Alto Ingredients Inc (ALTO) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Pacific Ethanol, Incorporated's third-quarter 2016 financial results. (Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Becky Herrick of [LHC]. Ma'am, please begin.

Thank you, Howard. Thank you all for joining us today for the Pacific Ethanol third-quarter 2016 results conference call. On the call today are Neil Koehler, President and CEO, and Bryon McGregor, CFO.

Pacific Ethanol issued a press release yesterday, providing details of the Company's quarterly and nine-month 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 10th, 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, November 3rd, and, therefore, you are advised that 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 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 the Company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations.

Non-GAAP financial measures should be viewed in addition to and not as an alternative for the Company's reported financial results as determined in accordance with GAAP.

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, purchase accounting adjustments, and depreciation and amortization expense.

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

Now I'll turn the call over to President and CEO Neil Koehler. Please go ahead.

Thanks, Becky, and thank you all for joining us today.

For the third quarter we reported net sales of $417.8 million, a 10% increase over last year, which was driven by records in total gallons sold of 243.7 million, and third-party gallons sold of 118.2 million. In fact, we are nearing a 1 billion gallon annual run rate for total gallons sold. These results reflect a 10% increase in our capacity utilization, encouraged by a stronger margin environment and significant operating improvements in our Aurora, Nebraska facilities.

Net loss was $3.8 million and adjusted EBITDA was a positive $9.3 million for the third quarter of 2016. During the third quarter our bottom line was negatively impacted in part by a few notable items that totaled over $11 million, including higher beginning inventory valuation, lower margins in our ethanol trading business, resulting from the intra-quarter drop in ethanol prices, significant repair expenses, and noncash mark-to-market adjustments related to open hedge positions.

Most of these expenses are timing related that negatively impacted us in the quarter. Bryon will provide more detail in his remarks. Although these results leave significant room for improvement sequentially, our year-over-year results demonstrate our success in integrating and optimizing our Midwest assets.

We continue to focus our attention on implementing projects that optimize our production, lower our carbon score, and produce meaningful near-term returns.

During the third quarter we received the first-ever approved registration from the EPA for the production of cellulosic ethanol from corn fiber at our Stockton plant using the Edeniq Pathway combined with the Cellunator technology. With over 1 million gallons of production anticipated at this facility per year, this accomplishment is a major milestone for Pacific Ethanol, as we are now generating high-value D3 RINs.

Together with the carbon credit under California's Low Carbon Fuel Standard and the federal second-generation biofuel producer tax credit, our cellulosic production is expected to provide a meaningful contribution to the profitability of our Stockton plant. And it is already generating targeted yield increases of greater than 2% attributable to cellulosic gallons.

As we fine tune the operating and economic aspects of this process, we are evaluating the expansion of corn fiber cellulosic ethanol production to additional Pacific Ethanol facilities.

Last quarter we contracted to install a 5 megawatt solar-powered system at our Madera plant, which is the first-ever commercial system installed at a US ethanol facility. The system is expected to lower our operating costs by displacing one-third of the grid electricity currently used. In addition to reducing our annual utility costs by approximately $1 million, the system will improve our carbon score and drive premium pricing on the ethanol produced. We expect to begin operating the solar system at full capacity in early 2018.

This week we initiated startup of our industrial scale membrane separation system at our Madera plant. The system, which separates water from ethanol in the plant's dehydration process, is expected to increase operating efficiencies, lower production costs, and reduce the carbon intensity of ethanol produced at our Madera facility.

We plan to be in commercial operations of our cogeneration technology system at our Stockton plant in December. This system will replace monthly electricity we currently purchase from the grid through delivering steam and electricity to the plant while lowering emissions, which is expected to reduce our energy costs by an estimated $3 million to $4 million per year.

With the acquisition of the Midwest assets in the third quarter of last year, we have successfully leveraged our leading market share position on the West Coast to other parts of the country. Our strong year-over-year growth in third-party gallons is attributable to the expansion of our ethanol marketing business across the country through growth in existing and new regional US markets, additional logistics activities, and new transportation agreements that enable us to expand our ethanol distribution capabilities.

