Alto Ingredients Inc (ALTO) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pacific Ethanol, Incorporated, first quarter 2016 financial results. 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, this conference is being recorded.

I'd like to introduce your host for today's conference, Ms. Becky Herrick of LHA. Ma'am, please begin.

Thank you, Neacy. Thank you all for joining us today for the Pacific Ethanol first quarter 2016 results conference call. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO. Neil will begin with a review of business highlights, Bryon will provide a summary of the financial and operating results, and then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday, providing details of the Company's quarterly results. The Company also prepared a presentation for today's call that's available on their 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 May 12th, the details of which are included in yesterday's earnings press release. The webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today, May 5th, and, therefore, you're 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 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 an alternative for the 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.

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

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

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

Thank you, Becky. Good morning, everyone, and thank you for joining us on the call today. Yesterday afternoon, we reported first quarter 2016 net sales of $342.4 million, up 66% from the previous year and 206.6 million total ethanol gallons sold. We also reported a gross profit of $1.1 million, GAAP net loss of $13.5 million, and a positive EBITDA of $1.6 million.

In addition, during the first quarter, we paid off $17 million of our Pacific Ethanol term debt, resulting in our four Western ethanol plants becoming completely debt free.

The first quarter was negatively impacted by seasonally high production of ethanol versus demand, which resulted in high ethanol inventory levels and compressed production margins for the entire ethanol industry. While this created a challenging margin environment, we executed well on our strategy to be a national leader in the production and marketing of low carbon renewable fuels.

The first quarter of last year was the weakest margin quarter of 2015, and we expect this pattern to repeat in 2016. With recent reductions in production, coupled with very strong ethanol demand, we are seeing significant margin improvement in the front end of the second quarter.

We are uniquely positioned in the industry with production assets in two distinct markets, the Midwest, the large producing region, and the West, the large demand region. With production in five states and sales of products both domestically and internationally, we spread our commodity and basis risks across diverse markets.

We are able to benefit from regional price opportunities as the markets adjust to supply imbalances, logistical constraints and availability of feed stocks. This diversity helps us partially mitigate the effects of the negative margin environment experienced during the quarter.

Our ethanol marketing reaches across the US, and we are on track to market more than 800 million gallons this year.

With our expanded reach of 515 million gallons of production, we have improved our logistics through increased ethanol unit train movements, and maintain our leading position in the low carbon fuel markets in California and Oregon, which deliver premiums for the sales of our fuel produced in those markets.

During the quarter, distillers' grain prices declined and were impacted by year-over-year reduction in demand from China. However, our diverse portfolio of high-value co-products, including corn, gluten, meal, and feed, corn germ, dry distillers yeast, CO2, and corn oil, provided strong returns for the Company and also helped mitigated the negative ethanol crush margin cycle experienced during the quarter.

Corn oil production and yields have increased. This product currently adds over $0.05 per gallon of incremental operating income.

As previously mentioned, the Low Carbon Fuel Standards in California and Oregon continue to support demand for the low carbon ethanol we produced at our facilities in those states. These regulations solidly in place and well supported in these states, produce meaningful financial results for the Company and are contributing significant carbon reductions to combat the acceleration of climate change.

Under the newly authorized LCFS program, the California Air Resources Board has recently updated carbon scores for all participating ethanol facilities. Our Western facilities that sell ethanol in California have improved based on both newly adopted lifecycle analysis by CARB and through the adoption of low carbon technologies and practices we have installed at our facilities.

Our Oregon facility has one of the lowest carbon scores of ethanol supplied to the Oregon market.

Carbon pricing in California is currently trading at approximately $120 per metric tonne, up substantially from a year ago. As the compliance curve for marketers of gasoline increases, we continue to expect strong pricing for carbon. And as our carbon intensity values improve, we expect to see carbon premiums of upwards of $0.10 per gallon for the ethanol we produce and sell into these markets.

During the first quarter, we advanced our plant improvement initiatives to increase operating efficiencies, enhance yields, improve carbon scores, and reduce operating costs. 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 plants dehydration process.

In addition to increasing operating efficiencies and lowering production costs, this technology reduces the carbon intensity of ethanol produced. We expect to be in commercial operation of this unit in the third quarter.

During the first quarter and continuing this quarter, we have initiated trials of Enogen corn at the Pacific Ethanol Aurora and Madera facilities. Enogen is a corn hybrid produced by Syngenta that contains alpha-amylase enzymes within the corn kernel. It is expected to improve our operating performance by reducing corn slurry viscosity and energy consumption.

