Alto Ingredients Inc (ALTO) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. Third Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

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

Thank you, Mark, and thank you, all for joining us today for the Pacific Ethanol Third Quarter 2018 Results Conference Call.

On the call today are; Neil Koehler, our President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of the business highlights. Bryon will provide a summary of the financial and operating results. And then, Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing the details of the company's quarterly 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 November 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, November 1, 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 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 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, please go ahead.

Thank you, Kirsten, and thanks to everyone for joining us today. Before I do my high-level review of our third quarter 2018 financial results, I wanted to discuss some recent regulatory and industry developments that are of positive significance to Pacific Ethanol.

First on the regulatory side, the Environmental Protection Agency, EPA, is beginning a formal rule-making process to allow year-round sales of E15 nationwide. This generates a significant growth opportunity for the U.S. market that over time could result in approximately 7 billion gallons of new ethanol demand, given the current gasoline market.

While commercial E15 implementation will take time, this move provides an important growth path for the domestic ethanol industry, and we expect E15 sales to accelerate materially in 2019, given the cost and environmental advantages of higher ethanol blends.

Subsequent to the President's announcement directing the EPA on the rule-making, 2 large retail chains announced large expansion plans for E15 distribution and we expect to hear other announcements soon. The EPA has committed to complete rule-making by the summer of 2019, and the ethanol industry is working to make sure they keep to that commitment. The recent E15 announcement reflects President Trump's repeated support for the ethanol industry and for agriculture.

With RIN prices now trading near 5-year lows, we see no rationale for the EPA to grant additional small refinery economic exemptions and if fewer or none are granted, this will result in stronger domestic ethanol demand in 2019.

Further, the West Coast carbon markets continue to create strong premiums for our low-carbon ethanol. This week, California carbon pricing per metric ton reached record highs of greater than $190, following the upward trend over the last 2 years.

Also leading oil and gas companies are increasing their diversification and investment in ethanol. Recently, Valero announced the purchase of several plants, demonstrating the positive long-term view of ethanol and also providing an updated indication evaluation of ethanol production-related assets.

Now turning to a review of our third quarter. Net sales were $370 million compared to $445 million in last year's third quarter. Total gallons sold were up 212 million. Production gallons sold were 140 million. We had a $3.8 million gross profit for the third quarter compared to a gross profit of $12.1 million in the comparable quarter last year.

Loss available to common shareholders was $7.8 million, and adjusted EBITDA was a positive $6.3 million compared to a loss available to common shareholders of $0.5 million and adjusted EBITDA of a positive $13.2 million last year.

Industry ethanol margins continue to be compressed in the third quarter with industry inventories near record highs, pointing to the need for some combination of lower production levels and new incremental demand from higher blends and exports.

As a company, we have reduced our production levels and are running at around 90% of operating capacity across the portfolio. We remain focused on implementing initiatives and investing our assets to reduce our costs, improve our yields and carbon scores and build long-term value for our shareholders. We are at or near completion of several plant-level capital projects with near-term paybacks.

We have achieved commercial operations with successful performance testing of our solar project at Madera. We currently are producing at 3.5-megawatt level and following upgrades by PG&E at the local substation. We'll move to the full 5-megawatt level by the year-end. This project lowers our electricity cost and improves our carbon score at our Madera facility, yielding over $1 million of annual operating benefit.

We have made good progress on our 3.5-megawatt cogeneration project at our Stockton, California facility. Required modifications to the 2 generating units were completed in the third quarter and the units are now installed. We're currently going through startup operations and anticipate the system will be at target performance by the end of the year.

Commercial operations at the Airgas CO2 plant at our Stockton facility have been pushed out slightly to the beginning of 2019. Although these operations are not under our control, but rather follow Airgas' construction schedule. We expect the plant to be producing revenue for Pacific Ethanol in the first quarter of next year.

During the third quarter, we received a new pathway from the California Resources Board (sic) [California Air Resources Board] for our Stockton cellulosic ethanol that adds to the premium pricing for this production and which is expected to contribute approximately $0.5 million of incremental EBITDA per year based on the current carbon market. We continue to generate D3 RINS and are still awaiting a final EPA approval of our cellulosic ethanol pathways for our Madera and Magic Valley plants.