As an example, subsequent to the end of the third quarter we signed a unit train agreement with the PPW Railroad, which allows us to provide reliable and efficient service to customers in new markets at a lower cost. In October we shipped our first-ever unit train from Pekin, and by the first quarter of 2017 we expect nearly 100% of our rail shipments will migrate from single manifest cars to unit trains or barges.

Overall, industry fundamentals are trending quite positively. Domestic and global demand for ethanol as a preferred high octane, low carbon fuel source continues to be very strong. [Daily] production run rates for the industry have recently declined but the fall maintenance and the days of supply on hand has recently reached the lowest levels of the year, giving the industry a reasonably snug supply and demand balance.

Meanwhile, corn prices remain stable to weaker, around a $3.50 per bushel range, as farmers are finishing harvest of the largest US corn crop ever. And ethanol prices have remained firm, supporting an improved margin environment. Industry margins thus far in the fourth quarter have been stronger than average margins in the third quarter.

California's Low Carbon Fuel Standard continues to support the investment in new technologies that improve carbon scores and generate higher premiums on the ethanol we produce. During the quarter our California plants received an $0.08 per gallon price premium compared to the benchmark Midwest ethanol.

The passage of SB version 2 in the just ended California legislative session granted the legal authority to the State government to extend California's world-leading carbon reduction strategies to the year 2030. The California Resources Board has now initiated the public process for extending the LCFS program to 2030, with yet-to-be determined carbon intensity reductions beyond the 10% required by 2020.

The 10-year extension of the program will enable Pacific Ethanol to make longer-term and larger capital investments to further reduce the carbon intensity of our ethanol, further enhancing our competitive advantage in the lucrative California market.

At the federal level, the EPA has submitted its proposed final 2017 volume requirement targets for the renewal fuel standard to the White House Office of Management and Budget. The EPA proposed increasing the amount of conventional renewable fuel to 14.8 billion gallons in 2017 from 14.3 billion gallons in 2016.

In its proposal the EPA said blending would rise from 10.1% of US fuel supplies in 2016 to 10.44% in 2017, proving that we have moved beyond the so called 10% blend wall. We expect the EPA to issue the final rule by the end of this month.

With a backdrop of strong ethanol demand and a record corn crop, we see a supportive environment for ethanol into 2017. Oil prices are forecast to be stable, or move modestly higher. Supply and demand in the ethanol industry is expected to remain generally balanced. Domestic demand should strengthen as E15 expands, driven by new infrastructure and the higher blending levels called for in the RFS.

We expect RIM surpluses to decline somewhat in 2017, which will send further price signals for incorporating higher physical volumes of ethanol into the fuel supply. And export forecasts remain robust, as US-produced ethanol continues to be the most competitively priced octane component in world markets. This year we project total exports of close to 1 billion gallons, approximately 10% higher than 2014, and we anticipate further increases next year.

All of these market trends, combined with our efficiently [operating] assets, bode well for a strong finish to 2016 and a solid 2017 for the Company.

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

Thank you, Neil.

Our consolidated financial results for the third quarter were as follows. We reported net sales of $417.8 million compared to $380.6 million in the third quarter of 2015. This represents a 10% year-over-year increase attributable to our record 243.7 million gallons sold during the third quarter, which was driven by increased production and third-party sales.

Cost of goods sold was $411.4 million compared to $388 million in the same quarter last year.

Gross profit was $6.4 million compared to a gross loss of $7.4 million in the third quarter of 2015. As a reminder, in the third quarter of last year we recorded approximately $8.7 million in acquisition-related accounting adjustments. The increase also reflects improved production margins compared to the prior year.

SG&A expenses were $6 million compared to $7.4 million in the third quarter of 2015. The reduction in SG&A reflects lower professional fees, as well as some of the synergies related to the integration of our Midwest assets Neil mentioned earlier.

Income from operations was $393,000 compared to a loss of $14.8 million in the prior-year period.

