Aemetis Inc (AMTX) 2015 Q3 法說會逐字稿

Welcome to the Aemetis third-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Todd Waltz, the Executive Vice President and Chief Financial Officer of Aemetis. Mr. Waltz, you may begin.

Thank you Manny. We welcome our shareholders and financial market professionals to today's Aemetis third-quarter 2015 earnings review conference call. We suggest visiting the Aemetis website at Aemetis.com to review today's earnings press release, the updated Aemetis corporate presentation, Aemetis' filings with the SEC, and previous Aemetis business conference calls.

Before we begin our presentation, I would like to read the following disclaimer statement. During today's call, we will be making forward-looking statements, including without limitation statements with respect to our future stock performance, plans, expectation for performance, opportunities, and expectations with respect to financial activities. I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risk and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the Company's Securities and Exchange Commission filings which are posted on our website or available from the Company without charge.

Our discussion on this call will include review of non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended September 30, 2015, which is available on our website in the Media section.

Adjusted EBITDA is defined as net income or loss, plus to the extent deducted in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, depreciation expense, and share-based compensation.

Now, I'd like to review the financial results for our most recent quarter. Revenues were $38.5 million for the third quarter of 2015 compared to $48.3 million for the third quarter of 2014. Decreases in ethanol and wet distillers grain average selling price and volume resulted in revenue declines during the third quarter as compared to the same period of the prior year.

Gross profit for the third quarter of 2015 was $1 million compared to $7.7 million in the third of quarter 2014. During this period, ethanol and wet distillers grain pricing fell more rapidly than feedstock purchase costs.

Selling, general and administrative expenses were $2.8 million in the third quarter of 2015 compared to $3 million in the third quarter of 2014. The decrease in selling, general and administrative expense was driven by improved efficiencies and lower spending compared to the same period of the prior year.

Operating loss was $1.9 million for the third quarter 2015 compared to operating income of $4.6 million for the same period of 2014. Net loss was $5.8 million for the third quarter 2015 compared to net income of $0.5 million for the third quarter of 2014.

Adjusted EBITDA for the third quarter 2015 was a loss of $0.5 million compared to adjusted EBITDA of $6.1 million for the same period of 2014. Cash at the end of the third quarter of $2.5 million compared favorably to cash of $0.3 million at the close of 2014.

Interest costs and financing fees during the third quarter of 2015 were $3.9 million, a reduction of interest cost and fees from $4.3 million during the third quarter of 2014. Importantly, we received an additional $2 million of EB-5 subordinated debt funding during the third quarter totaling $23.5 million of funding released to Aemetis over the life of the program of which $22 million of funding was released to Aemetis during the first nine months of 2015. As of September 30, 2015, the EB-5 program escrow account holds $11.5 million of additional investor deposits. With one investor approved for funding and one investor identified for the last available unit, the offering is nearly complete. This 3% interest rate funding will be used to redeem higher rate senior debt at the Keyes facility.

As of the end of September 2015, the outstanding balance due to Third Eye Capital is about $59.6 million, which is a reduction in the Third Eye loan balance of about $14 million since early 2014. The $11.5 million of remaining EB-5 escrow and any further EB-5 funds received will be applied to further reducing the Third Eye Capital outstanding balance.

That completes our financial results for the third quarter 2015. Now I'd like to introduce the founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?

Thank you Todd. For those of you who may be new to our Company, let me take a moment to provide some brief background information. Aemetis was founded in 2006, and we own and operate 110 million gallons per year of renewable fuel production capacity in the US and in India. Included in our production portfolio is a 60 million gallon per-year capacity ethanol plant located in Keyes, California, which is near Modesto. We also own and operate a 50 million gallon per year capacity distilled biodiesel and refined glycerin biorefinery on the east coast of India near the port city of Kakinada and have plans to expand the capacity to 100 million gallons per year.

Let's discuss our businesses. The Aemetis biodiesel business has entered into an exciting, rapid growth phase due to a variety of favorable factors in our primary target market, India. With the elimination in October 2014 of about $10 billion of annual subsidies for diesel in India, biodiesel has become a lower-priced, less polluting fuel in the 25 billion gallon per year India fuel market.

During August 2015, the government of India approved sales of biodiesel directly from producers to bulk customers, bypassing the three large government owned oil marketing companies.

Finally, on October 21, 2015, the government of India eliminated the excise duty on biodiesel feedstocks and other imports. This is a huge benefit for Aemetis as it opens up many sources of feedstock domestically and internationally, reduces feedstock costs and provides our India operations with significant feedstock security. We thank Prime Minister Modi and his Ministers of revenue, finance and Renewable Energy for systemically removing the obstacles to help grow the biofuels industry in India.

India has 13 of the 20 most polluted cities in the world. Biodiesel provides an 80% reduction in harmful particulates, an 80% reduction in greenhouse gas emissions and reduces sulfur emissions by almost 100% as compared to petroleum diesel. Biodiesel is also a low carbon biofuel primarily produced from waste renewable oils. Biodiesel and renewable diesel produced in India reduce the approximately 20 billion gallons of petroleum diesel imported each year into India at a cost of more than $40 billion per year.

During the third quarter of 2015, our India biodiesel revenues grew 56% sequentially quarter-over-quarter through the development of a sustainable domestic customer base made possible by these key government policy changes. The rapid revenue ramp during the second and third quarter is a result of successful customer testing, distribution to large bulk customers, the launch of a new tank manufacturing unit, and bulk tank installation at customer sites.

We've also built long-distance tanker trucks with extra onboard fuel that can operate solely on our distilled biodiesel for delivery to bulk customers located up to 1,000 miles away from our plant without refueling, without using any petroleum diesel for the entire trip.

With the full support our senior lender, we signed an engagement letter in October 2015 with an investment bank in India to explore the potential offering of shares of our India subsidiary in an IPO.

Our US ethanol business is showing steady signs of improvement driven by increased demand, but low prices caused by excess supply due to the two-year delay by the EPA in establishing the renewable fuel standard mandate.