Turning to the ethanol export market. U.S.-produced ethanol continues to see growth as a blend component in gasoline around the world due to its low-cost, high-octane content and contribution to reducing carbon emissions. An important recent development was the Trump administration's actions to preserve tariff-free treatment of ethanol exported to Canada and Mexico. Canada is the second largest export market, and Mexico, although nascent, is poised for increased ethanol use as a cost-effective, environmentally favorable substitute for MTBE. Both countries are showing year-over-year growth in U.S. ethanol purchases.

The trade tariffs imposed by the U.S. and reciprocated by China, however have caused China to cease purchasing any ethanol from the U.S. This has been a significant negative factor in the overall supply and demand picture for the industry this year. At the beginning of the year, China was on pace to purchase record volumes of ethanol from the U.S. However, since the tariffs began, exports to China have declined to 0. As a company, and as an industry, we encourage the Trump administration to relieve the market barrier caused by these tariffs. If China sticks to its 10% ethanol by 2020 goal, which we believe they will, China will need to import significant quantities of ethanol, supporting continued growth in the overall international demand for ethanol.

We expect total exports this year to reach another record high of between 1.6 billion and 1.7 billion gallons, which represents about a 20% increase from 2017 levels and we expect additional growth in the export market in 2019.

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

Thank you, Neil. For the third quarter 2018 compared to the third quarter of 2017, net sales were $370 million compared to $445 million. The 17% decline in sales is attributable to lower ethanol prices, fewer gallons produced and fewer third-party gallons sold.

Cost of goods sold was $367 million compared to $433 million in the prior year's quarter, predominantly a reflection of not only lower sales, but also affected by lower corn prices and reduced production costs.

Gross profit for the quarter totaled $3.8 million compared to $12.1 million in the prior year's quarter. This decline is a result of lower ethanol margins.

SG&A expenses were $9 million, up slightly from $8.7 million. We expect SG&A for Q4 to total $9 million in line with our prior guidance. Loss available to common shareholders was $7.8 million or $0.18 per share compared to $0.5 million or $0.01 per share. Adjusted EBITDA was $6.3 million compared to $13.2 million in the year-ago period.

For the 9 months ended September 30, 2018 compared to 2017, net sales were $1.18 billion compared to $1.24 billion. Cost of goods sold was $1.18 billion compared to $1.23 billion. Gross profit was $5.9 million compared to $7.9 million.

SG&A expenses were $27.2 million compared to $22.9 million, the latter of which included $3.6 million in onetime gains associated with legal matters in the prior year.

Loss available to common shareholders was $29.2 million or $0.68 per share compared to $22.6 million or $0.53 per share. Adjusted EBITDA was $12.9 million compared to $13.9 million.

Turning to our balance sheet. During the first 9 months of 2018, cash flow from operations was $26.1 million compared with $21.2 million coming from the third quarter alone, contributing to a stronger balance sheet. At September 30, 2018, cash and cash equivalents were $56.1 million compared to $49.5 million at December 31, 2017.

For the third quarter of 2018, our capital expenditures totaled $3.5 million, primarily related to plant improvement initiatives, bringing our total capital expenditures year-to-date to just over $10.9 million. In light of the weak market conditions year-to-date, we have adjusted the number of capital projects and expect to limit Q4 expenditures to around $3 million, well below our full year CapEx guidance.

For the third quarter of 2018, we focused on reducing our total debt with $23.7 million paid in the quarter through a combination of term loan repayments and reduced usage of both term revolver and line of credit facilities.

Looking at our overall capital structure, over the past few years, we've quickly grown from a company with 4 plants and annual ethanol production capacity of 200 million gallons to 9 plants with capacity of more than 600 million gallons, while diversifying product offerings and expanding nationally. We have built a scalable business model to take advantage of the expected growth we see in the ethanol industry.