Interest expense was $3.9 million compared to $5.2 million in the third quarter of 2015. The decrease is attributable to a lower debt balance compared to the prior year, as well as the capitalization of interest on capital projects.

As Neil mentioned earlier, in the third quarter our bottom line was negatively impacted in part by some extraordinary cash and noncash expenses totaling over $11 million. The majority of these expenses are largely timing issues and resulted from high beginning inventory levels that carried elevated production costs relative to then rapidly declining market prices.

We account for our major input expenses on a FIFO, or first-in, first-out basis. Accordingly, our production costs reflect a higher input expense in a falling price market and, conversely, reflect lower production costs in rising price periods. A precipitous drop in corn and ethanol prices from the end of June through July resulted in a high priced cost of goods sold relative to sales, negatively impacting this quarter's results. We expect with the recent rise in commodity prices to benefit from lower subsequent production costs.

Further, to mitigate some of the commodity price volatility exposure and to take advantage of relatively solid forward margins in Q4 and Q1 2017, we locked in positions on some of our feed and ethanol business, which resulted in noncash mark-to-market adjustments, as that inventory was valued at a time when corn prices were at their cyclical low levels. We expect to realize a gain from these positions through the rest of the year and into the first quarter of 2017, as the underlying sales generate the expected revenue.

The short-term decline in ethanol prices in the first half of the quarter also squeezed our margin in our ethanol trading business. Inversely, in rising ethanol price periods our trading business margins expand. Taking this into account and evaluating the performance and profitability of our trading business year to date, we are pleased with its results.

Finally, we incurred short-term extraordinary expenses for equipment repair, leading to our lower than anticipated gross margin.

Net loss available to common stockholders was $3.8 million, or $0.09 per share. This compares to a net loss of $15 million, or $0.36 per share, in the year-ago period. Adjusted EBITDA was $9.3 million compared to $2.4 million last year.

Through nine months ended September 30, 2016, net sales were $1.2 billion compared to $814.4 million in the same period last year.

SG&A was $20.4 million compared to $16.3 million in the nine months ending September 30, 2015.

Net loss available to common stockholders was $12.6 million, or $0.30 per share, compared to $19 million, or $0.63 per diluted share in the same period of 2015. And adjusted EBITDA was $31.3 million compared to $5.2 million for the 2015 period.

Now turning to our balance sheet, cash and cash equivalents were $40.6 million at September 30, 2016, compared to $52.7 million at December 31, 2015. The decrease in cash was primarily due to over $27 million in debt and interest payments and $14 million in CapEx paid year to date, partially offset by significantly higher cash flow from operations. Sequentially, cash balances improved by approximately $9 million over the prior quarter.

Our third-quarter capital expenditures were in line with guidance at approximately $7 million, mostly related to plant improvement initiatives. We continue to expect our full-year 2016 CapEx spend to approximate $15 million.

Working capital was a deficit of $15.9 million at September 30, 2016, compared to a positive $125 million at December 31, 2015. This decline was largely the result of the reclassification of our $155 million term loan from long term to current debt, consistent with its maturity in September of 2017. Addressing this term loan remains a key priority. As such we are actively pursuing a number of alternatives to refinance this debt on favorable terms and will provide greater details when appropriate.

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

Thanks, Bryon.

We are committed to our successful strategy of evaluating and investing in innovative technologies that optimize plant efficiencies, improve our carbon score, and ultimately enhance our profitability. As Bryon mentioned, it remains a high priority for us to reduce our cost of capital by restructuring our term debt. And we will continue to leverage our diverse base of production and marketing assets to expand our share of the renewal fuel and co-product feed markets.

With that, Howard, I like now to open the call for any questions.

(Operator Instructions) Eric Stine; Craig-Hallum.

Maybe just on the $11 million, just to dig in there a little bit more, it sounds like -- I mean, fair to say the loss in the trading business, I mean, that's normal course of business. But it sounds like the rest of it, that that is truly one-time in nature. So the thoughts there. But also to confirm it sounds like you also beginning of the quarter and then end of the quarter had things work against you. But, really, if you take out the quarter-end timing of it, those things offset and it's basically a wash. Is that a way to put it in plain English?

