Alto Ingredients Inc (ALTO) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. First Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Kirsten Chapman from LHA Investor Relations. Ma'am, you may begin.

Thank you, Ashley, and thank you all for joining us today for the Pacific Ethanol First Quarter 2018 Results Conference Call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of the business highlights, and Bryon will provide a summary of the financial and operating results. 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 for 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 May 16, 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, May 9. And therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay. Please refer to the company's safe harbor statement on Slide 2 of the presentation available online, which says that some of the comments in 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.

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 attributable 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 information later in this call, a reconciling table was included in yesterday's press release.

It is now my pleasure to introduce Neil. Please go ahead, Neil.

Thanks, Kirsten, and thank you, everyone, for joining us today. For the first quarter, net sales were $400 million, up 4% from last year's first quarter. Total gallons sold were 233 million. Production gallons sold were 141 million. Net loss available to common shareholders was $8.2 million, and adjusted EBITDA was a positive $5.7 million, improving $4.7 million and $7.6 million, respectively, in comparison to last year.

Production margins in the ethanol industry during the first quarter improved slightly from the fourth quarter of 2017 but remained compressed as ethanol inventories reached a historic high in early March. Industry fundamentals have improved as inventory levels have declined by 9% since early March and are about 5% below inventory levels at this time last year.

Gasoline demand is up around 3% year-over-year as we approach the high-demand summer driving season, and ethanol exports have been strong with a quarterly record of 522 million gallons exported in the first quarter.

Ethanol production rates are running only 1% year-to-year -- year-to-date over last year. Production margins, while still quite volatile, have improved thus far in the second quarter. Part of the industry's margin volatility arose from escalating trade positioning between China and the U.S., which resulted in additional tariffs placed on U.S. ethanol shipped to China at the beginning of April, halting for now new export business to China.

China had returned in the earlier part of the first quarter as a significant buyer of U.S. ethanol, supporting its announced 10% blending requirements by 2020. Nonetheless, we remain optimistic that the improved ethanol supply and demand balances will result in continued margin improvement as we enter peak demand season.

We believe that long-term market fundamentals remain strong. The very compelling blending economics, octane value and carbon-reducing benefits of ethanol will drive higher blend rates in both the U.S. and international markets. We are actively working with the entire industry to achieve RVP parity for higher ethanol blends. We have gained support from the Trump administration to remove the arbitrary restrictions on the blending of E15 in many markets during the summer. In the summer months, it will encourage year-round increases in the blending of E15. This was reaffirmed as recently as yesterday at a White House meeting. We firmly believe the EPA has the legal authority to make this change and anticipate that rulemaking will be initiated in the near future.

International demand for U.S. ethanol set records in 2017, and 2018 is on a pace to exceed that. Increasingly, more countries are importing ethanol from the U.S. as it is a low-cost source of high octane and low-carbon transportation fuel.

Most recently, Japan announced its intention to allow U.S. ethanol to meet up to 44% of a total estimated annual demand of 217 million gallons of ethanol used to make ETBE or the equivalent of approximately 100 million gallons of U.S.-produced ethanol annually.

Carbon values in our California and Oregon markets are gaining strength. This results in continued and growing premiums for our lower-carbon ethanol. In California, we are seeing prices above $150 per metric ton of carbon. Earlier this year, the California Air Resources Board announced changes to extend and increase carbon reduction requirements by refiners through 2030, requiring them to reduce carbon levels to 20% below 2010 levels.

Carbon prices have risen steadily over the last year, more than double where they were in 2017. Further, we are also seeing improved carbon prices in Oregon, with carbon values now reaching above $60 per metric ton for our lower-carbon intensity-rated ethanol produced at our Oregon facility.

During this period of tight production margins, our focus remains on implementing initiatives and investing in our assets to reduce our cost, improve our yields and carbon scores and build our long-term value. We are engaged in several plant-level capital projects with near-term paybacks, increasing output of high-value products like corn oil, corn gluten meal and yeast, and working with our ingredient suppliers to reduce cost and increase ethanol yields.

Our July 2017 acquisition of ICP provided us with important increased product diversification by way of high-quality alcohol products that support stronger margins and lessen our exposure to commodity price fluctuations in the fuel ethanol markets. The integration of ICP is on track to achieve our goal of $4.5 million in annualized cost synergies.