If trials are successful, we expect to be moving to commercial operations in parallel with the new corn crop later this year.

Late in 2015, we began producing cellulosic ethanol at our Stockton facility, using the combination of enzyme and mechanical processing of corn fiber, which we expect to increase production yields to produce up to one million gallons of cellulosic ethanol at our Stockton facility on an annual basis.

This production has been operating since the beginning of the quarter. However, we are still waiting for final approval from the EPA to qualify the ethanol produced as cellulosic for D3 RIN generation.

We remain on track for the installation of cogeneration technology at our Stockton facility. This technology converts process waste gas and natural gas into electricity and steam, which lowers air emissions and reduces energy costs. We expect to be in commercial operations by the end of the third quarter.

At all of our plants we continue to incrementally improve our yields, reduce our costs, and prudently invest in technology and improvements that position us well for sustained profitable operations.

And we continue to implement best practices initiatives to improve safety, inventory management, and production stability across our entire business.

As I mentioned at the beginning of the call, the industry was negatively impacted by compressed production margins, seasonally lower transportation fuel demand, and disproportionately high ethanol inventory levels.

As margins are improving in the second quarter, we are poised to benefit from the value of our larger, more diversified company, the improved performance of each of our facilities, the value of the technologies and initiatives at the plant level and our strategic locations that take advantage of the emerging low carbon fuel markets.

Further supporting a better supply-and-demand balance [of] exports, according to the EIA, ethanol exports for the first quarter were 250 million gallons, which was up 5% from the 238 million gallons in the first quarter of last year, which indicates an overall annual growth in ethanol exported to meet both the octane and low carbon demands in a large number of countries.

Exports in March at 95 million gallons were the highest monthly total in over four years.

In summary, we have demonstrated resilience to the seasonal commodity swings of the industry, and 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 continue to be focused on executing well on those areas within our control, such as implementing plant improvement initiatives, driving operational excellence, and reducing our cost of capital.

With the anticipated strengthening of the market environment, we believe we are well positioned to improve our financial performance and grow our share of the low carbon fuel market.

Now I'd like to hand the call over to Bryon McGregor, our CFO, for review of the financials.

Thank you, Neil. Our consolidated financial results for the first quarter were as follows. We reported net sales of $342.4 million, up 66% compared to $206.2 million in the first quarter of 2015.

Cost of goods sold was $341.3 million, compared to $207.2 million in the same quarter last year.

Gross profit was $1.1 million, which compares to a gross loss of $1 million in the first quarter of 2015.

SG&A expenses were $8.3 million, compared to $4.9 million in the first quarter 2015. SG&A was higher year over year as a result of our acquisition of the Midwest assets, and higher than our guidance of $7 million due to a seasonal increase and higher than anticipated professional fees.

For conservative purposes, we anticipate SG&A expenses to average $7.5 million per quarter through the remainder of 2016.

Loss from operations was $7.2 million, compared to $5.9 million in the prior-year period.

Interest expense was $6.2 million, compared to $1 million in the first quarter of 2015. This increase is attributable to the term debt tied to the Aventine assets and further reflects approximately $1.2 million in additional interest expense associated with our election to capitalize two months of interest, as permitted, under the credit agreement.

There was no provision for income taxes for the first quarter of 2016, whereas, a $2.7 million provision was recorded in the first quarter of 2015.

Net loss available to common stockholders was $13.5 million or $0.32 per share. This compares to a net loss of $4.7 million or $0.19 per share in the year-ago period.

Adjusted net loss was $13.6 million, compared to $4.5 million in the first quarter of 2015.

Adjusted EBITDA was a positive $1.6 million, compared to a negative $2.7 million in the year-ago period.

Now turning to our balance sheet, cash and cash equivalents were $19.2 million at March 31st, 2016, compared to $52.7 million at December 31st, 2015.

In tight margin periods, we have found it most effective in efficiently managing our liquidity position, including cash, to focus on optimizing our working capital resources.

We experienced a $12 million decline in working capital quarter over quarter, largely attributable to $5 million in capital expenditures and a $5 million reduction in our line of credit balance, the latter of which does not impact liquidity resources. These changes, in addition to the $17 million retirement of term debt and an over $10 million increase in our inventory and accounts receivable, accounted for the remaining decline in cash.

The increase in inventory and receivables is not unusual, and both are quickly reconverted to cash [for] excess availability under our revolving line of credit.

To this point, we have seen a subsequent increase in our liquidity resources by approximately $10 million since first quarter end.