In addition, dairy production in California softened while the availability of lower cost feed products increased, creating a surplus of dairy fees in a lower demand environment.

The EPA has announced that by November 30, 2015, it will announce the finalized biofuels mandates for the years 2014, 2015 and 2016. The EPA has proposed about a 600 million gallon per year increase in the ethanol mandate to 14 billion gallons per year starting January 2016. It is not expected that the EPA will fully enforce the corn ethanol renewable fuel standard of 15 billion gallons mandated annually that was passed by Congress and signed by the President in 2007. In the event that the EPA announces that the reduced mandate announced in June 2015 is being maintained, we believe that the corn ethanol industry will export excess capacity to other countries to bring supply and demand in balance during 2016.

Also, we are monitoring the pricing of Milo, an alternative feedstock to produce ethanol. Milo pricing has declined due to reduced demand from China. For reference, Milo was qualified and used in production of ethanol at the Aemetis Keyes plant in 2013. When the economics of Milo are attractive, Aemetis may switch to using Milo as a feedstock in production to increase profitability.

Aemetis was founded to commercialize new processes in order to utilize nonfood, low carbon feedstocks by the upgrading of first-generation ethanol and biodiesel plants. The next major phase of ethanol production is now launching the use of local municipal solid waste, wood and biomass crops to produce advanced ethanol. By reducing input costs and increasing the value of the ethanol produced, the estimated $3.00 per gallon of increased cash flow could be achieved by upgrading the Keyes ethanol plant with 30 million gallons of annual cellulosic ethanol production. Our ethanol business is operationally solid with a high yielding, high uptime plant, zero water discharge and a steam turbine that produces about 4 megawatts of onsite electrical power and is well situated for a return to profitability as we move forward.

Our third and emerging business, the renewable jet and diesel fuel. We believe that Aemetis was the first company to sign a global technology license with Chevron Lumos and Applied Research Associates, known as ARA, for the production of 100% replacement renewable jet fuel and renewable diesel. To our knowledge, every other approved renewable jet fuel type technology is limited to a 50% blend with petroleum jet fuel due to a lack of aromatics that provide engine lubrication.

The US jet fuel market is about 23 billion gallons per year and the US diesel market is about 50 billion gallons per year. Through the upgrade of our own production facilities and arrangements for the upgrade of other existing biofuels facilities, Aemetis is uniquely positioned to be a leader in this transition to next-generation cleaner burning renewable fuels and chemicals utilizing lower costs and lower carbon feedstocks to produce higher value products. We expect to have an update in the coming quarters with regard to the production of renewable jet and diesel fuel by Aemetis.

We believe that the development of these three businesses position Aemetis to be a worldwide leader in the production of a diversified range of products that supply the expanding biofuels market.

Finally, through our continued progress in reducing interest expenses, including the ongoing refinancing of our bridge debt with the low 3% interest rate EB-5 program funding and other commercial financing mechanisms, we remain firmly committed to strengthening our financial position to expand our opportunities for future growth and profitability. We are excited about the opportunities that lie before us and look forward to sharing our progress with you in the coming months and years.

Now let's take a few questions from our call participants. Operator?

(Operator Instructions). Craig Irwin, ROTH Capital Partners.

Good afternoon Eric, and congratulations on all the progress on your different technology initiatives. I wanted really to focus on the Indian biodiesel business, $6 and change million in revenue this quarter clearly coming from an acceleration. I know it's coming off a small base but you've made several press releases in the last few months helping people understand the changes in the Indian market. Can you maybe expand on how things are progressing this quarter, particularly with the change in tax structure with the last couple weeks, whether or not you would expect growth like this to continue?

We are absolutely seeing our customer base expand. The very favorable October 21 tax change at the federal level has enabled us to not only expand, but really internationalize our feedstock access. So our ramp up in the fourth quarter is going to be a debottlenecking of the plant we did in order to be able to go to our entire 50 million gallons per year. That included adding some electrical grid supply and some other upgrades we did in the plant so we can run essentially 24/7. And that was done in October and early November, and then ramping up our deliveries to customers here in November and in December. So the quarter will see an October debottlenecking and maintenance cycle with revenues that were less than what we would see at 100% production obviously, but a debottlenecking success that really allows us to exit the quarter at very rapid run rates.

So, we are looking forward to taking full advantage of the ability to expand in not only the southern India market where we've really predominated, but really the state of Uttar Pradesh. It's an agricultural state. It's very large. It's sort of like the California of India. And it's a very high margin state for us. So we are ideally located in the best place in India to put a biodiesel plant. And the freight costs are low, the revenue numbers in the state we are in are very, very high, and we are very pleased now. With the debottlenecking of feedstock and the policies now being in place, it's all about sales rep up.

Thank you for that. So those of us that follow the story closely will obviously have to pay close attention to price going forward as volumes go up there. I noticed, what, while glycerin had an 8% price increase sequentially, your biodiesel actually had a 15% decline. Can you talk us through what's driving this price volatility, and maybe you could share with us some of the public yardsticks that we can look at to understand the fundamentals of pricing in the Indian market?

One of the good news items of our business in India is that our feedstocks and our pricing of our products tend to go not in lockstep, but I would say they are closely in tandem. Our plant in India was built as what I believe to be the world's largest nonfood Styrian biodiesel plant. And that is a waste product that is produced in India as well as throughout Asia as a waste product of the edible oil business. So as the price of diesel goes up and down, the price of these oil products tend to also go up and down. So we had a price decline partially because the international price of diesel during the summer was about $60 a crude oil barrel, and we are of course trading at roughly $45 a crude oil barrel today. But there was similarly a dramatic decline, it was actually called a crash, in the feedstock side of the business in India.

So we are very well positioned using a waste oil that has a high-value contribution when you convert it into biodiesel that, as the price of crude oil moves from $45 to $50 to $60 or $70, depending on how optimistic you are over the next year, that will result in an increase in revenues for us. But using the waste oil input, we have seen the feedstocks tend to kind of not move up as much as crude oil. Certainly, last year when we were at $100 international oil, the feedstocks we used were significantly lagging in price. So our margins definitely expand as the price of crude oil goes up, and tend to go down rapidly when the price of crude oil goes down.