The 3.5 megawatt cogeneration project at our Stockton, California facility has not yet achieved continued commercial operations. The 2 generating units have performed intermittently since February and remained under the care of the manufacturer, who's working diligently to achieve final completion. We expect the systems to be fully operational at a target performance level at the beginning of the third quarter.

In terms of our previously announced plant improvement initiatives, the installation of the solar power system at Madera is progressing, and we expect to be in full electricity production starting in the third quarter. This should reduce our utility cost by approximately $1 million annually.

Airgas has begun construction of a CO2 plant at our Stockton facility, which is expected to be online and producing revenue for us in the fourth quarter.

Finally, we continue to produce commercial levels of cellulosic ethanol at our Stockton plant. However, due to delays in EPA approval of our cellulosic ethanol pathways for our Madera and Magic Valley plants, we have paused cellulosic ethanol production there. We expect the issue will be resolved soon.

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

Thank you, Neil. For the first quarter 2018 compared to the first quarter of 2017, net sales were $400 million, up from $386 million due to an increase of 6.5 million gallons sold and partially offset by a $0.05 per gallon decline in our average sales price per gallon.

Gallons sold for the quarter totaled $232.7 million, reflecting a 25.8 million gallon increase in production gallons, partially offset by a 19.3 million gallon decline in third-party gallons. The increase in production gallons sold is due primarily to the addition of ICP's production volumes and the reduction in third-party gallons. This reduction resulted from our deliberate efforts to focus our third-party ethanol, where we have a strong third presence around our production assets.

Gross profit for the quarter was $3.4 million, a $9.1 million improvement, resulting from sales of higher-margin products and better California carbon credit values. Despite this improvement, our operating margin was negatively impacted by $2.6 million in higher-than-expected repairs and maintenance expense at our Pekin, Illinois wet mill facility. As previously noted, we have experienced larger-than-anticipated expenses since the second half of 2015 related initially to the repair and then to the replacement of the 2 package boilers that failed shortly prior to our acquisition of Aventine. The $2.6 million spent in Q1 were related to the installation and start-up of the 2 new boilers. The installation is now complete, and we are in the process of demobilizing the 5 rental boilers that provided steam on an interim basis.

Q2 cost of goods sold will include the final cost associated with these boilers and is expected to total approximately $2 million. With the boiler issues largely behind us, we look forward beginning Q3 to the elimination of the wet boiler expenses, which totaled $11 million in 2017.

SG&A expenses were $9.3 million compared to $5.5 million and included expenses related to the operation of ICP that were not present in last year's quarter. As a reminder, the prior year also included $3.6 million in onetime gains from legal matters.

We continue to expect SG&A expenses of $34 million for the full year of 2018 as the first quarter usually contains expenses related to the 2017 year-end compliance and audit matters as well as higher payroll taxes that are expected to be lower in the remaining 3 quarters of 2018.

Adjusted EBITDA was positive $5.7 million compared to negative $1.9 million in the year-ago period.

Turning to our balance sheet. Cash and cash equivalents were $57.4 million at March 31, 2018, compared to $49.5 million at December 31, 2017. For the first quarter of 2018, our capital expenditures totaled $4.4 million, primarily related to plant improvement initiatives, in line with guidance. We continue to expect our 2018 capital expenditures will be level with our 2017 expenditures. However, as noted in our previous call, we will adjust the amount based on industry economics and company performance.

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

Thanks, Bryon. As I stated at the beginning of the call, we believe 2018 will be stronger than 2017. The fundamentals of long-term growth and demand for ethanol supported by octane value and the carbon and cost-reducing benefits of ethanol remain firm. Our goal is to capitalize on the demand and positive momentum in our markets, and we are keenly focused on extracting and maximizing value from all our assets through a combination of improved efficiencies and lower operating costs.

With that, Ashley, I'd like to open the call for questions.

(Operator Instructions) Our first question comes from Eric Stine of Craig-Hallum.

So I just wanted to start. Maybe I'll start with just the regulatory environment since it's pretty current from yesterday. But -- so a lot of noise, obviously, on the E15 waiver -- or the RVP waiver, but also talks of potentially export volumes coming towards RINs. Just curious how you think this whole thing plays out. And those 2 items, I mean, how do you view that? Is that -- are those 2 kind of a wash? Or is that export volume potential -- potentially will be putting in place, does that hurt?

