Alto Ingredients, Inc. (ALTO) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Becky Herrick of LHA. Ma'am, you may begin.

Thank you, operator. And thank you, everyone, for joining us today for the Pacific Ethanol Second Quarter 2013 Results Conference Call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with the review of business highlights, and then Bryon will provide details on the company's financial and operating results. Neil will then 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.net. If you have any questions, please call LHA at (415) 433-3777. A telephone replay of today's call will be available until 11:59 p.m., Eastern Time, on August 1, the details of which are included in yesterday's 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, July 25, 2013, and therefore, you're advised that any 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 that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward-looking statements are based on many assumptions and factors. Any changes in such assumptions or factors could produce significantly different results. Information about potential factors that could affect the company's financial results is available in the company's risk factors as updated in the company's SEC filings. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Also please note that the company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the reported financial results as determined in accordance with GAAP. The company defines adjusted EBITDA as unaudited earnings before interest, taxes, depreciation and amortization, noncash gain or loss on debt extinguishments and fair value adjustments and warrant inducements. To support the company's review of non-GAAP information later on this call, a reconciling table is included in yesterday's press release. It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

Thank you, Becky, and thank you, all, for joining us this morning. Our performance in the second quarter reflects the results of several accomplishments we have been diligently working toward over the past 12 months. Since 2012, we have been increasing our ownership position, the Pacific Ethanol plants, in anticipation of strengthening the market conditions, which is now translating into profitability on several levels. In comparing this quarter to the same period last year, net sales grew 14%, gross profit increased to $7 million from the gross loss of $4.9 million. Our operating income increased to $3.8 million, compared to a loss of $8 million. We reported consolidated net income of $1.1 million, compared to a loss of $10 million, and adjusted EBITDA improved to $6.6 million, compared to a loss of $1.5 million. With our ownership interest in the plants now at 85%, and given the current crush margin environment, we are beginning to see the significant benefit these valuable assets provide as the plants are operating profitably and contributing significantly to the overall financials of the company. In addition to these highlights, we also extended all of our remaining plant debt that was due in 2013 to 2016, and retired or repaid approximately $13.5 million in debt, strengthening our balance sheet and better positioning us to execute on our current initiatives. We made significant progress on our objectives to diversify our revenues and feedstock. In June, we began producing corn oil at our Magic Valley plant, and we expect to begin producing corn oil at our Stockton plant in the third quarter of 2013. Corn oil is an important initiative for Pacific Ethanol as it diversifies our revenue and provides immediate incremental earnings to the plants as we sell into the feed and biodiesel markets. At our Stockton plant, we continue to use a blend of corn and sorghum as our primary feedstock, which we're sourcing from local Midwest and international markets. Sorghum reduces feedstock costs and reduces the carbon output of produced ethanol. We also remain focused on driving efficiencies and improving yields of the plant at the plant level as every 1% improvement in yield results in about a $3 million increase in gross margin annually, in current margins and operating rates. We continue to reduce energy use to lower the carbon intensity of our ethanol. In fact, we currently have applications into the state of California for our 3 operating ethanol plants to reduce their carbon scores to a combination of feedstock and efficiency improvements. We are currently seeing a premium of over $0.05 per gallon on the ethanol that we produce and sell in California, given its lower carbon attributes. We believe our efforts to drive further reductions in the carbon score of our ethanol will continue to add value to the ethanol that we produce. Early in 2013, we announced we were implementing a yield enhancing technology, called Cellunators, at our Stockton plant. The technology is installed and operating, and we are beginning to see its effects on reducing particle sizes to achieve higher ethanol yields by increasing available storage for conversion. In addition, the installation of Cellunators technology gives us the option to integrate the Cellunator with proprietary enzymes to convert the cellulosic fraction of the corn kernel to ethanol, which enables the conventional plant to potentially produce cellulosic ethanol. The regulatory environment continues to support the long-term demand for renewable fuels. The California Low Carbon Fuel Standard requires refiners to reduce the carbon intensity of their fuels by 10% between 2011 and 2020. It's a very aggressive standard that requires a significant amount of low carbon fuel to displace gasoline and diesel in the mix. As Pacific Ethanol produces among the lowest carbon ethanol commercially produced in the United States, this gives us a significant advantage in the marketplace. Current blend levels of ethanol remained at about 10% of every gallon of gasoline sold in the United States. However, the opportunity for growth is significant as retail customer access to ethanol and other renewable fuels increases, driven by the Renewable Fuel Standard, or RFS. The next increment of growth is supported by the EPA's approval of 15% blend levels or E15. We believe that to meet RFS requirements in 2014, the oil industry will need to start blending higher levels of ethanol, and that will fuel another round of growth for the industry and our company. The RFS continues to be the principal driver, stimulating investment in domestic renewable energy and a steady increase in ethanol demand. Ethanol continues to be the most immediate, economic and practical solution for refiners to meet mandated biofuel blends as it continues to trade at a discount to the price of gasoline. In addition, advanced biofuels are increasingly necessary to meet required RFS levels. An important part of our long-term strategy is to integrate additional feedstock into our existing plants to produce advanced biofuels. As Pacific Ethanol continues to provide among the lowest carbon ethanol in the United States, we believe we are well positioned to benefit from this growing demand for ethanol and advanced biofuels for years to come. Regarding production margins, the strength late in the first quarter continued into the second quarter, while supply and demand for ethanol remained well balanced. The USDA is anticipating a record corn crop year for 2013, 2014, which has the potential to be a $14 billion bushel corn crop. But we don't yet know how the corn crop will affect the production side of our business, we will continue to operate our plants with discipline and flexibility in anticipation of the new crop. I will now turn the call over to our CFO, Bryon McGregor, to review the numbers. Bryon?