I think that is a reasonably fair way to think about. And these are volatile markets, so it's hard to say they're totally nonrecurring. But in the case of this quarter, beginning and the end -- I think you stated that very accurately -- we had a situation where we had a very large drop of both corn and ethanol prices from the beginning of the quarter to really into early August. We actually had higher than normal plant inventories at a higher than market corn cost. And so that was a timing issue that certainly negatively impacted the earnings.

And at the back end of the quarter, the opposite was true. We actually had less plant inventory and at a lower cost. So there is an offset and we expect to see that benefit in Q4.

Okay.

You accurately say on the marketing side that's -- you know, the same is true there. When you're carrying finished inventories as we do in transit, whether in unit trains, single cars, tanks, and the market dropped close to $0.30 a gallon between the beginning of the quarter and early August, while we've seen the opposite happen here at the subsequently ended Q3 into Q4, the ethanol prices moved up. So we would expect to get some of that back.

Right.

And as Bryon said, the year-to-date performance -- we always experience those fluctuations in the marketing business and we do our best to manage it. And year to date we're very pleased with the performance of the trading business.

Got it. And then, just on the repairs, any -- are those repairs now complete? Is there any insurance component to that, to recover some of those costs going forward?

Yes, they are largely complete. And while we were not able to accrue any additional insurance monies and we did take a pretty good hit in the quarter, we do anticipate that there will be some additional insurance monies that will offset that.

Okay. Maybe just turning to basis quick, I know in third quarter it looked like freight was tight there for a while. It seems like that's loosened a bit. And then the corn price, even though a record crop it has remained kind of stubbornly high at that $3.45, $3.50 range, at least on the board, but probably made up for in the carry.

How should we think about basis in fourth quarter? And I know things can change, but maybe an early look at 2017?

Well, we're definitely seeing a pretty wide basis, particularly in the western end of the Corn Belt. So that is beneficially impacting our Nebraska operations as well, as all of our destination Western Region plants. I mean, we've seen basis levels $0.20, $0.30 under the board.

And in some cases, given the very nearby to get the crop moving, which is now about, well, as of Monday, probably about 90% harvested and literally in some areas of the Western Corn Belt they are running out of places to put the corn and that is creating even more pressure on basis and more pressure on freight. And we've been able to pick up some spot corn headed west at basis levels that are more equivalent to $0.30, $0.40 under the board.

So looking very good, a little stickier in the East. We're seeing basis levels that are at or just a bit below the board for Illinois. But strong product values in those markets, particularly on the feed side. Seen a little uptick actually in the storage grain prices, which has been encouraging.

When you get into 2017 then it's always an issue of how many acres can be planted and you can see some volatility in basis. But what we have is a incredibly large crop, the biggest ever. Projected carry-out at the end of next year of close to 2.4 billion bushels, which would be about the highest on stocks-to-use ratio for the last 10 or 11 years.

Argentina, Brazil, I mean we're seeing world production of corn uptick as well.

So we generally see a very stable, if not declining, corn price and a attractive basis level to go along with that. That's what gives us, with a relatively balanced supply/demand balance on the ethanol side of it, gives us a lot of optimism for the coming year from a margin standpoint.

Got it. Okay, thanks. Last one, just on SG&A, I know that last quarter commentary suggested that it might see an uptick and maybe $7 million per quarter was more of a normalized rate. And you had a $6 million number in this quarter. Just how should we think about SG&A in fourth quarter and then maybe in 2017 as well?

Clearly we're trying to over deliver here. (Laughter) Clearly it reflects a couple things, Eric. One is being able to keep our third-party professional costs down. And that continues to be our target. So clearly (inaudible) the issue for the $6 million. I'm not comfortable in providing any particular guidance going forward, but we shouldn't expect it to exceed the numbers that we've given you in the past, and hopefully gravitating more towards the lower numbers.