It's a bad policy and a bad precedent. I will say that from my understanding of the meetings yesterday, there was broad agreement and consensus as there has been for some time now that we need to move forward on RVP parity for higher blends. As I stated in the prepared remarks, we do believe that, that rulemaking will be initiated soon. There was no agreement on the attaching RINs to export volumes. And I can tell you that there is a broad consensus in the agricultural and biofuels community that, that is a nonsensical and terrible idea. It's, first of all, not legal. The RFS is very explicit about supporting domestic demand for renewable fuels, not exports. Our exports are already the most competitively priced fuel component, an octane component in the market, and attaching the RIN essentially is an indirect subsidy to something that does not need to be subsidized and will also result, we believe, in retaliatory trade action, which will hurt farmers and hurt the ethanol industry. It's also true that if you're attaching RINs to export volume, that's going to take away the incentive to increase the demand for the higher blends, which the program is intended to do. So we are optimistic that the RVP will move forward. We are also optimistic that the notion that we would attach RINs to export volumes is a nonstarter.

Yes, that would seem pretty unlikely. It seems pretty unlikely. Maybe just turning to your corn purposes. I mean, it seems -- and it seemed like you've consistently done this, where you outperformed on your purchases, potentially buying them forward. Curious on that. How far out you're typically able to go? Or is it more of just a quarter -- a quarterly thing that you're able to put on?

We try when the pricing reaches a point that we find to be attractive. We will go out for some number of months at a time with forward basis purchases, and today is no exception. We have some pretty decent positions on -- in the Midwest. We've been a little more cautious out West. There has been some freight issues that have -- and high demand for exports that for grain, corn and soybeans that has actually caused some spike in the freight costs and the basis for our West Coast plants. So we have less coverage on there. I think our patience is paying off. We're starting to see the transportation ease and the basis in those premiums coming down. So probably a little closer to market than we typically would be at this time of the year. But we do believe that with farmers coming out of the fields after planting a great crop, that we should see an opportunity to pick up some additional attractively priced basis.

Okay, got it. Maybe just last one for me on distillers grains. Obviously, first quarter pricing picked up nicely. Just thoughts on maybe the trends there. And just can you remind me how you're structured there? If I remember correctly, you've got a decent amount under fixed contracts. So maybe you're not fully seeing the impact and potentially you will down the road?

Yes, that's a fair assessment. We do sell forward distillers grains and that market, as you mentioned, has been coming up very nicely. And the spot values are at higher levels than the increments that we have contracted. But we still also have quite a bit that's open. So a combination of having some fixed positions, but we -- across the whole, a portfolio have more open than is contracted. So we are benefiting from that. Proteins are very strong, very tight. Soybean meal has been a very expensive distillers grain, essentially right along with the other proteins. And a year ago, we were selling distillers grains at a discount to corn. We're now selling distillers grains at a nice premium to corn. Our coproduct return, as you can see from our published results, has improved over the quarter. It's also particularly beneficial at our wet mill, where we have a higher coproduct return to begin with and a higher focus on high-protein sales. We're seeing some added benefit there as well.

Our next question comes from Carter Driscoll of B. Riley.

So just to follow-up, there's just a lot of noise yesterday coming out of the news, the media, even some contradictive -- contradictory comments coming out of various congressional parties in the White House. I mean, Cruz tweeting a win-win and Trump very kind of cipherously saying it's going to be the last meeting on the RFS, what is your take? I mean, I still feel like there's a lot of misinformation out in the marketplace today. Obviously, the RFS has established loss, so there's the legal precedent there. Obviously, attaching RINs to the export market would throw it in disarray and probably cause RIN prices to plummet and really throw, I would argue, the export markets into, I guess, you said, potentially not make it the low-cost supplier that we are today. Kind of just give me your thoughts about how you think this plays out and under what time frame. Or how it gets resolved to the point that you can move more towards to parity, as you've been talking about, as the natural evolution in this marketplace.