With regards to future capital expenditures, we remain focused on only investing in those projects that represent the highest near-term potential value to the Company in terms of maintaining and improving plant performance and reducing carbon emissions.

Accordingly, we have budgeted $5 million in CapEx for Q2 2016, and have pared our originally forecasted full year 2016 spend from $26 million to $15 million.

Further, we expect to finance these capital expenditures through low-cost leases to further reduce our cost of capital, better match our investment profile with long-term value of assets, and to properly preserve and improve our liquidity and cash resources.

We also continue to evaluate and pursue opportunities to refinance the legacy Aventine term debt. Although our remaining term does not mature until September 2017, refinancing the debt on better terms remains a priority.

With that, I'll turn the call back to Neil.

Thank you, Bryon. We are encouraged by the growing strength in demand for our low carbon fuel and our favorable position in this market, by the continued global demand for ethanol and its co-products and by our continuous improvement in being a low cost, high value producer in the industry.

We remain committed to the following initiatives to support our growth. First, we are focused on leveraging our diverse base production and marketing assets to expand our share of the renewable fuel co-product markets.

Second, we will carefully evaluate and implement new plant improvement initiatives that provide meaningful near-term returns.

Third, we are pursuing opportunities to further strengthen our balance sheet by minimizing our cost of capital, efficiently managing cash, and optimizing our overall liquidity position.

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 help support the investment case for these technologies.

We believe we are very well positioned for success in the months and years ahead.

Neacy, we're now ready to being the Q&A session.

(Operator Instructions) One moment while we wait for questions. Eric Stine from Craig-Hallum.

Maybe just kind of a question about the overall market. Clearly, and you mentioned in your prepared remarks, but clearly seen market improvement here in the second quarter. Are you starting to see -- I know your utilization in the quarter was lower. That's something that you'd messaged. Are you seeing more rational activity by producers? Clearly gas demand, gasoline demand is a factor here.

I mean, do you look at this and say, okay, the market has improved here in the quarter and people kind of go back to the ways that caused some of the pricing issues in the first place? Or do you think that the market is kind of on sustainable footing to be more thoughtful in their production?

Well, if you look at the current production levels, they are off about 7% from their peak. Inventory levels are down about the same amount from their peak. The days of supply is down about three days, and that is significant and that is a supply/demand rebalancing that is supporting better margins that we're seeing today.

The demand does continue to improve from here in and through the summer months. So we are cautiously optimistic that we will maintain those balances.

The one cautionary point is that some of the reduction in production has come from seasonal maintenance and we are seeing those plants come back online. We had our own dry mill in Pekin that was down for a week while we were doing some maintenance work on that, and that is back online.

So we are seeing production increase. But, frankly, production needs to increase to meet the growing demand. So it remains to be seen. But, like last year, as I mentioned, where the first quarter was the toughest quarter and we saw a better margin environment through the balance of the year. That is our current expectation.

Okay. And maybe just sticking along those lines, I know you've talked about it, and, clearly, industry consolidation, it seems to be needed. We really haven't seen a whole lot of it to this point.

Do you think that this recent market improvement -- and I know it's been a few weeks. But I mean, is that something you view as maybe gives some reprieve to some of the guys out there that maybe are prime candidates or do you still view it as this year progresses we likely see more consolidation in the industry?

The M&A front has been relatively quiet of late. There are some assets that are currently on the market, and we expect to see those trade. It is the case that over the last couple of years plants were successful in paying down debt, and the balance sheets, generally, in the industry are stronger.

So I think it's less a situation of stressed companies and more a situation of return for shareholders and making a more rational industry that has the ability to maintain a better supply/demand balance. And just as you see in so many commodity businesses that are as immature still as the ethanol business, consolidation is inevitable. We've obviously seen quite a bit of that already in the ethanol industry, and we still believe there's more to come. The timing of it is a little harder to call.

Right. Right. Okay. Fair enough. Maybe just last one for me, just quickly on exports, it sounds like you expect some growth there this year. Maybe outside of the typical markets we think about that are going to be important for the export outlook, I've heard some rumblings that China might up their imports and maybe in a big way. Any thoughts on whether that is -- if that's a possibility, timing, and what that impact could be?

Yes, we are definitely seeing that with China. If you look at the government numbers, China, in the first quarter, imported 75 million gallons of ethanol from the US. And that is 5 million more than all of 2015. In 2014, there were only 3 million gallons of exports to China from the US.