Got it. Okay. Thanks a lot.

Craig Irwin; Roth Capital Partners.

So the first question I have is really one of clarification. The $11 million in one-time items, I just wanted to confirm that this is not taken out of the $9.3 million in [EBITDA] that you reported as an adjusted number. And if we do remove this, then we're looking at a fully adjusted number more like $20.3 million and maybe $0.17 in EPS. Am I looking at things correctly?

That's correct.

Okay. Excellent. Excellent. So this on a headline basis not strong, but actual performance it was a very strong quarter. That's good to hear.

Moving onto a separate subject, there's been discussion out there of [tight] incremental RIN capacity in the ethanol market at the end of 2016. Some plants could potentially be forced to slow down more than they usually do in December. Is this something where you have any exposure yourselves at Pacific Ethanol? Is this something you're watching for potential margin impact in the fourth quarter? Are you hearing this from any of the partners that you're doing business with?

There's been some talk of that. It's hard for us to evaluate. We are not impacted by that. Actually where we have plants, particularly out west, where 100% of our co-product is wet, there already is an established pathway for us to generate RINs beyond our grandfathered amount. So that's actually a competitive advantage that we have. And we don't have an issue running up against that at our other facilities as well this year.

There are quite a number of plants that through the efficient producer process of EPA have been granted the ability to generate extra RINs. So that offsets the comment you made. We are aware that there are some plants that may run up against that limitation. And how that will impact production levels is a little hard to definitively say.

But it could have an impact. I mean, clearly at this time of year we start seeing demand come off a bit. And it's our view that producers need to make sure we keep -- calibrate into that and make sure that where we have a pretty good supply/demand balance we maintain that through moderating production levels, if that's what it takes to get to the higher demand that we seek, both from continued exports and seasonally in the US.

Great. Thank you for that. Then moving on to the subject of your cellulosic production, can you maybe give us a little bit more color on the total gallons that you've produced to date using the Edeniq technology? Are you receiving RINs already on these gallons? What's the prospect to roll this out to other plants? And is the unusual sales process or interruption of a sales process of Edeniq having any impact on your ability to use the technology?

Answering your last question first, no, it's had no impact. We have a license to use that technology and to date the legal issue has not had any impact whatsoever on that.

We just recently received the pathway from the EPA. We then had to reorder the enzymes and starting in the month of October we began to generate D3 RINs. We had generated a few. We are trying to determine the exact amount of that through the demonstration process that we believe we will be able to recover as well.

But we are in steady production as of October. And as we mentioned in the prepared remarks, we are generating over 2%, so on a 60 million gallon plant, that would be over a million gallons on an annualized basis of D3 RINs. And as we are now in the market starting to sell those, we stand by our belief that on a premium basis, net basis, assuming the producer tax credit, the second-generation producer tax credit, continues as well as the D3 RIN values we're seeing and our anticipated pathway for (inaudible) that we will see a premium value on those gallons of $2 a gallon.

Thank you for that. So I also wanted to ask what you're seeing for crush margins in the fourth quarter. Other competitors of yours have talked about a strong environment and potentially one of the strongest quarters that we've had in years. Is this something that you're also seeing? And can you comment about whether or not your West Coast plants are seeing even greater potential for margin upside given the potential for margin spikes there.

Yes. The quarter is only a third over and, as we all know, this is a very volatile business. But as we outlined in our remarks, we see a very constructive environment and we see the supply/demand continuing to be tight. We see exports -- this could be the biggest export quarter in history. With high sugar prices in Brazil, shifting more to sugar production, we anticipate them to be a large importer in Q1 as well. So that helps us at the seasonally lower demand in the United States, lower corn prices.

And it is the case that in the first part of Q4 we've seen some of the best production margins in the industry and at our company than we've seen all year.

Great. And then last question if I may. Kinergy. In the many years that I've followed Pacific Ethanol, I don't believe I've heard you call out swings in commodity costs as far as something that impacted margins at Kinergy. Can you maybe discuss with us how you protect profits in this segment, value at risk, how you typically lock in commitments on both sides, and where the opportunities are for things to either increase or subtract from profitability in any quarter?