Well, we have a President who has been consistently supportive of ethanol from before he was President. Very strongly so during the campaign and has been consistently in support since then. There's an EPA that has not necessarily have seen it that way and has been talking about things. Last summer, Secretary Pruitt was talking about attaching RINs to export volumes. There have been way too many small refinery financial exemptions granted for companies that are under no financial hardship. That's a problem that has not helped demand, that has not helped the clarity around moving this program forward and increasing the demand for renewable fuels. These meetings do get frustrating because the politics are at a fairly high pitch, and we do see varying opinions. What is clear to us is that -- as I was mentioning to Eric, was that there is broad consensus to move forward RVP parity. And there is no support on the agricultural and biofuel side for attaching RINs to export volumes nor was there an agreement from what we understand. I was not at the meeting, but from the reports that we have gathered, there was no agreement on that point. So that is just such a bad idea. We can't imagine that, that would move forward. The way this plays out is with the rulemaking. There's issues in Congress and attempts to longer term look at how the RFS might be repositioned. But as you said, it's existing law. That is not changing anytime soon. And the focus now is at the EPA and what they can do through their statutory authority on regulation. And they have the regulatory authority to give RVP parity to higher blends. They also believe they have the regulatory authority to do other things, like attaching RINs to export volumes, but that would have to go through a rulemaking process as well. So our hope and expectation is that there will be an RVP rulemaking that will move. And it will not be moving with export RINs attached, and in our opinion, it might include some transparency on the RIN market. We have seen that market come off substantially to where RINs are trading at about $0.30 per RIN yesterday, near a 3-year low. So don't really see that as the problem. And as we've said before, and this industry very consistently said, is that the way to deal with RIN prices is to blend more ethanol because we sell ethanol today at close to a $0.60 discount to wholesale gasoline, and you get a free RIN attached to that screaming deal. So let's just get on with the blending of more ethanol, and the economy -- and the agricultural economy and the consumer and the environment will be better for it.

Okay, all right. Not to -- again, not to belabor this point, but the exemptions for the small refiners again seems to be also increasingly political. In particular, if it then shifts back cost of compliance to the larger refiners, which are increasingly getting noisy about it, is there a potential resolution whether it comes in the form of either a legal challenge or maybe just Trump starting to stem the issue, recognizing it could potentially have some negative impact on just the whole structure of the delivery and booking of RINs? Because hearing word that some of the bigger players are getting concerned that what they have on their balance sheets for that RIN compliance is starting to be devalued. Just trying to get your sense of how this issue gets resolved.

Yes. It gets resolved by the -- Secretary Pruitt and the EPA not handing out small refinery exemptions like candy in a candy jar for companies that don't warrant it. So we've seen -- and again, there's -- this is not public information. But what we can piece together, it looks like it could be as much as 1.6 billion gallons of obligation that have been exempted. It doesn't necessarily mean that those gallons aren't being blended. But if you piece the numbers together from the EPA data, it does appear that, that kind of demand has been lost relative to the RVOs. And that is demand that needs to come back to the ethanol industry and the agricultural economy and need to start by not exempting these refiners that don't warrant them. There is legal challenges that have already been brought by Bio. I think it's quite possible there could be other legal actions brought as well. The Trump administration, and it was a topic of conversation at the -- from what we understand in the meeting yesterday, it's very well aware of this issue and how harmful it is to the agricultural economy.

I appreciate all that color, Neil. Shifting over, can you talk about the expectations of what is the EPA's issues with deploying at Madera and your other facility for cellulosic?

It's hard to understand because a lot of the action out of the EPA has been a little hard to understand under Secretary Pruitt. But it appears that there is not a warm embrace of advanced biofuels, and so some concerns have been raised as to pathway applications. We find that to be curious when our Stockton pathway application was approved and our Madera and Magic Valley are identical with the same Edeniq technology and protocols and approach. So we believe this is just a delay tactic to hold back the advancement of advanced biofuels. We're not alone. There are any number of corn fiber applications that have been held up. In fact, any applications that are in the EPA today are on hold. Again, the White House has been made very aware of this. There's been coalition letters and letters from bipartisan folks in Congress complaining about this. And we are getting indications that, that log jam will be broken as well and these pathway applications will be moving forward in the near future.

Okay. Maybe a question for you, Bryon. So if I understood correctly, you're going to switch out -- you're going to finally fully decommission the problematical boilers this quarter. It will be a hit to COGS this quarter, but it should be fully operating with the new replacement. Is there any -- starting in 3Q, is there any recourse you have that has not been already pursued with -- maybe economically for the OEM that -- whose equipment it was that caused this ongoing problem?

Yes. So there's actually a lawsuit that's going on. We're -- which we're in this deposition phase, and these things take time. But we feel like we have a very strong case, and we'll continue to pursue that. And it's significant at this point. It was a bit of a discovery as we went along. So we first repaired them and discovered that, indeed, it was a manufacturing defect. So we ultimately had to replace them not -- so as not to put people in danger in the site. So it's definitely not something that we expected to do, but we look forward to having this behind us and be able to move on.