Okay, great. Then my next question is on the ethanol side. So I guess we're going to have to wait for the 10-Q for a couple of the numbers in there, but it looks like your coproduct return dropped by something in the range of 5% sequentially. I was wondering if maybe there was an inventory issue there or if there was something going on specifically in your local markets that might impact short-term economics, and if you would expect short sort of closer to the 30% range like what you've had over the last several quarters to repeat as we look at the fourth quarter and 2016.

I assume you're talking about distillers grain?

Yes.

Okay. Distillers grain in central California is fed as a wet feed. We don't dry it like you do in the Midwest. We ship it to a couple hundred local dairies in a wet format. And during the third quarter, there was definitely a price decline in distillers grain. It's been basically flat since then, and with China being a player in the distillers grain market, there has been some concern about the changes in imported distiller grain or not. Again, it's a global price, but sold physically to a local customer. So we are also (inaudible) price of corn and the corn price as we've seen it has had a favorable trend. So the absolute value decrease is probably more correlated actually with corn prices, which is impacted of course by the delivery of the harvest in the fall. Corn prices tend to fall during the fall.

So we are looking to expand capacity at the plant, and distillers grain production increases as you expand capacity, so one of our primary areas of focus is expanded marketing in our wet distillers grain to local customers in California and doing value-added things that could make our distillers grain more than a commodity distillers grain coming out of the Midwest. It would be wet distillers grain with higher value to our customers than the Midwestern product.

Great, great. And then as we look at the performance of the ethanol plant in 2016, if we assume something like mid-cycle margins, are there any outside factors as far as capital upgrades or specific improvements that you've made in the last year that you would call out as maybe impacting where those mid-cycle margins might be?

It's a very good question. We are very well positioned through a combination of periodic maintenance and one-time capital investments made over the couple years we've been operating the plan at -- since the upgrade we did to Milo in early 2013. And we are positioned so we really do not have any major or even minor capital projects. We just have period maintenance processes. And this is a very high uptime plant. I think we've had one day of maintenance in the last 12 months. And so it's designed to run very high uptime. So we are going to be a direct beneficiary of the improved cash flow that occurs in a mid-cycle kind of trend. Again, everyone has their own estimation of what the impact of renewable fuel standard is going to be, but I would like to remind everyone for two years we've essentially had no federal law for biofuels in the United States at all. And to enforce any kind of law provides a demand-side improvement that we currently expect will improve margins.

Now, the EPA is expecting a 600 million gallon per year increase, and that's less than 60 days from now. That's January 2016. That will have some impact on what we're doing. But we had noted in the comments today that our plant is uniquely positioned to be able to operate at volume up to 100% replacement of corn with grain sorghum commonly known as Milo. And this plant has run over 60 million pounds of Milo, and so it is fully approved and upgraded so that as Milo moves back into its historical discount to corn, it usually averages about a 10% discount corn, we are very well positioned to be able to utilize Milo in a small or a very large way to directly lower our costs.

Okay. And then just a couple of financial questions. So the biodiesel sales in India, biodiesel and glycerin, was that accretive to EBITDA for the Company in the quarter?

You know, that's a good question. I would say yes. I just don't know the number off the top of my head. So we could get back to you guys on that one, but it's hidden in the financial report somewhere.

I was going to wait for the 10-Q to get the actual number. But crush margins in the ethanol market sound like they've been improving, particularly for West Coast producers. Can you maybe comment about the market conditions that you are seeing right now, and whether or not you have commitments that give you visibility on improved performance there in the fourth quarter?

Very good question. We have definitely seen some price firmness. We've seen an upward trend on price. We have seen the entire industry increase production. And I would say actually to the surprise of many observers, the industry is relatively healthy and earning positive contribution margin per gallon and increasing production results. So this industry, which had been expected to be rather weak in this current $45 crude oil environment with no renewable fuel standard, has actually proven itself to be very resilient and positive cash flow.

In California, we of course benefit from the Low Carbon Fuel Standard which is about 1.3 billion gallons a year. But something has happened in the last four months that is worthy of note, and that is California is the only carbon trading market in the entire United States, and that carbon trading market had been delayed for about 18 months due to some litigation which was resolved. And so we now have a five-year California Resources Board Low Carbon Fuel Standard that was adopted a few months ago. And the price of carbon in California, of which we are direct beneficiary, has risen from roughly the and $20 range to I think it hit almost $90 last week. And that is a part of the premium that we receive selling into California. So, we do have some visibility into the carbon trading market. And in general, there's an expectation that the carbon prices are going to be relatively firm. The California Resources Board estimates an average carbon price of over $100, which is a premium over today's price. And being the low carbon fuel supplier that essentially receives those dollars from the high carbon fuel suppliers which are the oil refineries in California, that Cap and Trade market essentially is a mechanism for us to receive premiums for our fuels in California.

Now, whether that is particular germane to our business is as we move away from corn as a feedstock, we are reducing our carbon intensity. Milo plus biogas run through our plant, generates actually about a 52% reduction in carbon intensity compared to corn ethanol, which is approximately a 20% reduction. And so with a strong carbon market, we're talking about very significant amounts per gallon if you can get a $0.50 per gallon decrease.

Biogas is in short supply today, so we are currently not expecting to generate the B5 wins that could be obtained. But lower carbon Milo, even lower carbon cellulose, are the trend lines that we are accelerating in California. And over the course of the next year or so, we are expecting to take full advantage of producing much lower carbon fuels and having the carbon market generate significant additional value for us. And with the Renewable Fuel Standard being enforced, the renewable identification numbers have also their own economic advantage. So we are very pleased to be in the middle of a progressive carbon reduction environment and being one of only two public companies in California. And we are expecting to make some of the largest investments in reducing carbon in our fuels.