This growth has been conservatively funded through a sensible combination of equity, long-term debt and cash flow. Our balance sheet remains strong despite the current market challenges, and we feel it is appropriate to maintain as part of our capital structure a conservative level of long-term debt, lowering our overall cost of capital and enhancing shareholder return on investment. In this regard, we are actively evaluating opportunities to refinance our senior notes well in advance of their December 2019 maturity.

We exited the third quarter with solid liquidity of approximately $70 million, consisting of cash and excess availability under our revolving lines of credit.

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

Thanks, Bryon. To sum up, we believe that fair and open access for E15 year round and a properly and legally implemented RFS will support significant growth in domestic ethanol demand. And we are confident that the compelling cost, octane carbon benefits of ethanol will drive both new domestic and export demand in 2019, resulting in improved margins for our company.

Our focus today is on delivering additional value with our existing assets to capitalize on positive macro trends by cutting costs at both the operating and corporate level, further diversifying our sales through additional high-protein feed and alcohol products, and new initiatives to continue to lower the carbon score of our plants that can service valuable low-carbon fuel markets.

With that Mark, I would like to open the call for Q&A.

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

So just on the production side, clearly, you've pulled back some on production. Just wondering, if you're seeing any evidence of that in the industry? And just curious, I mean, whether you're seeing that or when you look forward, is it E15 and potentially China coming back that gets this market back in balance, or just how do you see that playing out?

Yes, a fair question. We've seen some reduction in production, not enough given the current inventory and the current supply-and-demand balance as we move into -- moving out of the driving season. So long term, really midterm, we're very bullish on incremental demand, but we're here, where we are, which is inventory is, well, not significantly out of balance, probably 100-million-plus gallons that like to reduce. What's encouraging, this week even with production up a bit from the week before, albeit down over the last 4 week average, the EIA inventories were down almost 5%. So that was actually a very good trend.

At the current pricing of ethanol, near historic low since they have been listed on the Chicago Board. And higher gasoline prices, we are seeing a pickup in exports now even without China. But to your point, with China in the mix, it would be a very different market and margin environment today. So we're also optimistic that China will come back in as well, and that a combination of some discipline on production and incremental demand will right the ship.

Okay. A good segue to exports. I know your earlier read, looking for growth in 2019. I mean, I would -- well, curious are you assuming anything from China in that view? And then, when you're thinking about growth year-over-year, maybe just talk about some of the important or incremental markets that help that.

Sure. The -- in a incremental, albeit small increase in 2019, I would say that does not include China. So China is a wildcard. I personally believe it will come into play in 2019 and that would result in larger increases. So I think, we see small increases without China and large increases with China. We are seeing now with the deregulation in Mexico, some incremental increases there expected in 2019. As you recall, Japan has now authorized some increment of their use of ethanol to be corn-based ethanol. It had been limited to only Brazilian to produce the ETBE that they blend into their gasoline. So we see that as about 100 million gallon incrementally new market starting in 2019. Brazil, the largest import of our ethanol will continue to be a strong user given the demand and the price point of ethanol in Brazil, so at/or potential increases.

Canada, they have new programs to increase the blend rates up there. We're seeing incremental growth this year. We expect to see incremental growth next year. India, has a large market as well, also with their moving their blend rates up and then continue to encourage ethanol use. We see incremental growth there.

Given the exceptionally good price point on an octane basis, so areas in the Middle East, and where ethanol gets used just for pure octane blending economics, we anticipate that given the current relationship between ethanol and world gasoline prices that we will continue to see growth there as well.

Okay. Maybe last one from me, and I apologize, if I missed this earlier. But I just wanted to confirm, you did say you generated cash in the quarter? I missed that.

Yes. I mean, clearly, our EBITDA numbers of over $6 million. And we're able to really focus on some debt reduction opportunities and reduce usage of our revolvers.

Okay. If my math's right, was that like $15 million, $20 million from operations for the quarter?

$26.1 million, I have it, if my recollection serves.

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

This is Carson Sippel on for Carter Driscoll. I just had a couple of quick questions. First, so the roughly 1,500 E15 gas stations across the country, what incentives are there in place, if this number could increase in the coming years?

