Alto Ingredients Inc (ALTO) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Ethanol, Inc. Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference to your speaker today, Moriah Shilton of LHA Investor Relations. Please go ahead, madam.

Thank you, Joelle, and thank you all for joining us today for the Pacific Ethanol Third Quarter 2019 Results Conference Call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of business highlights, Bryon will provide a summary of the financial and operating results, and then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions.

Pacific Ethanol issued a press release yesterday providing details of the company's quarterly results. The company also prepared a presentation for today's call that is available on the company's website at pacificethanol.com. A telephone replay of today's call will be available through November 15. The details of which are included in yesterday's earnings press release. A webcast replay will also be available at Pacific Ethanol's website.

Please note that the information in this call speaks only as of today, November 8, 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?

Thanks, Moriah, and thank you all for joining us today. Before discussing our third quarter results and the current state of the ethanol industry, I would like to provide an update on our strategic initiatives to strengthen our balance sheet, improve our liquidity and reduce our debt. While concluding these potential transactions has taken longer than originally anticipated, we are supported by an improving overall market and by stakeholders who understand the ethanol industry, appreciate the closing transactions in this environment takes time and retain confidence in the Pacific Ethanol team and strategy.

We're in discussions with multiple parties around the sale of assets and other strategic initiatives and are working diligently on these transactions. We look forward to providing you substantive updates when we have agreements to announce.

We are in the process of documenting a short-term extension with CoBank on our Pekin credit facilities. Further, we are engaged in collaborative and productive discussions with all of our lenders regarding amendments and extensions. Similar to our other strategic objectives. These activities take time to complete, and we believe we will likely take a step approach initially beginning with shorter-term extensions to align interest and that longer-term agreements to facilitate the effective implementation of our strategic plan.

During the third quarter, the ethanol industry experienced among the worst production margins in years due in large part to the EPA's excessive granting of small refinery exemptions and the continuing trade dispute with China. The prolonged negative margin environment resulted in industry production capacity going offline through plant idling and slowdowns. As a company, we continue to have 1 plant in shutdown and are running the rest of our facilities at less than full operating capacity for a combined run rate in the quarter of 82%. The industry production cuts have reduced inventory levels, bringing supply and demand more in balance.

During the cycle of poor production margins in the last several quarters, we have maintained our focus on reducing operating costs and improving operating efficiencies.

Starting at the end of the third quarter and continuing in this quarter, production margins rebounded to levels better than any time in the last 2 years, resulting in positive margins. These improved margins can be sustainable with continued discipline on the production side and increased demand spurred by incremental E15 sales, the reallocation of ethanol volumes from small refinery exemptions by the EPA and resolution of the U.S.-China trade dispute, which has suppressed ethanol export demand.

On the regulatory front, we are confident that the final rule for the 2020 Renewable Fuel Standard blending requirements will result in greater ethanol use in the domestic market. Over the last 3 years, the abuse of the small refinery exemption provision of the RFS has resulted in a de facto requirement of closer to an average of 13.6 billion gallons, which has been very damaging to the ethanol demand and economics.

With the Trump administration's stated commitment to prospectively redistribute in exempting gallons to the other obligated parties, the agricultural and biofuel groups are united in pressing this as a threshold political issue in an election year cycle. Given this and the continued compelling cost octane and carbon benefits of ethanol, we believe that the industry will be back on a growth trajectory.

Exports are on pace to reach just over 1.5 billion gallons this year, which while down slightly from last year, will still be the second largest year for export volumes. With an expected resolution of the China trade disputes and incremental growth in other export markets, we could set a new record for ethanol exports in 2020.

The support of low carbon fuel policies and market development remains a core strategy of Pacific ethanol. The California low carbon fuel standard continues to provide significant reductions in carbon emitted from transportation fuels, and ethanol is the single largest contributor to reduced carbon levels.

The Oregon Clean Fuels Program is falling in the same path as California. And at both markets, the carbon value continues to be at historic highs, with the California price currently trading at over $200 per ton. Adding premium pricing to the low-carbon ethanol we produce at our West Coast plants.

The industry is beginning to see additional support of carbon policies. In Washington, the Puget Sound Clean Air Agency is proposing a draft clean fuel standard that would apply to transportation fuels supplied or sold in the 4-county Puget Sound Area. In addition, other states and areas are evaluating new clean fuel standards, including Colorado, the regional Midwest and New York.