Sure, Craig. And we have mentioned in the past that we are subject to the swings in price, particularly when it happens rapidly.

The only material price risk that Kinergy has is on the inventory that it holds, both in transit and in tanks. We turn it very quickly. But when you see a market move $0.10, $0.20, in some cases $0.30 over a couple week period of time, then that is definitely going to have an impact. We do put on some positions to protect our inventory, but given basis risk and other variables, it's a very imperfect hedge.

So there is exposure on the way down and there's benefits on the way up. We obviously have the ability to see these trends. We try to minimize those inventories when prices are falling and to expand them when we see an opportunity on the upside. And on balance we've done a very good job of managing that, which is why Kinergy has always been a very profitable part of our portfolio, and will continue to be.

So that's really -- it's that simple. And we buy on a fixed-price basis. We sell some on a fixed-price basis. But we will most of it on an index, so there is some risk around that. But these markets very predictable in that regard. And, frankly, Kinergy being out there buying fixed-price ethanol, we've become a market maker and that provides some insight into markets and helps us to [provide] the ability to have some impact on how these markets move.

So it's a very, very important part of what we do, the producer/marketer model, trading around our assets, production assets, with marketing, providing valuable services to our partners. And as you can see from our results, it continues to be a growing part of what we do.

Great. And just a question on Kinergy as well. So Kinergy is a very large part of the ethanol in California. Your marketing efforts there have really just done a great job serving the State over the last many years. Is there anything that's changed in the State of California that would alter the ability of your market making operation to provide stability in this business?

Well, I mean, it's a competitive market. And while we do have the largest market share, particularly in Northern California, of any producer or marketer, we have to earn that every day. And we do through what we believe is a very unique set of production assets, the two that we own, the two that we market for.

So Kinergy markets all of the ethanol produced in California. That ethanol is some of the lowest carbon scored ethanol in the State. We also bring in by rail a good amount of it lower than your average scored ethanol as well because of the distribution system that we have that makes that -- that's a natural outlet for that through managing logistics, managing inventory for our customers, having our own downstream distribution beyond just our plants.

Leveraging our plants essentially as terminals for ethanol coming into the State. We produce 200-million-plus gallons in the State of California in a market that's about 1.5 billion. So there will always be a trade of ethanol coming in. And we are very well positioned to continue to take advantage of that.

It's why we put a lot of effort in at the plant level to continue to drive our carbon scores down, because that's what gives us this competitive advantage. Our customers really need -- and increasingly when we go from 2% reductions to 3.5% reductions starting January 1, there's really going to be a need to continue to keep ethanol relevant by bringing the carbon scores down so that we can provide that value to our customers. And that's our mission and our objective.

Great. Thanks again for taking my questions. I'll hop back into the queue.

Sameer Joshi; Rodman & Renshaw.

Thanks. (Inaudible). Just following up on the D3 RINs cellulosic ethanol, do you require any additional capital expense to bring this 1 million on line? Or is that all done?

The capital expense is done. It was investment in the Cellunators, which also improved our starch yield. So they were justified on that basis, but they also become the pretreatment for the corn fiber. And then it really -- with the elegance of the process, it utilizes our existing fermenters. And then the addition of a not inexpensive cellulase enzyme that we add to the process once the corn fiber has been pretreated through the Cellunators. So there is no additional capital investment. There are some high operating costs related to the enzyme.

And from an engineering point of view, does it in any way disrupt your non-ethanol, or non-cellulosic ethanol production?

Neil Koehler No. You can think about it as really just being very synergistic and improving the overall yield from a bushel of corn, because it is the fiber that's in that corn kernel that we are converting. So very additive. It actually takes some -- some of that fiber was going through as feed. So to the extent that 2% of that amount balance is now going to ethanol, that's a little less feed that we'll be producing. And in this case it's more valuable as cellulosic ethanol than it is as distiller's grains. So that's positive as well.

