Alto Ingredients Inc (ALTO) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Ethanol, Inc. Second Quarter 2020 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 over to your speaker today, Ms. Moriah Shilton of LHA Investor Relations. Thank you. Please go ahead, ma'am.

Thank you, Daniel, and thank you all for joining us today for the Pacific Ethanol Second Quarter 2020 Results Conference Call. On the call today are Mike Kandris, Co-CEO; and Bryon McGregor, CFO. Mike will begin with a review of business highlights, Bryon will provide a summary of the financial and operating results, and then Mike 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. It is available on the company's website at pacificethanol.com. The telephone replay of today's call will be available through August 19, 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 information in this call speaks only as of today, August 12. 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 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 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 impairment, loss on extinguishment of debt, 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 Mike Kandris, co-CEO. Mike?

Thank you, Moriah, and thank you, everyone, for joining us today. Before I get started, let me update you on our succession plan. Since Neil announced his retirement as CEO in May, the 2 of us have worked closely together as co-CEOs to facilitate a smooth transition. We would like to acknowledge Neil for his leadership since co-founding the company over 17 years ago, and wish him well on his upcoming retirement in September.

Now turning to our results for the second quarter. I am pleased to share with you our strong financial results, including net income of $14.6 million and adjusted EBITDA of $28.8 million. These results reflect the benefit of our diversification strategy and expanded production of high-quality alcohol. In the second quarter, demand for our products used in sanitizers increased significantly due to the ongoing COVID-19 crisis. To meet this demand, we focused on debottlenecking production and other process improvements to generate additional production capacity of 25 million gallons per year of high-quality alcohol at our Pekin campus. Furthermore, as recently announced, we are modifying and refurbishing existing equipment to increase production capacity of USP-grade alcohol by an additional 30 million gallons by the end of 2020. Entering 2021, our Pekin campus will have the capacity to produce a total of 140 million gallons of high-quality alcohol per year, the majority of which meets or exceeds USP specifications.

While there are some incremental production cost to manufacture these higher quality products, they consistently achieve better EBITDA margins over fuel ethanol. Further, high-quality alcohol is traditionally sold at fixed prices and volumes with longer commitments than ethanol. This allows us to lock in our input costs over the contract term and better secure margins and favorable spreads. Most of our high-quality alcohol production is contracted through 2020, and we are building a strong sales book for 2021 as we add new contracts and renew contracts signed last fall.

It is important to note that the high-quality alcohol market requires manufacturers to not only have specialized equipment systems, but also have strong quality controls, experience and the operational capabilities to create products that meet customers' precise and unique specifications. Because of the pandemic, demand for hand sanitizer outstripped available supply. In response, the federal government temporarily loosened quality control requirements. This had the unintended side effect of allowing questionable products to enter the marketplace. We expect this will eventually lead to the retightening of quality control regulations. Given our capabilities in quality control, we will continue to meet or exceed customer and regulatory standards.

We have been at this for a long time. Indeed, our Pekin campus has been producing industrial, chemical and beverage-grade alcohol for over 100 years. We have new as well as many long-standing relationships with key domestic and international customers, who benefit from our quality product, service and logistic advantages, which includes our ability to ship products via truck, rail or barge.

Turning to our high-protein meal and dried yeast business. We continue to experience strong demand for these products, which our Pekin facilities have manufactured for over 2 decades. Examples of this include a unique, high-quality yeast used in pet and human food and a high-protein corn meal used in poultry, pet food and aquaculture. Despite the slowdown of fuel ethanol production and associated co-products during the pandemic, we have been able to consistently maintain production of these valuable products at our Pekin campus resulting in strong co-product returns.

Finally, let me provide some color on our fuel-grade ethanol operations. Industry-wide ethanol production had declined by more than 50% at the beginning of the second quarter. Although we have seen some resurgence in both demand and production, the current market continues to be volatile and uncertain with overall demand off by over 10% from a year ago. Further, ethanol production crush margins remain variable without long-term forward predictability. Given these conditions, we do not expect to reopen our idled fuel ethanol plants until we can better secure positive forward operating margins for the facilities. Reopening would be achieved through either repurposing or restarting with high-value complementary or differentiated products. Further, we continue to consider all options for maximizing or monetizing the value of these plants. And we are in discussions with various parties in this regard.

I'll now turn the call over to Bryon to review the financial results in further detail.

Thank you, Mike. For the second quarter of 2020, net sales were $212 million compared to $311 million in the first quarter, the decline resulting from the reduction in fuel ethanol production gallons sold. More specifically, and as previously reported last quarter, we responded quickly to the decline in ethanol demand by idling the majority of our fuel ethanol production. This remains the case today, and our production gallons were down 52% year-over-year for the second quarter. Most of our commitments for ethanol were met through third-party marketing business, resulting in no material change in third-party gallons sold year-over-year for the same period.