So that is clearly the trend, and we're hearing the same, which is that China, this is an important part of their energy and environmental program. And we do anticipate to see continued strength in the exports of ethanol to China.

Mexico is another country that has been rumbling about as they privatize the energy, the fuel system there that there will be more opportunities to displace MTB as an octane enhancer in that market and in other markets around the world.

So we continue to be bullish exports. The price of ethanol in the United States continues to be the lowest cost source of octane and ethanol in world markets, and that is very encouraging.

Got it. Okay. Thanks a lot.

Thomas Boyce from Cowen.

Just a couple quick ones for me. I just wanted to get kind of maybe an update on your thoughts about hedging. Given if you think that the second half of the year is going to be strong, do you hedge more? Or how do you see that playing out?

We continue to look at it on a daily basis and take positions as they're available to us. This has been a market historically and no different today, where the forward curve is actually not as good as the current market. There are some improvements in the very near-term, and we will look at that on a bi-week, bi-monthly basis and do hedging around that.

We do take longer positions on some of our co-products at fixed prices, and we have hedged some of that out further.

But on the ethanol side, the curve is still inverted such that the margins today are significantly better than the margins out in the forward quarters, and we are taking a very careful view of that and looking for opportunities. And sometimes they'll emerge very quickly, and we'll be there.

But today, it still is a matter of managing the margin and risk managing around that current spot margin.

Got you. And how should we think then about DDGs maybe in the back half of the year? Is it seeing similar strength or how do we think about that?

DDGs are steady. They've come off a bit, as we mentioned in the prepared remarks, with some of the decline in exports, which is an important part. So we've had to increase the inclusion rates in the US, and that has requires some price incentive to do that. That's been done.

The market is in equilibrium. We're actually seeing some strength in that market. It's fairly flat as you move out. But unlike ethanol, which actually has a fall in values as you move out, that flat price opportunity, as we see some basis and fixed price corn positions against that that are attractive, has given us an opportunity to lock in some of those values.

Great.

On corn oil as well.

Okay. Just two more quick ones. I just wonder if you did an update on the Low Carbon Fuel Standard in Oregon. When does it start and when do credits start to be issued from that? Is there a latency or a lag between that?

The Oregon program actually started January 1. So the compliance period began for the 10% reduction over time in Oregon. The market is still clarifying itself, unlike California, where the credits are traded. Oregon is playing catch-up on that and has yet to establish a credit trading platform. We expect to see that in the next month or two.

So while we're seeing some price discovery, in the lower carbon ethanol sold in Oregon is commanding small premium values to surrounding markets that don't require that. Until we actually have credits actively traded, it will be hard to clarify what those values are. But we do expect that in the near term.

Great. Great. And then just the last one. Given sales process of several plants from ADM and Abengoa, is that impacting your ability to refinance debt? Do you see it, actually, over the next year or so, or maybe limiting it or strategic alternatives for modifying your own capital structure?

We actually don't see that as a factor. The bigger factor really has been the credit markets, which have been in a bit of a deep freeze. We are seeing signs of that loosening up. And so we are seeing opportunities to refinance that debt, and we will be pursuing those and are pursuing those.

And that, combined with an improving market environment in the ethanol industry and with assets being sold and further consolidation, that only helps improve the forward view on the ethanol environment. And that also will help facility a refinancing of the debt.

Excellent. Thank you so much.

Thank you. (Operator Instructions) Nathan Weiss from Unit Economics.

Couple of questions. So first, as you've worked your way, got some time under your belt with the new Aventine assets and, presumably, had some time to experiment with movements, ethanol movements and the synergies of the combined business, can you give us a little bit of insight, not only the cost savings, but some of the kind of operational synergies you've seen and the flexibility, having kind of two production regions and one umbrella?

Yes, it's been very good, both from the ethanol perspective and the co-product. On ethanol, it's just more origin points to spread our product, more rail lines, more opportunities, because there's always going to be imbalances in the market where a certain destination will have a better netback than another, and that moves quickly. And with our large rail fleet and our large access to many railroads in many markets, as well as truck and barge access at both our West and Central facilities, Pekin in the Central, and our Oregon product, which moves by barge in the west, we have tremendous diversity of logistics.

We've also been adding some opportunities to do unit trains out of Pekin, which did not exist before. So that's going to give us some access into the southeast markets in a competitive way that we've not seen before.

So we are very definitely seeing those opportunities, and with just a larger production base to spread our overhead, there are cost savings both at the plant level, the logistics, and at the corporate level.