Great. And then Eric, I haven't done the math on this in a long time, but $100 a ton for carbon. Can you remind me? That's roughly equivalent to about $0.05 a gallon on corn-based ethanol production? Is that accurate?

It's approximately -- yes, it's a little more than $0.05, but I think we are roughly $0.06 or $0.07 right now, so at $100 would be at $0.07 roughly. That's with a 20% reduction. So if you go to an 80% reduction, it's four times that. So you're looking up at the $0.25 to $0.30 incremental value when you start talking about low-carb and feedstocks. And of course at the federal levels, the renewable identification number value is estimated to be another $1.30 per gallon. So, you put the two together, $1.30 plus another $0.30, it's about $1.60 just from the value of the lower carbon fuel.

And then on top of that are some other premiums. So there's a $1.00 per gallon tax credit for example. So it's a very, very big opportunity for all corn producers in the United States, but specifically for those who ship into the California low carbon environment, to reduce the carbon intensity of our feedstocks and in so doing add about $3.00 per gallon of additional margin. That of course includes a little bit of cost savings on the input side as we see with Milo.

Okay. And then last question if I may, again this is sort of going to the weeds a little bit, but that $1.30 to $1.60 in potential cellulosic RIN, in other RIN markets, the producers don't necessarily hold on to the whole thing. Do you have an approximation of how much of that value you would hope to hold onto as you sell the fuel to third-party customers?

In the biodiesel business, there is some uncertainty around the value of the dollar per gallon tax credit because obviously when they are actually conducting business, Congress hasn't yet approved the tax credit so there is a sharing with the customer. We have not seen a sharing with the customer in the RIN market, the ethanol RIN market. We actual transfer the RIN along with the fuel and then add the California Low Carbon Fuel Standard value as a part of the calculation. So we see it as RIN is included in the fuel, and the overall price of the fuel plus RIN equals the sales price. Unlike the uncertainty that Congress unfortunately has bestowed upon the biodiesel business where people just don't know if they're going to be a tax credit or not, we know there will be RIN and we transfer to our customers part of the same.

So just to be crystal-clear, you would expect to capture the majority or most of the value of that cellulosic RIN in your sales price of the fuel to your customers. Is that accurate?

That is correct. We expect to capture 100% of the value of the RIN. And as you go to low carbon fuels, what we all see is a lack of investor activity, I think that's a good term, in these advanced fuels for a lot of very good reasons. But as they see these $3.00 increased margins, that's not increased price, that's increased positive cash flow per gallon, I think you will see increasing amounts of investor interest in this low carbon fuel environment created by California in the Low Carbon Fuel Standard and created now for the first time in two years by the federal government by extension of the Renewable Fuel Standard which of course by law goes to 2020.

Great. Thanks again for taking my questions.

Keith Goodman, Maxim Group.

Hi guys. I believe you actually doubled or somewhere in that neighborhood the amount of biodiesel that you sold from Q2 to Q3 if I'm not mistaken, which is obviously good, offset by biodiesel pricing. But you've previously said that you will be at max capacity in 2016. 2 million gallons, which is I believe what you did for the quarter, is a long way from the 12 million or 13 million gallons for the quarter that would be max capacity. When do you think you could get there in 2016? And what am I missing? I mean, it's a cheaper, better alternative to diesel. Why shouldn't it be just a dramatic ramp right now? And can you describe the IPO process and how you think that's going to take place?

We'll talk about expanded revenues and then we'll talk about IPOs, the two items. You are correct. The (technical difficulty) have been removed. And the opportunity we have now is to expand using domestic and international feedstock and to increase margins by selling domestically into our state and ship less product 1,000 miles away to the other part of southern India where we have strong customers but not as high margin because of high freight costs and the lower prices in the local markets 1,000 miles away from us. So it is a sales ramp up at this point in time.

We do have three government owned oil marketing companies that each own oil refineries and other assets that need to blend with biodiesel. And now, with the removal of these barriers, we are seeking to remove any barriers there might be to just selling, frankly, to the three oil marketing companies as a big part of our customer base.

The way to think about it is that they, in order to blend 5% for the railways for example, the oil marketing company needs to acquire biodiesel. And since we are the leading distilled biodiesel producer in the whole country, the process of ramping up our sales to one or more of the three oil marketing companies is basically a bureaucratic process to be frank with you. They are government owned, and so the timing on that ramp up is slower than what we would like. It's one of the big reasons why the August 2015 ability for us to sell directly to bulk customers has enabled us to rent our sales. So we are expecting to continue to focus on rep growth of our sales team, expanded tank manufacturing because we actually physically put tanks and dispensers at our customers' locations, and having our own manufacturing unit has enabled us to ramp up that capability, and make a very sticky sales and distribution model that both -- has both customers with our physical tank and location as well as future oil marketing company agreements.

I think we've mentioned this before, but less than 100 miles from our plant is a very large oil refinery, and that very large oil refinery is owned by an oil marketing company. And at a 10% blend, that's about 110 million gallons a year of biodiesel that's required just for that single oil refinery, to give you a sense of the scale. Now the entire industry is 25 billion gallons, but when you only have to truck less than 100 miles to sell twice the capacity of our existing 50 million gallon plant, we are obviously ramping into not only full capacity at this plant, but a plan to double the size of this plant to 100 million gallons a year.

So the ramp up is something that our entire management team is focused on. I've personally been in India twice recently, and our entire team has been in there quite a bit supporting our rollout, both from a policy as well as an execution point of view. And we are looking for major announcements with some of these larger customers as we ramp up the relationships.

On the IPO, by the way, we have signed our engagement letter with the investment banking firm. We are currently in the paperwork process of the IPO in India, and we are targeting an IPO in 2016. Of course, that would be helped by signing an agreement with one of these major customers, but the entire plant can be taken to full capacity without a single oil marketing company customer just selling to these bulk users of bus companies and truck companies and generators. But we certainly expect that the IPO will be assisted by an arrangement with one of the oil marketing companies.

Okay. What percentage of your business right now is from private companies versus any of those OMCs?