Cost of goods sold was $181 million, which resulted in a gross profit of $31.2 million compared to a gross loss of $12.9 million in the prior quarter. The profit was attributable to the increased sales of high-quality alcohol that carries a significantly higher price and corresponding margins. Cost of goods sold also included onetime idling costs and labor costs disproportionate to expenses associated with idled production, but supported by and consistent with the purpose of our PPP loan. We expect these costs to be lower going forward for our idle operations.

SG&A expenses were $8.6 million, compared to $10.2 million in the first quarter, reflecting our ongoing cost-cutting efforts. While up year-over-year, this reflects professional fees that are part of our restructuring initiatives. We expect general SG&A expenses to be lower in the second half of 2020 as we continue efforts to resolve our debt issues. I'll speak more on these efforts in a minute.

Income available to common shareholders was $14.6 million or $0.27 per share compared to a loss of $25.4 million or $0.47 per share in the first quarter. Adjusted EBITDA was positive $28.8 million compared to negative $12.3 million in the first quarter of 2020. As the majority of our high-quality alcohol has been contracted through year-end, we are expecting to generate solid results for the second half of 2020, with adjusted EBITDA expected to range between $50 million to $70 million or between $66 million and $86 million for the full year. Moreover, as we complete contracts for next year's alcohol production over the coming months, we expect to continue to produce positive adjusted EBITDA into 2021 as well.

Turning to our balance sheet. At June 30, 2020, our cash and cash equivalents were $29.8 million compared to $26.8 million at March 31, 2020. In the second quarter, we received net proceeds of $19.9 million in cash and $16.5 million in promissory notes from the sale of our 74% ownership interest in Pacific Aurora. Approximately $14.5 million of the cash proceeds were used to make principal payments on our term debt. For the quarter, we reduced our total debt outstanding by $34.4 million, including $18.7 million paid on our lines of credit and $25.5 million paid on our term debt. This aggressive schedule of reducing our debt obligations is consistent with our efforts to improve our balance sheet, and we continue to work with our lenders to satisfy our continuing obligation to agree on a plan to eliminate or refinance our term debt. To this end, our goal is to reduce our total term debt outstanding at year-end by at least $70 million. With that, I'd like to turn the time back to Mike.

Thank you, Bryon. Before we open the call for Q&A, I'd like to express my appreciation to all the employees and staff at the company and commend them for their performance, ingenuity and dedication to excellence. We have a fantastic opportunity to grow the business profitably and thrive. We have more work ahead of us, and we are all energized and excited about our future. I'd now like to open the call for questions.

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

Well, obviously, great performance here in the second quarter. I'm just wondering, as we think about Q2, if you're willing to kind of break down maybe spot versus contract volumes? And then maybe as you look forward, I mean, what is kind of the right number in terms of mix when you think about what you want to have under an annual or a multiyear contract and what you would like to have available to take advantage of potential nice pricing in the spot market?

So Eric, I don't know that we can provide you the exact details, but what we did provide in the prepared remarks, as we indicated, that we've increased our industrial-grade production in the second quarter. So in essence, converting what would otherwise been fuel ethanol in our Pekin campus into industrial-grade. And that was on the order of 25 million gallons per year. That would be volume that wasn't materially contracted for, so that would have been probably more of your spot production. And the rest would have been representing, more or less, your annualized or your long-term high-quality and beverage-grade product that we produce year in, year out.

Okay. And then, I mean, I guess when we think about the guide for the second half in the $50 million to $70 million in EBITDA. I mean, obviously, you're still going to have that spot contribution, but you're really -- I mean, again, you're factoring in that the remainder of that is under contracts that likely reflects pricing from 2019 or prior to that. And I would assume, given where the market is and the reasons for it, that you're seeing quite a bit better pricing for what that next contract or contracts might be?

Yes. I think that's probably fair. The -- it's normal for during -- the contracting period usually occurs after harvest. And so you would expect to have prices or you would expect to see pricing in negotiations around what would be the current markets and reflections of results. Harvest -- in essence customers and producers alike take all that information into account as they look out towards the next 12-year -- 12-month period.

And do you think that given what's going on right now and the increased demand, I think -- correct me if I'm wrong, but I think these have been typically annual contracts? Is this something where you foresee potentially them being longer than an annual contract?

I mean, I would say that would probably be outside the norm. There's nothing normal about the world today, and so it's difficult to say. I mean, if I were just putting on my hat as a buyer, I would also be rethinking how I purchase product. But at the same time, I also want high-quality, good, reliable product as well. And I want to make sure that I lock that in, especially if you've had long-standing relationships, you've gone through your certifications and everything else that you need to go through. So I think it will be -- it's tough to say exactly, but I know that we're in discussions now, and certainly would be -- I think it would probably be more the norm than the exception with regards to either longer-term or shorter-term contracts.