Thank you, Neil. For the second quarter of 2013, we reported net sales of $234 million, compared to $205 million in the second quarter of 2012. The increase in net sales was attributable to a higher average price per gallon of ethanol sold, which was partially offset by a reduction in total gallons sold. Gross profit for the second quarter of 2013 was $7 million, compared to a gross loss of $4.9 million in the second quarter of 2012, due to significantly improved production margins, better yields and higher coal product returns. For the third quarter to date, production margins remain profitable. SG&A expenses were $3.1 million, or 1.3% of sales, in the second quarter of 2013, compared to $3.1 million, or 1.5% of sales, in the second quarter of 2012. Operating income was $3.8 million, compared to an operating loss of $8 million for the same period last year. Fair value adjustments and warrant inducements were $1.4 million, compared to $1.3 million in the second quarter of 2012. Interest expense was $4 million, compared to $3.1 million in the second quarter of 2012. The increase is attributable to increased corporate debt balances. Consolidated net income was $1.1 million, compared to a loss of $10 million in the second quarter of 2012, which was due to significantly improved commodity margins of specific ethanol plants. Net income available to common stockholders was approximately $700,000, compared to a net loss of $2.9 million last year. Adjusted EBITDA was a positive $6.6 million, compared to negative $1.5 million in the same quarter of last year. This improvement illustrates a significant impact of our increased ownership position in the Pacific Ethanol plants and improved production margin in the second quarter of this year. For the 6-month period ending June 30, 2013, net sales were $459 million, compared to $403 million for the same period in 2012. Net loss available to common stockholders was $5 million, compared to $8.2 million for the same period in 2012. Adjusted EBITDA for the first 6 months in 2013 was positive $6.9 million, compared to negative $4.1 million for the same period last year. Now turning to our balance sheet. Cash and cash equivalents were $7 million at June 30, 2013, compared to $7.6 million at December 31, 2012. Our positive cash flow during the quarter enabled us to retire or repay approximately $13.5 million in debt. Of this amount, approximately $10 million was in cash payments consistent -- consisting of $7 million of plant debt and $3 million of corporate debt, with the rest in convertible debt conversions of $3 million. As a result, our working capital position improved to $53 million at June 30, 2013, compared to $45 million at the end of 2012. In addition, during the quarter, we closed on $8 million in financing. And in doing so, used part of the proceeds to reduce plant and corporate debt. The financing, as a whole, strengthens our balance sheet by enabling us to reduce or extend debt maturities to 2016. As of June 30, we had total unused lines of credit of over $15 million, with over $14 million in availability. With that, I'd like to turn the call to Neil.

Thanks, Bryon. We believe we have a very compelling value proposition. The long-term demand for ethanol remains strong, supported by federal and state regulations. The economic advantages of ethanol, as it continues to trade as deep discount to gasoline and ethanol's position as the highest performing fuel on the market. Also our destination model and West Coast locations are distinct, competitive advantages as we were able to reduce transportation costs, lower our carbon footprint and provide low carbon fuel into California markets, for which we received a premium. In addition, our proximity to local markets provides quick and reliable access to ethanol and feed customers and optimizes the quality and supply of feedstock. Lastly, due to our efforts to extend, repay and retire debt, as well as our increased ownership in the Pacific Ethanol plants, we are well positioned to capitalize on growth in our market. We remain committed to our strategic goal for 2013. We intend to continue to improve operating efficiencies at the plants, continue to diversify our revenue and feedstock, increase product values by further reducing the carbon intensity of our ethanol and support sustained profitable growth. We look forward to keeping you updated on our progress. I would now like to open the call for questions. Sam, please begin the Q&A.

[Operator Instructions] Our first question comes from Paul Resnik of Uncommon Equities.

