Alto Ingredients Inc (ALTO) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol Inc. Fourth Quarter and Year-end 2017 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Kirsten Chapman, LHA Investor Relations. You may begin.

Thank you, Bruce. And thank you all for joining us today for the Pacific Ethanol Fourth Quarter and Year-end 2017 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 financial and operating results, and then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing details of the company's quarterly results. The company also prepared a presentation for today's call that is available on the company's website at pacificethanol.net. If you have any questions, please call LHA at 415-433-3777. A telephone replay of today's call will be available through March 8, 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 1, and therefore, you are advised that the 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 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 the company's -- Pacific Ethanol's filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements.

In management's prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believes these measures will assist investors in assessing the company's performance for the periods being reported. The company defines adjusted EBITDA as unaudited net income or loss attributed to Pacific Ethanol before interest expense, provision or benefit for income taxes, asset impairments, purchase accounting adjustments, fair value adjustments and depreciation and amortization expense. To support the company's review of non-GAAP measures information, later in this call, a reconciling table was included in yesterday's press release.

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

Thanks, Kirsten, and thanks to everyone for joining us today.

For the fourth quarter, net sales were $395 million, total gallons sold were 240 million. We achieved a quarterly record of 150 million gallons of production gallons sold, reflecting the addition of Illinois Corn Processing, or ICP, assets in July.

Net loss available to common stockholders was $13.6 million and adjusted EBITDA was negative $273,000. Our results were impacted by several factors. First, the loss was primarily driven by a sharply lower average ethanol sales price per gallon during the quarter, compressing production margins. The industry's historically high inventory levels negatively impacted ethanol margins in the fourth quarter. Only recently have we begun to see reductions in industry inventory levels resulting from lower ethanol production and higher domestic and export demand. In response to high inventory levels and lower margins, we began to moderate production in locations most impacted by margin compression and where we weren't otherwise contractually committed. We also began to reduce contractual sales of third-party gallons and focus our sales efforts, as previously noted, around our production assets where we are best able to maximize profitability and contribute to greater pricing stability. Our focus on managing production and rationalizing marketing volumes has, in part, contributed to improving margins and correcting supply and demand imbalances. Industry ethanol inventories, which hit a record high at the beginning of the year, running 20% higher than the prior year period, are now slightly lower than last year as reported by the EIA this week against higher ethanol demand. This has contributed to margins improving by about $0.15 per gallon from the lows in December.

For the full year of 2017, net sales were $1.6 billion, essentially flat year-over-year. Net loss available to common stockholders was $36.2 million and adjusted EBITDA was $13.6 million. Total gallons sold were 952 million and production gallons sold were a record 527 million. We are confident we're heading into a stronger 2018 supported by an improved supply and demand balance, ongoing stable corn prices, a strong export market and increasing E15 adoption in the United States. Domestic gasoline demand in 2018 is running over 5% higher year-to-date than in 2017. Exports reached a record level of 1.37 billion gallons in 2017, a 17% increase over 2016, and we expect strong growth again in 2018. Also in 2018, we expect to see continued incremental growth in E15 availability and sales. E15 was available at more than 1,200 stations across 29 states as the year began, and we expect that to increase to over 2,000 stations by year-end. E15 is a great fuel for cars with a higher octane rating and lower cost at the pump than the standard 10% blends. We are working diligently with the entire industry for E15 and higher blends to gain RVP parity with the standard blend, which will allow it to be sold 12 months of the year across the country. The low cost, low carbon, high octane and growing supply of ethanol is driving new ethanol demand in transportation fuel markets.

Our focus remains on implementing initiatives to build our long-term value. We are a leading innovator in the ethanol industry, and we are focused on making the appropriate investments to reduce costs, improve our carbon score and support profitable operations. Our July acquisition of ICP provided us with important product diversification by way of high-quality alcohol products, which help support stronger margins and lessen our exposure to commodity price fluctuations in the fuel, ethanol markets. Further, the integration of ICP is tracking well, and we are on target to achieve our goal of recognizing $4.5 million in cost synergies in 2018.

Of our 2 natural gas-fired cogeneration units in our Stockton, California facility, one is now fully commissioned and power is being generated and used in production at the plant. The second unit is still in the commissioning stage. The innovative system allows us to supplement natural gas with waste gases from our production process to deliver usable, clean electricity and steam production back to the plant. In addition to reducing energy purchases by an estimated $4 million annually when fully operational, cogeneration is expected to lower Stockton's carbon and nitrogen oxide emissions.