And just one clarification. Maybe I misheard. Is it in 2018 that this will be in full production at 1 million gallon? Or is it 2017?

It's -- on an annualized basis we're confident that we'll get over a million gallons. And that run rate started in the month of October, about mid-October. So we will see the better part of that run rate in Q4.

Got it. Okay. And in terms of overall sales, I heard you say 1 billion gallons in the year. Is that a annualized run rate for the next quarter or is it for 2016? Because from my calculations you have sold just under 700 million gallons through September, yours as well as merchant. So you will need to sell more than 300 million gallons. Is that right?

That would be right. And that is not what we said. What we said is that if you look at Q3 on an annualized basis. So our sales continue to increase. And if you annualize Q3, that would be close to a billion gallons. So that is our current run rate. And that's our current run rate in Q4 as well.

Right. Great. Got it. Most of my other questions are already answered. Thanks a lot.

(Operator Instructions) Jeff Osborne; Cowen and Company.

I was wondering if we could dive back into the $11 million of kind of extraordinary items. Is there a way, Bryon, that you could kind of laundry list the scope of each of those, in particular the repairs and the hedging losses?

I think the way I would portray it is say -- we mentioned in the prepared remarks the majority, so it's over half of that $11 million, is attributable to the high inventory prices and the fixed hedges into Q4 and Q1. (Inaudible) rather than putting hard numbers around it, it's fairly -- I don't want to say it's minimal, but the repair costs are a relatively minimal part of that, but at least notable, and thus we brought up the point.

I assume because you highlighted the 10% utilization improvement at Aurora that it's a safe assumption that the repair was Pekin?

Yes.

Got it. And then can you just address -- you highlighted the industry and the export opportunity that others in your peer group have highlighted as well. Did you particularly have any notable export volume in Q3? Any anticipation of that in Q4 and as we move into 2017?

We continue to focus on that. If you look at our West plants it's -- since we're sort of the export market of the United States, the highest value is always as close to our plants as possible. So none of that volume would be exported.

In Nebraska we do spread wealth to the Gulf, some of our product. We don't carry it on export, but some of that has been exported. We are currently -- that plant is well positioned, not only from a logistics standpoint but also from a technology standpoint, to produce the various export grades of ethanol. So we are in the process of obtaining a DSP permit from the TPB, the federal agency that regulates that, so that we can ship [undenatured] ethanol from that plant and be more directly involved in export.

So that is a focus. There is a premium for that. We have the ability to produce those grades. And we anticipate that to be part of our program in 2018.

That's great to hear, Neil. And the last question I had is just you provided a tremendous amount of detail on this call and prior calls just about how you're squeezing more value out of the existing plants that you have, in particular in California. With that being said and with the step-up of the carb requirements and likely additional step-ups in 2020 and beyond, any kind of preliminary thoughts on CapEx brands for 2017 at this juncture that we could think about?

We're developing that now. So rather than speculate I think certainly when we get to our next earnings call we'll provide you some good detail on that.

And you're right, and we did say with carbon and the extension -- what we need to see from the State of California is that actual extension of 10 years. Because some of the projects that we're looking at, like we've mentioned in the past anaerobic digestion is a notable one, where we can displace a good amount of the natural gas we use with biogas.

We're now looking at investments that are between $10 million and $20 million and a investment horizon that goes beyond 2020. So we are -- and the State hears us loud and clear. That's why they're moving on a workshop process, because they want to make sure that companies like ours are properly incentivized to make those more fundamental investments.

And so as we see the signals from state government in California, see the signals from other governments as this program expands, as we see more clarity on what happens with the RFS post 2022 we will calibrate our capital expenditures accordingly. But we anticipate that we will be making some material investments to continue to drive down the carbon footprint and the efficiency of our process so that we can continue to be very relevant to our customers.

Excellent. I appreciate the detail. Thank you.

(Operator Instructions) I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Neil Koehler for any closing remarks.

Thanks, Howard, and thank you all for joining us today. Appreciate the support of our shareholders. And we will look forward to speaking with 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 wonderful day.