Is there going to be an insurance claim outside of the lawsuit you're in?

There is. Yes, there is. And there were proceeds we received initially against the initial event. There was only one boiler that exploded, the other one was we brought down just as a -- for security purposes. And when we opened it up, we were seeing the same decay and deterioration. So that does not result in an event that would be insurable. So one of the 2 boilers was covered, and we're in the process of finalizing discussions with our insurer on that. But then having repaired them and then discover the same event, that is not an insurer event then either. So really have to look more to the OEM to get this thing resolved appropriately.

Got it, okay. Maybe, Neil, so obviously, the trade rhetoric with -- or what's gone on back and forth with China look like a very promising market at least in the short term. Now how do you see this playing out? Maybe just characterize some of the opportunities and other export markets. Obviously, you hit a record last year and a very promising start. You're positioning from there your expectations of being able to incrementally ramp exports. And then I just have one last follow-up.

Yes, exports are key. I mean, it's always the incremental barrel in a commodity market that really drives your supply and demand balances and margin environment. And in today's market, where we have a relatively flat, although slightly increasing with gasoline demand. Domestic market growth has been in the exports. And so while China only represented about 10% of total exports in Q1 coming from virtually nothing last year, so that was very promising, and looking like they were going to continue to grow. With those gallons coming out of the market, that relatively modest increment has had an impact in the shorter term. There are other countries that are stepping up, both new countries taking ethanol and existing countries. There were courses like Brazil, who are taking record quantities, and Canada; increases in South Korea; India. So we're seeing the growth. I stated last quarter that we anticipated to see 1.6 billion to 1.8 billion gallons of export this year. I still think that's the right range. If China comes back, it could be closer to the higher end of that. But I would say the current expectation, that it's probably on the lower end of that. They had a 30% tariff last year, which really did eliminate most of the business with China. But given the very compelling price spread with gasoline and ethanol, we were able to clear the market even with that tariff. But adding the additional 15% to take it to 45% in today's market is preventing any additional trade, plus the uncertainty as to how long it's going to be on. I do think that China, with their very ambitious program to blend 10% ethanol by 2020, that is the equivalent by then given their very dramatic increase in gasoline demand. That will be the equivalent of about 4 billion gallons of ethanol. They have domestic capacity for just 1 billion. So they're going to need, at some point, if they're going to stay on that program. They will continue to need as they build their own ethanol production industry, which, obviously and laudably, is their objective. They do have their own corn supplies. But we think that in the interim, there's a great opportunity as we move to higher blends in the U.S. to continue to support China with exports. When that starts, is it later this year, is it next, we think it's a matter of not if, but when.

Okay. Maybe just the last one for me. Can you give me an update on your -- are you seeing any changes to the potential rollout or expansion, I should say, of E15 at the retail level? And/or are you seeing any movement on the front to maybe have some incentive at the federal or state level to do so? Or as the whole kind of RV parity, I don't want to say dispute, but just the machinations that have gone on in the last couple of weeks, has that put a dent in it at all? Just trying to get a sense of what the retail environment is relative to kind of last quarter's expectations than the material changes.

Yes. It's -- if it is happening, albeit slower than we all would like to see. But there are close to 1,500 stations today or 1,400, some number such that, growing to closer 2,000 stations by the end of the year. We believe there's incrementally 50 million to 75 million gallons of ethanol that are being blended in E15 and E85 today. So in a domestic market of 14.3 billion gallons, that's not much. But we think that, that doubles on a run rate by the end of this year. And it's -- like I said before, it'll be a lot like E10 because there's no -- the incentive is there. The price spread to $0.65 a gallon were cheaper than wholesale gasoline today. And gasoline is going up, oil is going up. Even more important to be blending more domestic ethanol given what's going on with Iran and internationally to secure our own energy security. We will see it grow when you have E15 at the retail level. It's currently selling for close to $0.10 cheaper than the E10. And consumers are picking up on that, where E15 is being distributed. We're seeing very good volumes at those stores. And even those that didn't necessarily want to blend E15 are starting to blend it. Minneapolis is kind of the Ground Zero right now for E15 with a very large penetration, and we're seeing it grow. So it is something that we believe will accelerate. And given both the octane needs, carbon reduction and cost benefits of the fuel, it is our firm belief that the market -- over time, the entire market will migrate towards the higher blends.