Private companies, 90% plus. So we have a significant ramp up opportunity as those OMCs, which have for their own reasons -- we have the Prime Minister of the country announcing a 5% blend. And the oil marketing companies have the mechanism to deliver that. They were 100% of fuel supply in the entire country in the 2014 time frame. That was the law was you could not buy fuel other than from an OMC. So, we are seeing a rapid change. It's for our benefit in the policies and now as those OMCs become suppliers to their customers, they have to obviously buy from the five or so biodiesel plants in the country, of which we are the leading one.

Okay. And on the private side, so what's -- your largest customer, what type of volumes are they giving you? Were you unable to deliver them, what they've requested, because of the excise tax? Can you give us a little like a clear picture of where the growth is going to come from from the private side? Do you need more customers or do you need the existing customers to increase their demand?

Actually, to be frank with you, we are constrained by feedstock supply. Prior to the October 21 change in policy, we were very restricted on the amount of feedstock we could supply. And that enabled -- that made it difficult for us to even meet the needs of our existing customers. So we are now ramping up our production, biodiesel production of bulk delivery tanks, just physically getting in more of their sites now that we can actually deliver. We were not constrained by customer demand so much as we were by feedstock supply chain, which the announcement on October 21 of the policy change resolved that issue.

Okay. And without the help of the oil marketing companies just sort of giving a massive order, when do you anticipate that you could be at max capacity?

Our plant actually runs at max capacity. So we are constrained -- we are constraining historically by feedstock, the debottlenecking we just did. Our job now is basically the combination of sign the supply agreements with the OMCs, expand our existing supply agreements and continue to deliver to our existing customers and add customers. So it's a very broad-based marketing opportunity.

We do expect the 2016 full capacity. We do expect demand to exceed our supply at 50 million gallons and a need to increase to 100 million gallons.

And I think that we should all watch for the press releases because there are some very exciting developments with not only single bulk customers but also the OMCs that are now reflecting the fact that India at a 5% blend needs over 1 billion gallons, 1.25 billion gallons, of biodiesel and only produces about 20% of that. So there's a 1 billion gallon expansion of production required in India. And as we see that ramp up happen, I think that our company certainly through the IPO will be one of the primary beneficiaries.

Okay. Thanks a lot.

Tom Welch, Ameriprise Financial.

Thank you. It's encouraging and exciting to hear about what's happening especially with the biodiesel arena. A question in the biodiesel area. You were saying that your bottleneck was really supply of raw materials. You're kind of inferring from that that really up to this point, because the taxes involved, your supply of raw materials was pretty much 100% domestic, and that was -- is that correct? That's where the bottleneck occurred?

Yes. It was the tax that was removed was an improper what's called inverted excise tax. And I won't get into why it's inverted, but it's real simple. When we sell our product, we are supposed to be able to pass along the taxes from the feedstock that comes in and the value-added tax system. When you sell your product and you are not able to charge your customer tax but you have to pay taxes on your feedstocks, it's called an inverted excise tax. And it's not proper. It's not the way a value-added tax system is supposed to work. So until they removed that tax on our feedstock, what actually was happening as we were actually unable to buy the principal feedstock we need to use. We had to buy other more expensive and less available commodities. So, you can almost look at it as this is the first time we can actually buy the styrene that we use to run our plant. And the ability to ramp up our business the way it was designed required that this improper inverted excise tax be removed. And that of course required a little bureaucracy to work for us, and they did and we are very appreciative of it. But now we are able to actually for the first time buy the product we actually designed the plant to run on, which is the styrene waste product.

Very good. A question for you as to the ramp up. Is your current plan to ramp up domestic production in the biodiesel arena for India, just do it on site, or are you looking at also potentially taking over different sites that -- for example, it seems to me there was a biodiesel plant a couple of years ago that shuttered its doors not far from you. It was geared to produce biodiesel from jatropha oil, and that fell apart. I don't know if you looked at buying another biodiesel plant nearby or not. I don't know if those assets are still even available.

The answer is yes. For competitive reasons, we probably shouldn't talk about which ones we are targeting. But we are I think extremely well positioned to be able to take assets that were built. And I'll give you two categories. One is assets that were built and they were unable to make the high-quality distilled biodiesel to meet European specifications. This is a product that's 99.8% pure. It looks like water and when it arrives in Europe can pass the tests, the filter tests and otherwise, in Europe. And so those companies who were unable to upgrade their facilities to meet that requirement were basically limited to a small amount of India-based revenue. So, there are really only five producers in the country. A couple of those producers could be acquired simply because they just didn't do the upgrades necessary to be able to have an export market, and so they fell behind and are certainly a target for us.

A second category, though, which is very important to realize is that India has special economic zones, typically in port cities, with the idea that the product will be exported from that plant. And so there are several plants that have been build in special economic zones, and when they do not export their product to the US or to Europe, they actually incur a 10% tax penalty. So we end up with a 10% cost advantage against them permanently in the Indian market because they were just built in the wrong place. And some of these opportunities are very large plants, one 75 million gallons for example.

And so as we look at the economics of build versus buy, there's actually two different kinds of buy. One is just buy an existing plant. The second one is to take a plant that is physically in the wrong place and then move it a mile or two, and for very, very low cost you end up with a large amount of capacity.

So, there's only five players in the whole market. So it's not the corn ethanol business in the US with 210 plants. But there is the ability to build brand-new, buy one that is already positioned correctly or buy and move at even cheaper prices. We are actively looking at all three opportunities because we do have a plan to increase the size of our existing plant and then add another 100 million gallons past that all within the next 24 to 36 months.

Oh, really? Double the size of the existing plant from 50 million to 100 million gallons. And then looking at the different options, double that again to 200 million gallons at some point down the road, two, three years down the road. Wow. That's huge.