In terms of our previously announced plant improvement initiatives, we received an updated LCFS pathway from CARB for Madera, incorporating the benefit of our industrial scale membrane system. We are realizing a 5% reduction in natural gas use at the plant. We are in the process of evaluating the technology for potential implementation at other Pacific Ethanol facilities.

We continue to produce commercial levels of cellulosic ethanol at our Stockton, Madera and Magic Valley plants. The installation of the solar system at Madera is moving ahead on budget and on schedule pending interconnection with our local utility. The system is expected to reduce our utility costs by approximately $1 million annually and lower our carbon score.

With that, I'll turn the call over to our CFO, Bryon McGregor.

Thank you, Neil.

Just a note before I comment specifically on our financial performance. Fourth quarter 2017 is the second quarter in which the operating results of ICP are consolidated with our quarterly results. While we do not normally disclose detailed information on each plant's contribution, consistent with our reporting requirements for recent business combinations, we note that for the fourth quarter, ICP contributed approximately 10% of net sales and $2.3 million in pretax net income.

I'll now provide a few highlights of the quarter and full year 2017. For additional detail, you can refer to our results in our press release or related presentation for the full financials.

For the fourth quarter 2017 compared to the fourth quarter of 2016, net sales were $395.3 million, down $46.4 million compared to $441.7 million, largely the result of a decline in our average sales price per gallon. Total gallons sold were 240 million, including record production gallons sold of 150 million, primarily attributable to our ICP acquisition.

We had an overall negative gross margin for the quarter due to compressed margins from lower average sales price per gallon. Fourth quarter SG&A expenses, on an absolute basis, were relatively flat compared to the fourth quarter of 2016 and were in line with our 2017 guidance. It is notable that while our SG&A costs were unchanged, they now include expenses related to ICP.

Bottom line, adjusted EBITDA was negative $273,000 compared to positive adjusted EBITDA of $27.4 million in the year-ago period. For the full year 2017, net sales were $1.6 billion, consistent with the year-ago period, as the decrease in our average sales price per gallon was offset by higher total gallons sold, including record production volumes. Significantly lower corn crush margins in 2017 as compared to 2016 negatively impacted our gross margin for the year, and our gross profit was $5.9 million compared to $54.4 million in 2016. As a percentage of revenue, SG&A remained consistent in 2017. For 2018, we expect SG&A expenses to continue to approximate $34 million for the year or $8.5 million per quarter. Bottom line adjusted EBITDA was $13.6 million compared to $58.9 million in 2016.

I'd now like to briefly discuss the new federal tax bill that was in place by quarter-end. Under the new tax bill, we revalued our deferred tax liabilities resulting in a tax benefit of $300,000. Given that a significant amount of our tax -- excuse me, given the significant amount of our deferred tax assets are comprised of net operating losses and are fully reserved, we expect any taxable income in 2018 would be offset, and thus, we would not expect an effective tax rate of any significance for the near future.

Now turning to our balance sheet. Cash and cash equivalents were $49.5 million at December 31, 2017, compared to $64.3 million at December 31, 2016. Cash usage was primarily driven by our ICP acquisition. For the fourth quarter of 2017, our capital expenditures totaled $8 million, primarily related to plants' improvement initiatives. This brings our 12-month total to $21 million. For 2018, we currently expect our capital expenditures to approximate our 2017 spend. We may adjust the amount based on industry economics and company performance.

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

Thank you, Bryon.

Going into 2018, we are encouraged by the continued strength in gasoline demand, increasing penetration of higher ethanol blends and growing export opportunities. The long-term growth in demand for ethanol continues to be supported by the octane, carbon and cost benefits of ethanol. Key to our strategy is to leverage our operating platform to drive growth. Our strategically located biorefineries enable us to serve multiple markets. The diversity of our production, geography, technology, feedstocks and logistics helps mitigate exposure to commodity price risks. And our focus on innovation supports our goal to increase efficiencies in yields through the implementation of plant improvements.

With that, Bruce, I'd like to open the call for Q&A.

(Operator Instructions) And our first question comes from the line of Eric Stine from Craig-Hallum.