Well, the biggest incentive is the price of ethanol. If you blend ethanol with a 10% blend to bring it to 15% blend, you're lowering your cost by anywhere from a nickel to a dime. And the retail business is highly competitive, and so having that cost advantage is a large incentive. We, as an industry, have a program called priming the pump that helps with the modest investments that some stations are required to put in blender pumps, et cetera. So there is aid there. There have been time-to-time USDA grants available as well to aid with infrastructure. But the real driver is the superior economics that ethanol lowers the cost and makes you more competitive on the street. And then increasingly with carbon, certainly out West becoming a factor, the ability to blend more ethanol, more low-carbon ethanol is going to be very significant in meeting compliance under various low-carbon fuel requirements.

Got it. And then, this is more specific to the company itself. So it seems like third-party gallons have gone down materially for the past 2 quarters. Do you expect this decline to continue, or do you think you'll begin increasing this number moving forward?

I think we're at a pretty good run rate right now. As we said publicly before, is that, we -- really reevaluated some of the third-party business and where we were not able to make money and it wasn't strategic and tributary to our production assets, we pulled back. So that was a very intentional strategy and it has resulted in significantly improved profitability in our marketing business. So -- but right now we feel that we're in a pretty good place, but we're always evaluating that both in terms of where we might decrease and where we might increase.

Got it. And then last for me, can you provide a quick update on the legal claim for the boiler?

It is still in litigation and we are still optimistic that we will be successful in that outcome. But as it is true with legal actions, hard to handicap timing, but we're pushing hard to have resolution in 2019 on that subject.

(Operator Instructions) And our next question comes from the line of Craig Irwin of Roth Capital Partners.

Can you please walk us through the sequential impact on the sunset of the boiler repairs and the integration expenses for Aventine?

The integration of Aventine is complete. We and ICP and there are $1 million of synergies that are being recognized. You point out the boilers, that has been a significant drag over the last 3 years to the tune, when you add up all of the lost time, the repairs, the repairs and maintenance, the rental boilers, the litigation, it's been a $27 million drain to the company over the last 3 years.

Other than the ongoing litigation, which we expect to recover a significant amount of money from, those expenses are behind us. So that is -- when you run the numbers on $9 million a year, you can see the large impact that has.

In a positive light to with the ICP integration, the access to the water, we've cut our expenses on logistics by over $2 million on ethanol by moving the barges to our own dock. We're improving our netbacks as the water barrels today are more valuable than moving product out by rail. We're finishing the movement of our distillers grain, which all goes out by water as well to our own dock, which is another $1 million of savings. We're reducing our rail fleet. We now have realized almost $5 million, $6 million of annualized savings going forward on reducing our rail fleet with another 100 cars coming off in April. So these are -- those are some high-level items of how we really have reduced our costs and are in a much better position going forward.

Great. So then for those of us that believe that the logical outcome of the trade dispute with China is that China is a very large customer of U.S. ag going forward and that we find a way to be friends, not enemies. That kind of points to fairly high value for forward access for loading ethanol going West, particularly, that's on rail, right? Can you maybe talk a little bit about whether or not your existing facilities have the capability to add a loading terminal on the water? What you feel about the rail supply into your existing facilities? How you would go about permitting and potentially constructing that? And if this is something that you've looked at as a potential investment over the next couple of years?

It is something we've looked at. The only facility that we have that currently would be appropriate would be Stockton. Double served by 2 railroads on the largest inland port on the West Coast. It can't take large vessels. It doesn't currently have the infrastructure, the dock for loading ethanol, so there would be a fair amount of construction in piping and docking. But as China and Asia, generally picks up, we do anticipate quite a bit of demand for moving products, ethanol, in particular, off the West Coast. And it is something we're evaluating for ethanol that would be outside of our own production, because our focus there particularly on the West Coast is to add value on carbon and you don't get that on [passports]. So our best netbacks for our own ethanol are close to home, but as we do have a diversified portfolio and marketing company, we are looking at that option as well.