Let me express to you that it sounds like an interesting rapid growth phase, but in the 25 billion gallon roughly $75 billion diesel market, we won't amount to a rounding error on the decimal point. We will be a little dinky spot on the map. So it is, from our point of 50 million gallons, it's pretty good. It will be a $600 million plus revenue business, but out of $75 billion, we are still very small. A 5% blend is 1.25 billion gallons and revenues of over $3 billion. So we will -- we are currently at about a 20% market shareholder. Just to stay as a 20% market shareholder, we've got to exceed $600 million in revenues over the next two to three years. And so it's a rapidly expanding environment and we intend to try to maintain our market share, which of course means we have to rapidly expand as well.

Wow. Exciting. Switching gears a little bit to ethanol, obviously the plant is already set up for advanced ethanol production. You're looking at feedstock. As I understand it, from what you said, the bottleneck there in advanced bioethanol essentially is biogas. And the price of biogas is just too high right now, or the availability just isn't there. Do you have any image or any vision on how that might be changing in the next six months or a year, or are you just subject to just social to market and who knows?

We are already perfectly positioned to be able to buy Milo and buy biogas. And frankly, with the carbon price in California increasing, we continue to run the financial models. We very well might just pay the higher price of biogas. And our current supply-chain of natural gas is with one of the oil company majors. So we have as good of access to biogas as any company in the country.

So I would not completely set aside the idea that we might buy biogas. And by the way, it's a paper trade. There's no real physical thing you do with the plant to buy biogas. That opportunity, certainly with higher carbon prices in California and with the new renewable fuel standard enforcement expected November 30, it very possibly could be we can actually run the plant the way our D5 approval with the EPA is designed. So that's -- let's call that scenario A, is that we are already positioned to do that with really no capital expenditures at all.

Scenario B, though, is with the passage of time, the Department of Energy's extensive investment in advanced technology and a number of venture capitalists with billions of dollars of investment in how you could take nonfood feedstocks and upgrade them to make ethanol, the reality is there are several very, very exciting, promising technologies available to us, and I do expect that we will be announcing an upgrade to our Keyes plant starting small, but eventually scaling up to 30 million gallons a year. So we will continue to be processing corn but we will be displacing corn for a part of our feedstock, and the margins on that business will come from a reduction in the price of our inputs, the feedstock will cost less, but significant Low Carbon Fuel Standard Value in California and significant RIN value at the federal level as well as just the price of ethanol. So the overall margin increase is expected to be approximately $3.00 per gallon. And that is not a technology announcement we've already made, but I can assure you it is absolutely at the top of our list. And with the quadrupling of the value of the carbon market in California, it is drawing the attention of not only our Company but, frankly, the entire corn ethanol industry is looking for those technologies. So our ability to get exclusive rights, demonstrate the technology and then go and either acquire their plants and upgrade using our patented technology or joint ventured plants or even licensed plants. There's 210 of those customers in the US who are all going to be in the same position of trying to use cellulosic corn stover as a feedstock and trying to figure out how to integrated with their plants.

And we think there are very few corn ethanol producers in the US that have the capability to actually adopt new technology, commercialize that technology, and then scale it up at other plants. And Aemetis was actually founded specifically for that purpose. And as you look at our, I don't know, half-dozen other publicly traded biofuels companies in the US, I don't know a single one that was founded to do that through technology adoption. So, I believe, over the next 12 months, you're going to see increasing interest from technology type public investors who are understanding the scale of what a 15 billion gallon or a 16 billion gallon increase in nonfood, non-corn ethanol means in terms of the economics for the industry.

Very good. That concludes my questions. Thank you.

James Stone, PSK Advisors.

Good afternoon gentlemen. Good to see that you are ramping. I was disconnected a couple of times, so I may be repeating something that happened while I was not listening. I'd like to first understand the ramp up problem because, as you know, you and I have discussed the ramp up quite a bit. And I thought one of the advantages of your Company was that you are in the midst of where the feedstock is in the most plentiful supply. And are you saying that all of that is tied up and that none of them would switch to you? Is that the difficulty?

We did build the plant in a port city on the east of India. It's east of Hyderabad called Kakinada. And that port city has about a dozen refineries that take crude, edible oil, process it into edible oil that can be fed to humans, and they have a waste byproduct called styrene that is a hard product; it looks like candle wax. It is solid at room temperature. So we built our plant really in the midst of a dozen refineries.

Unfortunately, the tax regime had been improperly applied by the government in which they were taxing our purchase of that styrene feedstock and until we got the tax regime fixed, our ability to buy from those local vendors was severely constricted. We were really having to buy a different product and run through our plant. So we were buying a more refined product than what we really want to buy. We want to buy this waste product.

And so I personally met with the Revenue Secretary in his office in New Delhi multiple times, and we had events with Prime Minister Modi and the Energy Minister and Transfer Minister and all sorts of other individuals. And I can very comfortably say that there was universal support among the entire government and its leadership in India for a need to remove this improper tax, and this improper tax on our feedstocks. And October 21 of this year, that was actually announced by the Revenue Department.

Okay. So you are saying that you are paying 12.5% and the product itself that you're using is not imported. It's locally.

We have a local. It's also available from the export -- from the import markets. And actually to tell you the truth, it is slightly cheaper. That changes over time. But it's right now looking very attractive to import it. And since we are a port city and we are connected by pipeline and we can also run trucks to the port, we literally just bring it right off the boat into our plant, and then if we want to export again, we can pipeline or truck (multiple speakers)

What I'm trying to understand is why you could not buy them. Anything you had to buy from the local folks was still at 12.5%?

It's not now. It used to be up until October 21 we would've had to pay that 12.5% amount, so we had to buy more expensive feedstocks than styrene to make a margin's worth.

When you first built the plant there in India, was that tax in effect at that point or was it a tax (multiple speakers)

It was. There was a bigger gap between the price of our feedstock and the price of biofuels. But remember, we had no domestic market at all until diesel no longer received approximately a 30% subsidy. So we didn't sell anything in India until the October 2014 decision to not subsidize diesel. So unlike the US where there is support for biofuels and in concept there is some additional value through the renewable identification numbers, etc., India was doing the opposite. They were physically subsidizing with government cash about $11 billion in 2014 the diesel market.