It's Aaron Spychalla on for Eric. First, maybe on exports. Can you kind of talk about your kind of overall expectation for 2018 and some of the markets that are driving that, maybe specifically China, with their kind of E10 goals over time? And then Brazil with the ethanol tariff?

Yes. As I've said in the prepared remarks, 1.7 -- a 17% increase year-over-year from '16' to '17 to that 1.37 billion gallons. We anticipate a similar, if not greater, growth rate in 2018. There have been -- sort of the conventional wisdom has been gravitating around at 1.6 billion to 1.8 billion gallons. And certainly based on the exports that we're seeing in Q1, that appears to be a fair number. We are now involved with exports with quite a bit of our product out of Nebraska going down to the Gulf. So we are definitely seeing the uptick in demand ourselves. As it relates to China, they were virtually nothing in '17 and have already booked a few hundred million gallons, certainly, 200 million gallons of ethanol in the first half of this year. So we are seeing strong demand in support of their initiative to have 10% ethanol blends in place by 2020. And there's a huge gap there between their 1 billion gallons of production and a 3.5 billion gallons requirement that, that 10% would represent. So we do see that. While they can be up and down, we see China as a very positive in this year and potentially years to come. Brazil, with their initiatives to continue to support local blending as part of their carbon reduction target under the tariff's protocols, they still need ethanol. They are structurally short. And even with the tariff there, even though there is some discussion that the tariff might be lifted, they continue to be a very, very strong market as well. Seeing growth in the historic markets India. With the cost benefits and octane benefits in markets like the Mid East, we're seeing that pickup and in other Asia markets as well. So Canada continues to be the -- Brazil and Canada, they continue to be the workforces in terms of the outlets for our exports, but we are seeing growth in other markets as well.

All right. Good. And then maybe on kind of RINs overall and potentially E15. Can you just kind of give your latest thoughts on some of the meetings that are occurring or might be occurring? And just whether -- if you get the year-round waver for E15, I mean, do you think that offsets some of the stuff that's been kind of rumored on the give side of things?

Yes. No question. And there's lots of discussion and lots of political intrigue out there. And there is a meeting today in the White House and -- from our industry's view, and we're very united in this position. It's a very simple equation. The RIN prices are high because we're not getting enough market access to blend more ethanol and other renewable fuels as the Renewable Fuel Standards intended to do. And the RVP parity for E15 and higher blends would immediately resolve that issue. The EPA has the discretion to make that happen. It would result -- if it were done today, result in significantly more if E15 blended this summer. And with the ethanol that we sell at a discount to gasoline, at cash to that is basically a free RIN. So it is a very, very simple equation that if we put more ethanol into the mix through -- to the 15% blends that we would resolve any RIN price volatility. RINs would drop to single digits, and the Renewable Fuel Standard would continue to be the great success that it is. There's no reason to trade that for anything because that is such a simple straightforward solution that protects the integrity of the RFS and continues to build this industry and provide the economic, environmental and energy security benefits that our fuel is delivering every day.

All right. And then maybe last from me. Just on a corn basis, in light of corn prices kind of increasing here recently. Can you just talk about that? And what you're seeing in the market today and kind of your outlook here in the near term? Can you kind of keep that same basis number?

We've definitely seeing basis under pressure. Exports of corn have been up. There have been logistical issues. The board price has been at or in some cases, below the cost of production. So there's certainly been a sentiment on the part of farmers not to sell at these prices and hold on in on-farm storage and in elevators to the corn. And as the ethanol industry and other users of corn need the product, they have to bid it up through basis. So we certainly have seen a firming of basis, probably even a bit more out West given that the freight issues. So basis is up in the quarter, but we anticipate, given that we have plenty of corn in storage and have a huge crop and projected to be another strong planting this spring that in the relative short term, that will resolve itself, and we will get basis numbers that are more historically normal over the last 1 to 2 years.

And our next question comes from the line of Craig Irwin from Roth Capital.

Neil, I wanted to ask a little bit about spot margins, what you're seeing across the platform today and how volatile they've been in the last number of weeks?