Okay. Got it. And then I -- I mean, so from your commentary, I mean, should we assume basically that all of your western plants are either idled or varying -- or running at very low numbers? And as Mike had mentioned in his remarks, you're looking at all options there and those are potentially part of the strategic plan going forward. But also you could come back with those providing -- or producing a higher-quality product and perhaps that is alcohols. I mean, is there a way to think about the type of investment that, that would require? I mean I know the near term, it's about the debt. But as you look a little bit longer-term and what this potentially means for your business, maybe thoughts on what it might take to upgrade some of the western plants.

Yes. I'll take that one, Eric. As we said, we are considering every option that's out there. We -- the one thing we know for sure is, after a decade of struggling with fuel ethanol in the west, to open them up as pure fuel ethanol facilities probably is not in our future. We need to come up with a differentiated strategy for those locations to be able to open them up. We want to have predictability of positive margins going forward if we do open them up. And we have been very actively looking, since we idled those facilities, of what those options may be. So right now, I don't have anything definitive for you. We have a lot of interest, different ideas. And as we know more, we'll certainly share that.

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

Congratulations on a strong quarter. With respect to the alcohol sales, is there any revenue concentration on that side right now?

I think it's pretty well distributed, and it certainly doesn't look like what you would normally see in the -- in more of the fuel ethanol space. And I would say that also, as I mentioned on the prior -- in some of the prior questions and answers, this is anything but normal. So you would take not only your existing relationships, but then you would add to it not only incremental addition or volume that you would be providing your existing customers, but then many new customers that have come about as a result. And so I think the general answer is no.

Got it. And then from a certification point of view, Bryon or Mike, players who don't have the required certifications, et cetera, should we assume they probably are locked out of the market now that you're signing up these customers? In some sense, some land-grabbing taking place right now, at least for the next few quarters or even until mid-2021?

Yes. The certifications, the back office, as we indicated in the remarks, this is a heck of a lot more than just producing product. There are all kinds of audits, certifications, laboratory resources that you need behind the scenes to be able to deal with the higher-quality customers. They demand it. And we -- again, we've been doing this for an awful long time, and we have those resources. And even with that, we're continuing to develop further resources and certifications to even be able to play at a higher level. So I can't tell you how critical it is. And I think it is a differentiator going forward in terms of the people that really do have the skill set, the history, the culture and the back office to be able to handle those kind of things and deal with customers going forward. We're being very selective. We've had a lot of new customer interest, obviously, over the last quarter. And our commercial group in Pekin has been very selective in terms of looking forward to what kind of customers we want to engage with on a go-forward basis. And again, I think it will bear fruit. It also is making us stronger, making us take a harder look at ourselves. But again, we've been doing this for a long time, I think we have a leg-up on most.

Understood. And again, just a follow-up on the alcohol side. Is this all going to your domestic customers? Or is there some international contribution here as well?

Yes, it's both. I would say that the -- there's a significant amount that's probably domestic. But we also have a number of international customers, and we would expect also in the future that, that market would continue to grow more really for the likes of industrial-grade alcohols.

And I would add to that, again, like we mentioned, we are perfectly positioned to deal in the export market when that time comes with our barge capability out of the Pekin campus.

Yes, that's -- yes. The infrastructure edge definitely is a positive over here. Just one last one on the high-value feed side. Did something change relative to prior periods with respect to this business line? Given that you saw some stronger demand, it looks like -- just wondering if there's more sales and marketing effort. Or was it just a demand-side thing?

Yes. I mean, I wouldn't say so. I mean, certainly, it's getting a lot more headlines lately. I know that a lot of producers in the fuel ethanol space have been focusing on -- for just the economy awards, trying to convert dry mills to wet mills. We've been producing, as Mike's emphasized, doing it for a long time, over 2 decades of producing yeast and with the building of that original facility. It's certainly an area of focus for us in the future. We've got a lot of latent product that we can further extract and we'll be focusing on that. So to the earlier question of, are we committed? Clearly, we're committed to reducing our debt obligations, but we're also committed to reinvesting in our assets, and we'll certainly take this opportunity to do that and improve our production capabilities there to continue to augment. But I guess one last thing I'd add is, you'll recall that we talked in the past about co-product. Normally, this -- the proteins and the -- it's usually referred to in this space as co-products. It's not intended to be a less interesting part of the business, but it's awfully just to offset against your input cost of corn. But you'll recall that on a wet mill, you're looking at co-product returns well in excess of 50% as compared to what would be a normal dry mill, which should be around 30%. So you see those in our numbers, and you'll continue to see that. Certainly, you'll see a greater number of that. Or it will be -- it will stand out more clearly because your denominator less number of plants and production that's going into that denominator to show you that return.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mike Kandris, co-CEO, for any closing remarks.

Thank you, and thank you for joining us today and your continued support of Pacific Ethanol. We really hope everybody is staying safe, and we look forward to speaking with you soon. Thank you.

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