I'm trying to understand. So you built a plant knowing the tax existed. I'm surprised you weren't starting with them a little earlier in the process to get that tax removed.

Two items. Number one is by exporting to Europe, that tax was not as relevant to us. But number two is yes, you're correct. We spent seven years changing this tax, and that's one of the reasons why we've highlighted that the new Modi government which was elected the summer of last year has had a very positive impact on our industry, because we've literally spent seven years working on getting this tax rescinded. And it had lots of impact to us as we went into Europe, we would import our feedstock and then export again, so this tax really was not as relevant. For domestic sales, it's been there for seven years.

When you get up to full capacity, then at that point, what do you think very roughly will be your split of how much of the feedstock you are buying local and how much you may be importing?

I think we're going to end up at 50-50. We have some tremendous foreign suppliers who want long-term partnerships on feedstock and really see the expansion of biodiesel sales into India as very important to their business. And we've had some just very exciting discussions with feedstock suppliers who have investment appetite. They are interested, by the way, in our business in the US and how that has global implications as we make lower carbon ethanol in the US and India, as you may know, is a major ethanol market and is growing rapidly.

So we have -- through this I would say this tax regime change, the ability to sell directly to customers, the subsidy for diesel being removed, the India market is now a very healthy growth environment and we are positioned, being the Chairman of the Biodiesel Manufacturers Association of the country and the largest distilled player, really the highest quality producer, the only one that is selling distilled product into Europe and approved for European sales, we are the sole corporate level player in India with the highest quality product. So our 20% market share is expected to be retained as we continue to grow the business and the market continues to grow rapidly.

A quick question. If you had shipped more at the 12.5% -- with the 12.5%, would you have been shipping at a loss or would it just had been a smaller profit?

Smaller profit. Mostly it's a smaller profit issue, so we just did the math and bought more expensive feedstocks. We didn't have to pay the tax.

Because I would think, with your current cash position, every penny you could get, yes, it would be nice to get a nickel, but even a penny is better than zero. I was wondering why you weren't shipping and just taking the lower margin until you get the tax situation resolved.

Yes, the primary constraint was this lower margin is significantly lower margin. I mean, take 12.5% out of a $150 million revenue stream, it's a very big chunk of cash. So the inability to sell to bulk customers was removed in August of 2015. So domestic sales in India were basically zero October of 2014 because you had a subsidy for diesel. August of 2015, we could sell for the first time directly to our customers. And then in October, we actually then had access to the feedstock that we had built the plant to operate on. So these are initiatives which we had expected would happen in 2015. I am pleased to announce they've actually been completed and now we are in the ramp up stage.

Now, on that tax, is there any retroactive to the beginning of the year or anything, or is it just from October 21 forward?

It's just from October 21 forward.

Okay. So then the next question is pretty obvious. In October 22, did you see a jump in sales? If not, why not?

We didn't see a jump from sales because our customers had already been asking for product we couldn't deliver. What we did have a jump in was delivery. So, we have been able to do a debottlenecking of the plant, which is being wrapped up this month, and so we are expecting to exit this quarter with full 50 million gallons per year delivery capability and with access to feedstock that could match that.

So our emphasis has definitely shifted now to just the sales and marketing rollout and that's the bulk customer direct sales with our trucks delivering physically to their location, and it's the oil marketing companies. There's three of them. But there's one that happens to be pretty close to us. So ramping up the oil market marketing company relationship is a high priority.

That was the part I was disconnected where you said you will be at the full capacity or damn close to it by year-end is what you're saying.

We are definitely ramping up to 2016. Our production capability is expected to be fully debottlenecked before year-end, actually before month-end. And so at that point in time, the constraint is just the bureaucracy of the oil marketing companies. They are a charging a 5% blend. That's 1.25 billion gallons of which they will probably ship 1 billion gallons of it. And so that in the -- that is the obvious scale up opportunity. But we are selling directly to their customers. When you think about it, one of their big markets is just selling to trucking companies and bus companies. And so we are doing that directly right now.

Well, I would think, for some of these trucking companies, especially ones that are close to you, they would be very happy to drive up to your plant and buy fuel which is a lot cheaper than if they have to take it from the other folks.

Jim, you're exactly right. That's exactly what's happening right now.

Okay. But back to -- I'm a little lost. The plant you said would be at the full capacity. You will be shipping at full capacity by year-end, or is that going into next year?

We won't be shipping at full capacity year-end. Let me put it this way. We may be shipping but we are not projecting it, we are not promising it. We will have the production capacity to do exactly that, but we would have to sign for example one of the oil marketing company arrangements to actually achieve that. It is not currently projected, but it is certainly something we would have the production capacity to be able to do.

I was hoping you would be able to give us a Christmas present.

Yes, we are working hard on Christmas presents. The question is will they come late this year. That's really the question.

Okay. Now, on that, when do you plan to break ground for the expansion of the plant? Is that --

We expect an announcement in 2016. We've previously announced it's about $15 million to double the footprint of the plant. It was originally designed to -- or laid out to be a 100 million gallon plant. So the additional process plant, etc., is about a $15 million expenditure, and we expect to announce in earlier --- in the first half of 2016 in order to be able to go into 2017 with the additional capacity.

Okay. So very roughly speaking, you could be well near capacity on that expansion by the end of next year?

Correct. That is actually the full expectation. Frankly, if we sign one oil marketing company, we could very easily be in that position of not having sufficient supply even with the expansion.

Okay. And then I'm also -- from what you're saying, you will be looking at buying or building something in the following year, so that by the end of that year, you would have some pretty decent supply to ship?

That's correct, Jim. Actually, that's the driver for our IPO. The IPO is to fully capitalize that expansion plan so that we can continue to accelerate and maintain our roughly 20% market share position as the whole country goes from a 5% blend to 10%. They're 10% on ethanol right now by the way. They want to be 10% on biodiesel. That's about 2.5 billion gallons, almost all of which has to be new construction. So in order to maintain a 20% market share, we have to be at 500 million gallons a year.