Near term, we continue to keep a close eye on operating costs across all our plants and remain focused on yield improvements, energy reductions and reductions in carbon intensity.

I'd now like to turn the call over to Bryon for a financial review of our third quarter results.

Thank you, Neil. For the third quarter of 2019, net sales were $365 million compared to $346 million in the second quarter, with most of this growth coming from third-party gallons sold. Cost of goods sold was $380 million. The quarterly increase in average corn prices without a material corresponding increase in ethanol prices resulted in a gross loss of $14.8 million compared to a gross profit of $4 million in the prior quarter.

SG&A expenses were $8.7 million compared to $6.7 million in the second quarter, reflecting an increase in professional services and in employee medical benefits. Loss available to common shareholders was $27.6 million or $0.58 per share compared to $8 million or $0.17 per share in the second quarter.

Adjusted EBITDA was negative $12.4 million compared to $7.2 million in the second quarter of 2019. Our capital expenditures through the first 9 months of 2019 totaled to $2.1 million, mostly attributable to ongoing repair and maintenance of our facilities.

Turning to our balance sheet. At September 30, 2019, our cash and cash equivalents were $18.9 million compared to $16.5 million at June 30, 2019.

As Neil mentioned earlier, we are working with our lenders to amend and extend our existing term loan facilities and notes. These discussions are occurring in parallel with the strategic initiatives also highlighted. CoBank is in documentation to extend this forbearance and deferral for the Pekin credit facilities in order to evaluate a longer-term solution, which may first take the form of short-term extensions to provide lenders with time to evaluate, establish and execute a longer-term solution.

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

Thank you, Bryon. In closing, we are encouraged by the positive margins thus far in the fourth quarter. Industry ethanol inventories are near 2-year lows, and supply and demand is more balanced than any time this year and regulatory and trade developments promise to increase the demand for low carbon, high-octane ethanol moving into 2020. With this backdrop, we are working diligently on closing a number of transactions that will strengthen our balance sheet and position the company and its shareholders to benefit from the improving market environment and growth opportunities ahead.

With that, Joelle, I would like to open the call for questions.

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

So just quick on the quarter. It looked like basis was elevated in the quarter? And also co-product return or co-product volumes a bit depressed versus some previous quarters. So maybe just some color on that, some of the things that occurred there during the quarter. And then maybe an outlook for both going forward.

Sure. This has been, certainly, a tough year on corn basis with the late planting, concerns over the crop itself, which actually is turning out to be just fine. But certainly, dislocations, certain areas are better than others. Harvest is slow. Some areas have barely begun, particularly in the Upper Midwest. So it has created a situation where farmers have not been as interested in selling. Pricing hasn't been as elevated as they would like to see. You have a lot of on-farm storage. And with the concerns around supply, a lot more holding onto that storage and not letting go. So that has resulted in the overall corn basis levels that have been higher than average. So that did impact the quarter, for certain.

As we move into the late harvest, we've seen elevated corn basis that started in the quarter. Certain areas worse than others, but it's had an impact. We are still seeing that in today's environment. So looking forward, we do believe that -- and if you look at some of the forward offers. Once we get this harvest in the bins, and we'll have an update from the USDA this morning on their outlook, but it is still looking like a solid crop and projecting solid carryouts next year and potentially even the greater ones in the year after with expected strong plantings and assuming a more normal production and yield. So we are seeing basis levels as you move to the end of the year and into the first quarter starting to relax and move to more historical normal levels.

On the co-product return, there has been some softness in distillers grain and corn oil, we're seeing a little strengthening today. So I would say, between the 2, the corn basis has been more of an impact than the co-product return in the quarter results.

Got it. And then just thinking about the overall market. I mean, there are kind of differing views that production has come off-line, and you saw 2 more this week, but then also this kind of the concern that as plants kind of -- they come out of their turnarounds, does that production ramp back up. So I mean where do you kind of stand in that debate? I mean it sounds like, obviously, things have improved quite a bit here in the fourth quarter, but where do you stand on the debate of how things trend with production for the industry?