There's been a fair amount of volatility in margins in the ethanol industry for many years, and that continues. As I stated earlier, we definitely saw a pretty significant fall off in margins in the fourth quarter. And it is all about supply and demand and days of supply. And it got to be at historic high levels and has come down since then. The demand piece has been very good, on the gasoline side and on the export side. And we also have seen production levels moderate. So we're basically at the same level of production year-to-date that we were a year ago. And that's the first time that, I think, in a year or 2 that we can say that. So we're definitely seeing a little more discipline on the production front with incremental increases in demand and that has supported better margins. They are not anywhere where they should be, given some areas where basis is higher. We're still at break or even or in some cases, negative margins. And in other markets, we're seeing decidedly positive margins. So it's trending in the right direction. Q1s tend not to be great margin environments for the ethanol industry. We actually have been encouraged by seeing here in February, before we even get into March, an improvement. But it's still clarifying itself on the forward curve, and we anticipate better margins in March forward and are doing everything we can to support that development through our own cost initiatives as well as keeping a lid on our own production levels.

So the second question I want to ask about is about your slowdowns. Can you maybe quantify the impact of your slowdowns on a gallons or sort of percent of capacity basis?

I would say that -- and it's being evaluated daily. And it moves up and down, but we're in that 10% reduction level. And in some plants, more than that; in other plants, less than that.

Okay. And then another question. I know you guys are much more conservative -- or you have been over the last year about calling out one-time items, unusual items on the expense side. And that you've been really no longer capitalizing certain expenses that -- maintenance expenses that maybe some others would have in the past. Can you maybe discuss with us if there were any significant items on the P&L that hopefully would not repeat in the back end of '18?

Nothing that I would call out specifically, Craig. And you're right, we're very conservative in that regard and try not to make excuses by way of those unless they really rise to a very extreme level. I will say that we are very focused on keeping our repairs and maintenance costs under control. Cost containment initiatives, whether it's chemicals, whether it's repairs and maintenance, whether it's labor, energy, all of the aspects, we have a great operating team that is working on that. We have been modernizing, certainly the older facilities we have in Pekin, and do feel that the cost structure of those plants and the -- that which we can control on operating performance in '18 will be noticeably better than in '17.

Great. And then last question. I guess 2:00 p.m. today is a big meeting, particularly given, let's just say, the drama in the Tuesday meeting, people being ambushed by unreasonable demands.

Right.

Some people are believing that the irrational demands made by a senator, who's either looking for his next job or desperately fighting to keep his seat, that they've actually opened the door to some concrete action near term. So on the biodiesel side, people I met with yesterday were optimistic that this could actually help get the 5-year reinstatement of blenders and producers. I'm assuming that it could help with the RVP waivers and some other items that the ethanol industry has been asking for. What's your best scenario as far as ethanol regulations that could come out of this meeting?

Well, that scenario which I'm not predicting because I think the political stalemate really continues. But the best and most appropriate outcome is what I outlined, which is on the ethanol side that there's RVP parity for higher blends. That is pure and simply the way to resolve any concern about RIN prices. The industry has said, we'll talk about RIN transparency. I mean, if there's ways to regulate that market to downplay any distortions on the way of speculation, those are things that can be on the table. But notions of RINs for exports or RIN caps, I mean, these are demand destroyers and are completely inconsistent with the letter and the intent of the RFS. And as long -- or any in the program in 2022. As long as those are the demands from the other side, there isn't going to be any deal, and we'll continue to have a stalemate. Right now, existing law is our friend and on our side to support the continued growth of renewable fuels. So cautiously optimistic at the end of the day, which may not be today. It may be some time from now that saner minds will prevail and the appropriate public policy will move forward.

And our next question comes from the line of Carter Driscoll from B. Riley.

This is [Carson Sipple] on for Carter Driscoll. Given the overall supply of ethanol, do you think there's going to be any industry consolidation? Or do you think the export markets can make up for it?