Finally, reaching profitability, it's been a long trip. I have a question regarding your efforts to reduce your carbon scores. You said that, that would add value. Can you go through the -- what kind of -- I mean, does that increase your nickel spread or -- in what way does that add value?

Yes. Well, Paul, good question. If you take a look today at the assessed value of the metric tons of carbon credit under the Low Carbon Fuel Standard, currently trade for $67 a ton. What that translates into, on a carbon score basis, is that for every point that we can reduce our carbon score, which currently at our California plants is at 80.7, every point is worth about $0.05 per gallon. That's where we come up with the $0.05 because we're about 10 points better than the baseline at 90.1. Put it in some context, for every 1,000 BTUs, we can reduce the fossil energy input into our plan, is equivalent to about 1 point. So you can get a sense of how the -- how sensitive it is to energy use, the use of alternative feedstock, such as sorghum, provide a point or 2 of benefit as well. We are looking at cogeneration to further reduce energy, looking at biomass combustion to completely displace fossil energy, which, obviously, can have a large input. We believe that in the range of reducing by 5, even 10 points with the introduction of our new technologies and processes as possible, and that would be another $0.05 to $0.10 a gallon of value.

Excellent. On the Cellunator, the -- when you say integrate cellulosic, so do you envision a plant that is simultaneously is using cellulosic materials, as well as corn and sorghum?

That is correct, yes. So there's fiber in the corn kernel. What the Cellunator is, in addition to a way to liberate more starch in the corn kernel essentially, is a pretreatment to open up also the fiber. So we will be working with the Edeniq technology company, that has provided us the Cellunator later this year, to do some trials where we will take proprietary enzymes that then, in the same process and the same vessels, can convert that fiber to ethanol. And so, it is all part of the integrated process that we currently have. It's a relatively modest amount of additional ethanol, but if we can achieve another couple percent of yield on the basis of cellulose and qualify for an advanced ramp, that, obviously, has a real value to us.

Great. Going back to the quarter just ended, I noticed there was a significant decline of third-party ethanol sales. Is this temporary? Or what are you looking for here?

Well, we have continued to -- as we bring on and increase our own production, there's been some displacement of the ethanol there. We also have looked at our positions, and in markets where we're strong and we can sustain profitability, and our third party were maintaining us positions. Our overall sales are relatively stable. So it's really more a matter of the mix between the produced ethanol, third party and that which we market for. The overall market has obviously been a little bit of a stall until we can resolve issues around E15. And with the RFS driving new volume, we anticipate that the market will start growing again and our sales as well.

Right. So I guess, that would go to your own production, which is -- was off just a little bit in the quarter. But do you expect that to just remain stable until overall demand picks up?

I think that's a fair assessment.

Yes, okay. The corn oil production at Stockton, would you say -- is that -- I mean, are you in a position to give any guidance on that, August or September or is it a little too early to say?

No, it's not too early to say. I mean, what we've said is that we will be starting that system up and producing corn oil in the quarter. I think meaningful amounts of corn oil contribution at the Stockton plant will be in the fourth quarter. There will be corn oil produced in the third quarter, but I think, from a financial standpoint, it will be a relatively modest contribution.

Okay. And interesting, I think, in the slide presentation, it said you're investigating at your other plants as well. Now that's Burley -- that one at Burley, that would be, hopefully, before year end or do you think...

Well, are you talking about corn oil, Paul?

Corn oil, yes.

Yes, so we already hit Burley in the Magic Valley plant in Idaho, we're already producing corn oil. And so, the other 2 plants would be...

Okay. I'm sorry. I got it. Go ahead.

Yes. So the Oregon and the other California plant, Madera.

Okay. Would Oregon be before year end?

At this point, we do not have a timetable or a plan. That's different market up there, and that we're heavily weighted in the cattle feed business where the fat and the oil is the important part of the feed. So we're taking a more careful approach to how we implement corn oil without disrupting our feed markets up there. We do believe that it will be implemented.

And I guess, the question is, would you start to position yourself to produce corn oil in Madera even before you start -- restart operation there?

That does make sense. Corn oil, as we've discussed, the industry participants greatly appreciate at significant value. So we are working carefully on a plan that would start up Madera. We have no timetable at this point. But corn oil is definitely in the focus as part of the start-up plan.

Okay. And lastly, just an opinion. In looking at the corn market, there is, of course, the Chicago Board of Trade price of corn, which looks a lot lower for the new crop. But one number that a lot of people don't see, of course, is that in the drought [indiscernible] shortage conditions, the actual CBOT price is the starting price, the actual cost of corn is a good deal higher. Normally, though what they call the basis is very often a discount in some markets, where now, they're actually -- it's above. Do your industry contacts give you any sense of what's going to happen to the basis when the new crop comes in?