And then on the co-product side, certainly with the wet mill and the large production of co-products that are other than the corn oil and distillers that we produce in the dry mills, that has given us not only a higher co-product return, but some insulation on the price risks in the ethanol business, which tend to be, as you know, very volatile.

So we are seeing those advantages and we're continuing to enhance those advantages every day.

And switching over to the cash side, in terms of borrowing and debt restructuring, so you mentioned that your Western plants are now debt free. In earlier comments, you mentioned a possible lease transaction.

Are you looking at a sale and leaseback transaction on those plants? Or what kind of options are on the table outside our traditional debt restructuring or rolling over?

Yes, Nathan, I don't think we're looking at a wholesale lease financing of those plants themselves. We'd like to keep them unencumbered, more so with regards to specific assets.

So as an example, we have the cogeneration facility, things like that, that lend themselves - no pun intended - to a lease-type structure where you can match up the long-term lease with the value of that, that you derive from that asset.

But more importantly, it's again focused -- we think it's beneficial, as well, to keep those unencumbered, not only because it helps match as well our desire to keep a fairly conservative amount of debt on the balance sheet, but as well as we'd love to refinance the existing debt, that it's the appropriate message and the appropriate structure to have, particularly as well to lend itself to as you look out into the future and the financial markets are open again, would allow us to continue to pursue a structure that makes sense for the Company and these assets that are core to us now.

I assume you watch Green Plains Partners with great interest. If you looked across your assets, if you were to do a similar, say $0.05 per gallon charge on your existing storage and internal plant marketing, as well as add in additional revenue and earnings from your third-party marketing business, how big an EBITDA company could you carve out if you were interested in doing so?

We look at it. We're certainly not at the size that Green Plains is, that's fairly manifest. But I think that those will be improving and growing opportunities to consider. And the natural progression, as demonstrated by Green Plains and being able to deploy resources and properly manage those resources across that line.

Okay. And then --

Clearly, Nathan, it generates EBITDA, obviously, for every gallon, and we can all do the math. And at this point, it's a key part of our integrated producer marketing model, and we like the way that behaves and operates today. And certainly, as Bryon mentioned, we'll continue to look for ways to improve that in the future.

Yes. I think sometimes it's better when you do the math, but maybe that can be for a future call.

And lastly, just looking at the capital expenditures, you obviously have a lot of flexibility because you have some very interesting (inaudible) projects. Can you talk just a little bit high level about some of the laundry list of projects, kind of more flexible, high-return projects, and what kind of payback periods, including probably pretty far down the list, but the potential reactivation of the port at Stockton?

I'm sorry. What was the last part about Stockton? The port?

Yes, the potential reactivation of the port there.

Right. Well, starting with that, it is a deepwater port, and it doesn't currently have access to the water for petroleum products or ethanol products. That is something that we're looking at. We have access to both the mainland railroads, the UP and the BN railroads, and the opportunity to capitalize a pipeline to the water and a dock to be able to export ethanol.

We think that exports of ethanol from the west coast will be a reality as the global market continues to develop. And we're pretty uniquely positioned there. That is definitely a longer term project, but something that we are evaluating.

As it relates to the laundry list, starting with the incremental just efficiency improvements, there's still a tremendous opportunity, particularly in Nebraska, to do what we've done out west. I mean, if you look at the yield differences between our plants, we do have much higher yields in the west, given the find grind and the chemical changes we've made, and other just general operational switches that we've made, and we're implementing that in the Midwest region, both the dry mill in Pekin and Nebraska. And those are paybacks that are less than a year. And so we're certainly exploring and implementing all of those.

We have the larger projects that we've talked about, the cogeneration and then exploring now with cogeneration, which is process, the anaerobic digestion and the solar power in the west, where we have the low carbon value where we can reduce our scores by anywhere from 4 to 10 points. At a penny a gallon, that adds up very quickly, and you can justify with two-year paybacks or less some fairly large capital investment projects that we are looking at.

We have the cellulose, the fiber conversion that we're doing in Stockton that once we have the EPA D3 RINs and work with California to get the proper pathway treatment under the Low Carbon Fuel Standards, that is definitely a technology we would like to roll out to other facilities, particularly where we're supplying the low carbon fuel.

So those are a few examples, and there are more as we move forward.

Great. Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Neil Koehler for any closing remarks.

Again, thank you all for joining us today. It was a difficult quarter for the Company and the industry. But we do feel very good about the way that we managed through it. And with the margin environment getting better, we are optimistic in Q2 and moving forward. And appreciate your support of the Company and look forward to talking to you next quarter. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.