Well, I think both are possible. We haven't seen much in the way of M&A activity in the ethanol industry for a while. Do we think more is possible? Absolutely. You have 6 players. We're #6 that control about 50% of production. It would be not uncommon in a commodity business like this as it matures for 5 or 6 players to actually control something closer to 60% or 70%. So that will be healthy, but not necessarily seeing that in the near term. On overall supply-demand, we are cautiously optimistic on that. If you look at the numbers, last year, we produced 15.8 billion gallons. So even if we're producing -- today's rate is 16 billion, even if we end up producing 16.2 billion, 16.3 billion, you run those numbers and you have 14.4 billion or so. And that's just on a 10% blend and add 1.7 billion, 1.8 billion gallons of exports and incremental E15 of whatever it might be on the low end of 50 million, it could be high as 150 million. You then start seeing a draw on inventories and a much better supply-demand balance, if not tightening up, particularly in the driving season and a scenario that supports better margins. Definitely, we've had an overhang on supply, but you look at it in terms of days of supply, running at about 24 days. You can look at the numbers historically and 20 to 21 and lower do support strong margins but also point out that with exports being an increasing piece of it, the supply chain is longer. So it could be something that is only a couple of days off where we are to really have it be a much more snug supply-demand balance. And we're talking 150 million gallons of the 1 billion gallons of -- roughly 1 billion gallons of inventory out there. So it wouldn't take much of a draw to tighten this up and support a better, more sustained margin. And we're seeing the -- on the sources and uses, we're seeing a scenario that would suggest that we should see a tightening as we move into the second and third quarters.

Great. And then also, if you don't mind, could you address your capital availability and the flexibility, given the rising interest rate? And I'll get back in the queue.

Yes. Sure. We still have significant excess availability and cash reserves on hand. And our work that we did or continue to do, but the work that we completed in December of 2016, significantly lowering our overall capital cost to borrow certainly will benefit us in a rising interest rate environment. So we're still looking at -- from an historic basis, significantly lower cost of borrow for our company than what we've seen in the past.

And our next question comes from the line of Sameer Joshi from H.C. Wainwright.

Just a housekeeping question first. What is the actual total of products and capacity of all your plants?

605 million gallons per year.

605. Right, right. Yes. Talking about the Stockton cogen unit. I know one of them was commissioned earlier -- recently. And then you -- on the call, I heard you mentioned there is another unit that is possibly coming online. What is the timing on that? And is the $1 million cost savings that you spoke about only for the first unit or for both units?

Yes. On cogen, it's $4 million of annualized savings. And so the 1 unit is running pretty much at capacity, so that would annualize pretty close to half of that. The -- as we've mentioned before, this is sort of -- it is standard natural gas cogeneration technology with serial #1, very innovative technology on the ability to use a oxidizer to burn the waste gases off the facility rather than incinerate them through a thermal oxidizer. And it's very good technology and having some fine-tuning issues on the units, which is taking more time to get both of them up. One is now where it needs to be. The other is still in fine-tuning, and we anticipate that, that will certainly be up and running and fully operational in Q2 at the latest.

And are there any plans to replicate this across other plants and other facilities?

The cogeneration?

For the cogen.

Yes. That's -- it's particularly valuable where we have a very high electricity rates, which would be California. So certainly, as we get this up and prove its performance and verify that it's generating the savings and the efficiencies, we would look at expanding that first to Madera.

Okay. Going to the ICP acquisition. I know you spoke about the $4.5 million savings in costs and then your current SG&A costs are fairly -- are like slightly lower, but it includes the ICP costs. Are you actually realizing those $4.5 million combined? Like it's difficult to see it from where we stand.

Right. On an annualized basis, as we go into 2018, we are realizing about $3 million of that $4.5 million. So some other initiatives that are mostly around logistical opportunities in savings through optimizing the use of the direct access we have now to the river, we fully implemented that on ethanol and barging, and we're in the process on distiller grains, most of which we export from Pekin. So that would be the largest opportunity. There are some other smaller opportunities as well, but we expect that to be in place certainly in the last half of the year at the latest on that.

Okay. And then one last one. You mentioned your CapEx for 2018 should approximately be at the same levels as 2017, which was $21 million. Can you provide a little bit more granularity on where this will be spent?

Mostly what we have identified in that budget number are projects throughout that platform that are both necessary for just basic maintenance CapEx as well as some initiatives that have already been in place. Finishing up solar, certainly, finishing up the cogen, we have some dryer work at Pekin, some items that are really both very quick payback in terms of new projects and very necessary just to maintain safe and efficient operations at all the facilities. So it's a bay float. As Bryon mentioned, depending on where margins are and market conditions, we certainly have other innovative projects that we could do, but we're going to be very careful to make sure that we are stewarding our capital resources prudently, and we'll monitor that and calibrate that as the year progresses.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to Neil for any closing remarks.

Thank you, Bruce. And thank you all for joining us today and your continued support of Pacific Ethanol, and we will work hard to improve the operating results of the company and deliver profitability and look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.