The expectation -- yes, there's some forward prices discovery on that, and what we're seeing as you would expect with what appears to be a record corn profit. The forward basis is looking to come back to something more normal. Your point is a very good one. People often look at the board and try to determine a crush margin. And in today's market, that's only a part of the picture because the corn basis in the Midwest, that as you accurately pointed out, typically, is half or below the Chicago Board futures number is now at about a $2 premium in the Midwest. So the cost of corn today for the dwindling supplies of old crop are quite expensive. And that basis for the forward months goes to something that's at or slightly below the Chicago Board December futures.

Our next question comes from Jim Mcelroy[ph] of Sheridan.

Jim Mcelroy[ph] of Sheridan. Can you talk about your capital spending plans for the year? What happens -- what are your capital needs if E15 becomes a reality?

Our own capital needs are no different with E15 and E10. And today, they -- other than being able to increase incrementally the production, they are in installment technologies, it's just maintenance that we have. What E15 does, certainly, is provide the basis for starting up the Madera plant and that would be a working capital requirement.

Okay. And it looks like the prior caller was asking about your internal ethanol production. It seems like it's -- you kind of flattened out at the 2012 quarterly level. Is there an opportunity for that to increase to the 2011 levels?

Yes. So this has been a challenging couple of years, and certainly, this year started off with not a very positive margin environment. In the first quarter, we are running the 3 operating plants at about 87% of their capacity. In the second quarter, we are running those plants at about 92%, and that has been incrementally increasing. So as the margins and the supply/demand dictate, there is an opportunity to, not only run the 3 operating plants at higher rates, but also, obviously, to start up the fourth plant, which would add in a 40 million gallons of operating capacity.

Our next question comes from Nathan [indiscernible] of [indiscernible] Economics.

A couple of questions following up on corn basis cost and corn prices. Can you talk a little bit about what you paid for corn in the prior quarter? And how much inventory you keep around? And then, along that line of thought, how you might source it differently if the forward trivial comes to fruition and you are buying corn, say some $5 in Iowa in futures -- September futures are below $5 today. I mean, just how that changes your sourcing and corn inputs?

Sure. The -- I think it's in our numbers what we pay for corn. It's -- what is it?

$6.55.

$6.55. So typically, we're paying Midwest those freight. And so, the Midwest is whatever the basis relationship is. And so, if it's in a spot market basis, Midwest is $2 over the board, we'd be $3 over the board. That moves one of the things we're able to do is lock forward basis. We typically are able to do that in a way that it's advantageous and gives us an advantage over the freight. There's also freight is discounted. Today, you're seeing $200 to $300 a car of discounts on moving corn because not a lot is available to move. And so, there's a excess supply, if you will, of transportation. That's a benefit. We have local sources. We're getting into the new crop. Our Stockton plant will run new corn for -- new local corn almost entirely, ones that comes available at the end of September. And we also have been importing sorghum, grain sorghum from Argentina. So we have quite a diversity of ways that we source our feedstock, which allows us to improve our position from just that Midwest plus freight. We have not yet -- we're waiting for the basis to clarify our forward, but as I said to the previous caller's question, that we are expecting the corn basis to come down very materially with the new corn crop.

As a follow-up question and -- my spreadsheet might be broken here, but when I ran through 36 million gallons per quarter production, and a potential $2 decline in corn price is a little on $1.50 decline, not looking for guidance, but I follow the things that hold constant. If ethanol price stays roughly the same, the input cost will be roughly the same. That looks to me, on paper, like a $0.50 per gallon margin uplift or $18 million a quarter margin uplift. Am I crazy or kind of working go wrong if that's what you're thinking?

No, that's not crazy at all. And I think this is what is really clear in this market, is that with that forward cost of corn and the forward cost of oil and gas, the value proposition of producing ethanol and marketing ethanol into the gasoline market is profoundly positive. What you do see on the forward curve on ethanol, not that it's always the base indicator, but you do see a decline in ethanol prices. So I think that if you factor in a lower ethanol price, then you, obviously, would come to a different margin number. But our future view is that supply/demand are going to stay balanced. Fourth quarter could be a little choppy as we deal with a lower gasoline demand seasonally. But we'd get into 2014 with the higher required levels of ethanol blending and what appears to be a tremendous value proposition. We expect to see an increase in ethanol demand and a strong margin environment.

Our next question comes from Tom Donino of First New York.

The previous caller asked the questions that I was going to ask.

And at this time, I'd like to turn the call back to management for any closing comments.

Thank you, Sam, and thank you, all, again, for joining us today. We do believe that we are very well positioned with the differentiated strategy of producing and marketing ethanol and feed co-products in the Western United States to build upon our strong market share and take advantage of this market as it grows. I appreciate the interest and look forward to speaking with you again soon. Have a great day. Thank you.

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