continue to make investments to lower the carbon and provide that benefit to the marketplace.

And can you just remind me -- I believe that, thinking about it as it trends to 2020, that kind of a target carbon value of $200 a ton.

I don't know if that's the case or not, but I guess that would imply there's more room there, more room for improvement over the next few years in that premium that you are getting.

Yes, that's correct.

The $200 is actually a price cap that CARB put on the program.

There have been a lot of criticisms about this program could just, given how aspirational it is, that the pricing could get out of hand and could have a very significant impact on gasoline prices.

So as part of a cost-containment component to the program, CARB did put a price cap of $200 a ton on their program, and the general expectation is that it goes to $200 a lot faster that it goes to, say, $100 or $50.

So as you get the out years, to it in perspective, a 10% reduction by 2020, not that far away from where we are today, where we are only at a 2% reduction.

So it is going to require a fair amount of lower-carbon fuel to make it to the marketplace, and we do believe that will support strong carbon pricing.

Okay.

Thank you for that.

You mentioned that you are moderating production.

Just curious -- and we all know where the market has been.

Pricing has been pretty tough.

Are you seeing any indication that others in the market are either starting to do this or starting to think about it, given prices at $1.35, $1.40 recently?

Well, I think we are seeing both.

The other public reporting companies, green plants, specifically, in their earnings call talked about moderating production.

There have been some other announcements, and, anecdotally, we are hearing it as well.

It is, if you look at the EIA numbers, we are down about 2.5% as of the numbers reported yesterday from the peak production levels.

So we actually have seen some moderation in production at a time when the demand is actually increasing.

But to see more of that would be helpful.

And I think a combination of the demand increase and a little bit of production restraint would tighten this thing up pretty quickly.

It's a curious situation because when you look at it from just a vacuum, for us to reduce production -- it's not like a situation in 2012 where the margins were so negative that you weren't even covering the contribution margin.

In today's market, we are covering a contribution margin, so it's as well, you should just run all out, and that's been the mentality in the industry.

But if you want to actually have a good reinvestment-grade margin, we need to do better than that.

And so that's why we thought it was important to do our part to reduce production.

And certainly if we saw even from the 2.5% reduction from peak levels, if that was a 5% level, which is really not very much, that combined with the increase in both domestic demand and export demand, we think it would tighten this market up fairly quickly.

Okay, got it.

Maybe last one for me -- just in terms of ethanol plant transactions out there, haven't seen a whole lot lately.

I know there's talk in the market of Abengoa, their assets and Archer Daniels potentially thinking about selling.

But any thoughts on maybe what you are seeing or hearing in terms of price per gallon?

That would be helpful.

There is talk of assets out there.

I think when you see a financially stressed environment like we are seeing today and basically zero-margin business, there are players that would like to monetize their investments and sell.

And we've seen some of those announcements.

And referring back to the prior question about being able to moderate supply and demand, clearly this is a fragmented industry.

And if we had further consolidation -- and over the last five years we've seen quite a bit of consolidation, but another round of that, I think, would create a healthier industry.

And we do expect that that is what we will see over the next 12 to 24 months is some additional consolidation in the industry.

Okay.

Thank you.

Jeff Osborne, Cowen and Company.

Can you just touch on which of the plants you are running at lower utilization to get to that 85% level?

Is it one of the legacy [Avansty] plants?

I assume it's not the California one.

We don't actually give guidance on individual run rate, but we did want to give aggregated numbers.

And I'll just say generally that the spreads, whether it's corn, whether it's (technical difficulty), whether it's carbon, are constantly moving around, whether it's feed values --.

So those decisions are made in a pretty dynamic fashion.

And even in a week's period we may run one up and one run down, and the next week it could be opposite.

So it's really -- the best way to think about it is in an aggregated way.

And we are on an hourly basis on top of all the markets.

The fact that we have the national footprint that we have now gives us a visibility over all of these national markets, and the very spread analyses that come into play in making our decisions on where it's best to run a little harder and where it's best to run a little less.

Got it.

That's helpful, Neil.

On the CapEx of $24 million I believe you called out for this year, can you just remind us what the maintenance CapEx is for the 6 facilities?

And then what are the one or two key initiatives to lower the carbon footprint that you called out (technical difficulty)?

Maintenance CapEx typically runs about $0.01 per gallon.

And obviously it can move up and down a bit from there, but that's a good guidance number.

We have certain ongoing projects that we are still spending money on, so the cogeneration would be a good example of that.

So the two projects that we mentioned in our opening remarks, the cogeneration and the membrane technology in Madera, those are two significant projects that continue to spend money on and both lower cost and reduce carbon.

We have other just some tweaks, whether it's variable speed, electric motors and finishing projects around all of the plants to do that, which lowers electricity costs.

We are introducing some new chemicals that actually do cost a bit more but result in both a higher yield and lower carbon.

So there's a lot of just general attention to how we run the biochemistry in the plants.

And then as I also referenced, we are looking at more transformational projects like anaerobic digestion to replace some if not all of the natural gas in our California plants, where we have the significant low-carbon value and the potential to also put in some photovoltaic electrical generation.

We have a fair amount of space in our facilities.

And if we could substitute that, very clean renewable source of electricity, for the grid electricity, that would also be helpful.

So there's -- it's a combination of things that are larger capital projects that we are committed to, individual tweaking of all of the plants across the platform and then starting to look at the more transformational projects that, with the right carbon pricing and signals and margin signals, we are optimistic that we could move forward on.

Got it.

The last one I had, just for Bryon, on the $145 million in debt -- how do we think -- as that becomes current, where are we in negotiations to either extend that or renegotiate it or refinance it?

What are the options that you are exploring?

Just seems to be a bit of an overhang on the stock?

It would be helpful to have your comments on it.

Sure.

That's one of the reasons we wanted to take the $17 million out then to be able to focus on the central plants, exploring a number of options, continuing to push on that.

To some degree, if we wanted to do a bigger type of a transaction, we are somewhat dependent on the fixed-income, high-yield markets.

And those clearly -- I'm not sure if the ice is yet broken on that market.

But I think there's a period that still needs to be seen with regards to resolutions, particularly around the oil and gas markets, in order to see that market open up.

That being said, I think that there are some opportunities.

We are pursuing them.

I won't get into specifics, but we remain optimistic with regards to the refinancing of that and have the benefit of some time.

Perfect.

Good to hear.

Thanks much.

(Operator Instructions) And that's all the questioners that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

Thanks, Andrew.

You all for joining us for today's call.

We really appreciate the interest and support of the Company, and we will speak with you next quarter.

Have a great day.

Ladies and gentlemen, thank you again for your participation in today's conference call.

This now concludes the program, and you may all disconnect your telephone lines at this time.

Everyone have a great day.