All right. Great. My next question is really about asset value. You consolidated your Western plants at what, $0.30 a gallon, and then, you bought Aventine for, I guess about $0.50 a gallon. This is a big discount to some of the private transactions in the market. What would you consider liquidation value of your plants if you were to just sell them? Would you expect to get $1 a gallon, if you were to sell them the way Green Plains has moved some of their plants? And what would you consider potential cut it up and sell at real estate value? I mean, it seems where the stock is now that we could be even below those levels if we factor in the debt and look at where the stock's trading.

I can't disagree with you. That's obviously not our focus. Our focus is to recognize the real value, which is operating these assets at peak performance. And to your point, they are undervalued given the current equity evaluations, they are great assets, diversified assets. All I can say, in terms of market value, is that you will have to look at recent transactions and that is in that $1-plus range that most recent transactions of the Green Plains facilities to Valero. So if you run that math, you can quickly see that there is a huge disconnect between the inherent valuation of the plants based on recent transactions and our current [enterprise] valuation. There is negativity in the ethanol world, and we brought it on ourselves to some degree as an industry. We've got too much production. We need the incremental markets and demand and with both the E15 and China, you're looking at the opportunity and the direction in a much more positive market environment, and valuations will take care of themselves.

So my last question is about the litigation that started or should start relatively soon, let's hope. Looking to force EPA to reallocate the gallons from Scott Pruitt's foray into inappropriate small refinery waivers. Do you have any strong views on the potential of the case? And would you potentially have interest in participating in litigation with some of your peers in the ethanol industry?

Well, we are participating through our trade association, the Renewable Fuels Association of which, I'm the current Chairman. So we're very active in that. We do feel very strongly that what happened under Pruitt's watch on the small refinery exemptions was absolutely not legal and that we have a very strong case, really waiting until the final RVOs come out, because to be able to bring lawsuits on these topics and to be able to prosecute them, we need for that final rule to be out, because there is a possibility, I'm not expecting it, but they could be reallocating gallons in the final rule. Again, not expecting that and do anticipate that the lawsuit will be prosecuted with vigor after that point. So it is our view that those gallons should be reallocated. It's our view that there is no basis upon which to be granting these small refinery exemptions. So at a minimum with the pending E15 that are listed on the EPA website, those should not be granted. There is no rationale, and that alone will help improve demand relative to the demand of the past couple of years, where we saw over 2 billion gallons of small refinery exemptions taking away demand.

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

I just want to confirm that within your prepared remarks, did you mention that you are currently operating at 90% capacity?

That is correct.

And given the higher inventory and the fact that summer months are behind us, do you expect these 90% operations for the next -- for this quarter?

That is our expectation. We will continue to evaluate that; if anything, we could bring it down some as well.

Okay. Just following up on one of the previous questions. The third-party sales, are there any other factors apart from cost reductions that are playing into your decision to lower the volume there?

No, we really incumbent these markets. We could have continued to maintain those sales and even grow them, but it was purely an analysis -- financial analysis of where we should best put our resources, whether it would be working capital and where we could maintain profitability in certain markets, certain areas that really we just didn't have much of a strategic value, Arizona, being a good example, trading dollars at best and very competitive market. Why would we do that. So purely a financial analysis and decision to refocus that part of our business the way that we can have sustained profitability.

Okay. Most of my other questions have been answered, but just one clarification on the cogeneration at Stockton. Do you expect that to be operational by end of the year or first quarter next year? And then a follow up on that is, when do you expect the full $4 million savings from that?

We do anticipate it to be fully operational by the end of the year. I -- we have had dates that have come and gone, so there is some caution there. But everything looks very good and the issues that were slowing that installation down appear to be behind us. And when the thing starts up, it could be in the first quarter a little bit of up and down as there is some fine tuning, but we would more or less anticipate the full opportunity in savings for the calendar year 2019.

Just a quick follow up. So if everything else stays same in terms of costs, do you expect the $9 million quarterly run rate to come down based on these savings as well the Madera solar plant?

No. Those wouldn't show up in the SG&A line. That would be in under your operational lines.

Under the operational, okay. Got it.

And I'm showing no further questions at this time. I would now like to turn the call back to Neil Koehler for closing remarks.

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

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