Our next question comes from Sameer Joshi of H.C. Wainwright.

Most of my questions have been answered, but just a few clarifications. The D3 RIN for Stockton, that remains in place, right? There's no issue on that while you work through the Madera and Magic Valley issues?

That is correct.

Okay. And sticking with Stockton, you mentioned that the cogen unit is working intermittently and that you expect it to start by -- in the second half. Are there any plans for the second unit in -- under progress? Or are those on hold at the moment?

Yes. We have never initiated any additional plans until we had these fully operational and could verify the performance in terms of energy savings and also to confirm what carbon benefits there were as well. It is something that we believe will have good application at other plants, Madera in California with -- where we have these very high electricity rates would be the next opportunity. But for now, we're focused on getting these 2 units up and running and performing at expected levels in Stockton.

Got it. And then another clarification on the boiler issue. You mentioned there will be a $2 million hit in the COGS in Q2. How does it relate to the $4.4 million CapEx? Like, is it -- can you just clarify those things for me?

Yes. Because they're showing up as cost of goods sold by a few million versus CapEx. The CapEx shows up as where we would capitalize it, and then advertise it over its sustained life. But because we already have the 2 boilers originally in our capital structure, we didn't write those off. And so instead, we're now expensing the purchasing and installation of new units as cost of goods sold and repair and maintenance.

Okay, understood. And then just one last clarification on the interest payments. I see your interest expense is around $4.4 million, $4.5 million this quarter, which is higher than -- sequentially than the previous quarters, whereas the debt has not gone up that much. Can you just give some clarity on that?

Yes. It just changes. Well, there's 2 things. One is the increases in LIBOR rates, and then -- I'm sorry?

No. I meant your LIBOR is different than the LIBOR gap.

Yes. So it's primarily LIBOR, and then we canceled our Aurora -- Pacific Aurora facility. Just didn't need the facility. And as a result, any charge that we had for the initiation of that as far as bank fees and the like were taken in as expense on that -- on the quarter.

Okay. And one last one for me on the OpEx front. The $4.5 million savings from the integration of ICP, have those already been realized? Or when do you expect the complete realization of those savings?

Yes, we're pretty close to that. I would say that for modeling purposes, you should assume that we'll have them fully integrated and seeing the benefits of those in the second half of the year.

Our next question comes from Annapoorni of Roth Capital.

So just following up on the boiler upgrades. I have multiple questions. So just to understand that all the major expenses related to this are compete with Q2 and we can assume that there are no expense going into Q3 and onwards.

That's correct.

All right. And can you talk a bit more about if there's a need for the catch-up maintenance and transition expenses related to '17 or ICP plans? And just trying to understand how we should look at the financial impact cost-wise going forward on these.

I guess I'd say that we don't have any -- there's just normal maintenance on these facilities now going forward. For the most part, these are -- the ICP facility and the Pekin wet mill are older facilities. So they do carry a slightly higher cost of goods sold and higher repair and maintenance requirement than do our newer facilities. But that being said, we think that we've addressed the more significant items that needed to be repaired or replaced from the time that we made those acquisitions. And so now we're more into the maintenance mode.

So they're reflected in our budget, which, Bryon, in his remarks, reaffirmed that our capital budget for 2018 is covering all of that.

All right. And just looking at the bigger picture and the industry. So it continues to be fragmented. And from recent announcements, it doesn't look like consolidation is taking place any time soon. So what are your thoughts on the industry dynamics? And how that's going to impact the demand/supply in the industry going forward?

Well, from supply/demand, again, we feel that there are arbitrary restrictions on introducing higher blends. We remove those. Ethanol is such a compelling product to plan that we see an increase in the domestic demand in what is 40% of the world's gasoline market here in the United States. You're right about fragmentation. You're right that consolidation is not happening at the moment. We have seen quite a bit of consolidation over the last 5-plus years, but it has stalled out over the last couple. We do believe that, ultimately, we have an industry with 6 players controlling roughly 50% of the production, and it will be helpful for 6 players to control closer to 60% or 70%, and we think ultimately that is where we trend. And -- but in the meantime, we do continue to have a fairly fragmented market that often doesn't act as rationally as you would hope.

And I'm not showing any further questions in queue at this time. I would like to turn the call back to Neil Koehler for any closing remarks.

Thanks, Ashley, and thank you all for joining us today. We appreciate your continued support of Pacific Ethanol and look forward to speaking with you all soon. Have a great day.

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