So, our current plan actually lags the growth of the market to a 10% growth over a three-year time period. And we are working directly with the Energy Minister and the other people in government who are making those decisions. And so our real reason for the IPO is so we can maintain that 20% market share.

Speaking of the IPO, with the nonsense that's been going on in this country about IPOs and volatile markets, has any of that impacted or do you still think you're on that trail for the 25% and $70 million cash?

India has a different IPO process than the US. It is primarily 75% of the offering is sold to institutions and only 25% goes to retail. But what's interesting is that any retail investor in the whole country can buy into any offerings, any stock offering. And so the overall supply and demand in an IPO tends to be wildly oversubscribed. We had one that we are familiar with, it was 78 times oversubscribed, over $15 billion of demand for a $200 million offering.

And so we're going through the administrative process. We do expect we will be well positioned in the middle part of 2016 to be able to complete the process. And market conditions will always have some impact on us.

I think, in general, the oil price market condition will be improving during 2016. If you look at the supply of oil worldwide and the demand for oil worldwide, with 7% growth in China and India, economic growth, I think we are facing a balancing of the oil price metric and in general upwardly trending oil prices. So if we end up going from $45 to $60, that's a 33% increase in the price of oil worldwide. I personally think that will have a positive effect on an appetite for a lower cost, lower carbon, lower polluting product in India. And that's what our investment bankers believe as well.

Okay. Now, you are also saying then that you had originally thought that you could have the IPO in the spring and you think that may slip to summer?

You know, it's going to be subject to marketing conditions. We certainly will expect to be positioned to go. It's expected administratively we would be ready to go in the spring. And then we'll be dislodging market conditions.

Okay. So it will be. And I was under the impression that you were looking for two bankers and earlier you had mentioned only about one banker having signed, or do you have two bankers signed?

We've announced we've signed one banker, and we do expect to have multiple bankers by the time we do the offering next year.

Okay. That seems to be moving ahead nicely. You and I had spoken at one point, you said you thought there was a plant near you that had been closed or not too far from you, diesel I'm talking about, and that you were thinking about bidding for that. Has anything happened in that process, or has that gone away?

There is a very large annual purchase order from all three oil marketing companies. We see that we will get better pricing by selling to the oil marketing company whose refinery is very close to us. And so we are working aggressively to develop an expanded relationship with that oil market company who we are already supplying, but we're looking to (technical difficulty)

That I understand. Maybe I didn't make myself clear. When you and I chatted, you said there was a plant that had been shut down and you had an opportunity to buy it and move it.

Yes.

And you were examining it. That was something you wanted to do. Has that gone anywhere?

That actually still exists. We are not expecting that anytime in the next month or two. Jim, why don't you and I have a call this afternoon and we will follow up. We're kind of running out of time on this call. I think we have one more collar we want to take.

Okay. Let me give you one last quick question. The three big guys put out RFPs. Have they -- you responded. A lot of other people I assume responded. Have they accepted anything yet?

We did not bid in that offer. We made the decision that we would get better pricing, better terms, by dealing directly with the oil marketing companies individually rather than through the annual fixed price bid process they were going through. So, I'll give you a call this afternoon, Jim, and --

Thank you very much. I'll turn it over to somebody else now. Thank you.

Tom Welch, Ameriprise.

One quick question, Eric. Here in the United States, distilled biodiesel is a pretty rare commodity. It sells for a significant premium over diesel and biodiesel. I point to your own California market. I also point to Europe where distilled biodiesel as being a premium product sells for more than diesel and sells for more than regular biodiesel.

Is there any indication from -- it's probably way too early if there in India. But is there any indication at all that the lightbulb is starting to go on that people are beginning to understand, consumers are beginning to understand that distilled biodiesel could potentially be selling just like it does here in the US and just like it does in Europe for an actual premium over regular diesel or biodiesel?

I would say, Tom, that the understanding of the different kinds of biodiesel is broken down into a very simple application. And that is what you would call yellow biodiesel, which is what is non-distilled. It has contaminants in it; it has the yellow color. It could only be blended up to about 20%. And so the customers that we deal with in India look at this decision as do they buy a product that can only be 10% to 20% of their fuel, or do they buy our product, which is a 100% replacement, in the wintertime it's an 80% replacement for the fuel in their tank? So it's simple economics. It's either buy our product and your get five times economic benefit were by a competitor's product and have a limitation on the amount of blending.

Because we sell at a discount to diesel in India, an up to 10% discount can have a very, very strong positive financial impact on our customers' fuel budget. And the fuel budget at many of these companies is half of their total expenses. So to be able to use five times as much of a product that has a 10% cost reduction is really the way they look at it. They're really not so much looking at it as being higher quality or anything else. They're basically looking at the economics, as you would probably expect.

I think, over a long period of time, you will see a bifurcation, a separation, of customers, ones that require high quality supply chains with delivery, price and product quality as being important to them, and ones that driven purely by economics and, quite frankly, they will take a lower quality product but blend it 5% and just throw it in the tank and save some money. And we have been focusing on the higher-volume, higher-quality customers, and that strategy has worked well. And I think, over time, the pricing advantage they have will be retained, but they will be getting a very high quality product and we will continue to be pleased with us as a supplier because of that.

There is a story that hit a little bit of the media that was just, again, reiterating that you really don't want to blend more than 20% unless you're using our product. And one of our customers called us and said we just decided to standardize on Aemetis. Universal Biodiesel is our India subsidiary, and we're just not going to buy from any of these other vendors. We need a high quality product because it's what's going to allow us to have confidence that our trucks and buses are going to run all the time.

Okay. All right. Thank you.

Thank you Tom. I Think that wraps up our call today. Operator, do you have any other callers? Hearing none, thank you Aemetis shareholders. Thank you for stock analysts that were on the call today and other investors. We really look forward to meeting with you and continuing our dialogue about growth opportunities for Aemetis. And feel free to contact me or Todd Waltz at any time.

Thank you for attending today's Aemetis business update conference call. Please visit the Investor website of Aemetis where we have posted a written version and an audio version of the Aemetis earnings release and business update.