Well, we certainly -- even with the increased production over the last several weeks, we're still running about 5% to 6% below year-before levels. And the same is true on inventory, running about 5% or 6% below. The margin environment has improved. But it's not gotten to the point where -- and not enough forward clarity, you still have an inverted market where the forward curve is not showing the kind of profitability we're seeing today. We think as we roll forward, that we'll continue to see it. But if you're a plant that's shut down today, you're going to want to see more clarity on that forward curve before you're going to bring the people back to work and commit the working capital to fire that plant back up.

I do think that we have an industry that is, while we can do more work in this area, is more disciplined than it's been in the past. And that we are cautiously optimistic that we will see an industry that will continue to keep supply and demand in better balance.

But you're right, there's always that risk that with the positive margins, which we have not seen in quite some time, that we overdo it as an industry and we ramp up production, and we get back out of balance. So I -- we also, in the prepared remarks, wanted to note where we see the demand, because it's really important that ultimately, we do have an industry that is capable of producing more than the current market is demanding. And so incremental demand is critical as we move into next year. And we truly believe that with the EPA, while still a bit of an arm wrestle on the final rule, we are confident that, that rule is going to result in more domestic demand starting next year, and as we move forward. And then we will see continued growth in exports. And with the China resolution, that could be a real shot in the arm to where we quickly could move to where, even running closer to full capacity, we will be struggling to meet the demand for ethanol.

Okay. Last one for me. Just on the strategic review, and I can appreciate you can't give specifics. This is underway. But I mean, it sounds like, given the environment, things may be getting a little bit easier on that front. Are there -- I mean, can you speak to, are there any potential sales or other things that you've got going that would be triggered, say, by a favorable 2020 RVO or favorable movement in regard to China and trade?

Yes. As we said, I mean, it's -- everybody gets a bit myopic on these transactions. And so when things are very bad, it's like, well, how can we do this? But so having a favorable current market and a favorable outlook as we move into next year, it is very helpful and conducive in being able to complete transactions.

(Operator Instructions) Our next question comes from Amit Dayal with H.C. Wainwright.

Just on sort of the E15 availability now in the market in a more sort of regular basis. Has that impacted -- or how has that impacted, from an industry perspective, the production and demand side of things?

It's been incremental, but very modest to date, and that's why the proper implementation of the RFS is critical. We really need that driver to say you have to blend more than 10%, at least in some markets. We have nearly 2,000 stations. The economics of E15 continue to be excellent. The performance, you have virtually every car on the road today is approved for using E15, either through warranty or by the EPA.

So all of the pieces are there. But we do need a little push to get it into the marketplace, and that's where a minimum of 15 billion gallons of conventional ethanol under the RFS is critical. At 143 billion gallon market, that's 14.3 billion of E10 -- ethanol to produce E10 and to find a home for another 700-plus million gallons because we do believe that 15 billion is the floor, it's not the ceiling. That will necessitate higher blends, both in the form of incremental E15 and E85. So we do believe that compelling economics of E15, with the proper regulatory signal, we will see a good increase in the blending of E15 next year and in years to come.

I'd also note that we're working very collaboratively and expeditiously with the state of California to approve the use of E15 in the state of California, which will be a very important tool for further compliance under the low carbon fuel standard. So we're very optimistic on higher blends, not only E15 in the near to midterm, but higher blends, E25, E30 as we move towards higher octane fuels and higher compression combustion engines.

Understood. And then on the regulatory front, you -- there were some expectations that some final ruling would have already come into play. But this kind of keeps getting put out. Is there a time line you have or the industry has on when something could come about? Or does this become a 2020 type of thing?

No, it will quite definitely be this year. The EPA has committed to that, the President has committed to that. And it -- because of the proposed supplemental rule, which is in play now, which is how we get to the at least 15 billion gallons, meaning 15 billion gallons. The timetable has slipped from the end of November to sometime in December. But the commitment, and we believe it will be fulfilled, is that this rule will be final before the end of the year and will be in effect in 2020.

Got it. And lastly, just on the strategic initiatives, and I know Eric asked this as well. But with sort of some of these improvements now taking place in the market, are all the options you have been considering still on the table? Or has anything changed for you right now?

All options are on the table. And as we continue to work hard on it, additional opportunities present themselves.

I'm not showing any further questions at this time. I would now like to turn the call back over to Neil Koehler for any further remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.