Alto Ingredients, Inc. (ALTO) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Pacific Ethanol Incorporated Third Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call maybe recorded. I would now like to introduce your host for today’s conference, Becky Herrick. You may begin.

Thank you, operator and thank you everyone for joining us today for the Pacific Ethanol third 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 PM Eastern Time on November 14. The details of which are included in yesterday’s press release. A webcast replay will also be available at Pacific Ethanol’s website. Please note that information in this call speaks only as of today, November 7, 2013 and therefore, you are 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, 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 from those statements. Factors that could cause or contribute to such differences include, but are not limited to events, risk and other factors previously and from time-to-time disclosed in Pacific Ethanol’s filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements. 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, non-cash gain or loss on extinguishments of debt 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. Pacific Ethanol’s improved year-over-year results demonstrate combination of fundamental improvements in the industry, including a better supply and demand balance as well as our increased ownership position in the Pacific Ethanol plants, which enabled us to benefit from improved market conditions. In comparing this quarter to the same period last year, net sales grew 8%. Gross profit improved to $3.5 million from a gross loss of $2.4 million. Our operating income improved to $1 million compared to a loss of $5.3 million. Loss available to common stockholders was $5.3 million, a $1 million improvement over the third quarter of last year and adjusted EBITDA improved to a positive $3.4 million compared to a loss of $900,000. During the quarter, we continued to strengthen our balance sheet as we retired $8.4 million in senior and convertible debt. This quarter, we continued to execute on opportunities to further diversify our revenue and feedstocks. Corn oil, the high value co-product with markets including biodiesel and animal feed. Our Magic Valley plant began corn oil production in June and in October we started production at our Stockton plant. We are now operating at yields at or above our initial expectations at both facilities. Corn oil is an important additive initiative as it enables us to diversify our plant revenue streams and improve operating income. We have also diversified our feedstock sources to benefit from lower material costs and improved operating margins. We continued to purchase grain sorghum, which contributed significantly to our feedstock supply in the third quarter. We sourced sorghum from local, Midwest and international markets and reduced our feedstock cost as compared to corn. Sorghum has many beneficial properties. It requires less water and fertilizer than corn and the EPA has designated sorghum-based ethanol as an advanced biofuel when coupled with greenhouse gas reducing technologies. In this regard, we are developing plants to achieve a pathway to advance biofuels using sorghum as feedstock. In October we announced the purchase of 167 million pounds of surplus raw beat sugar to be easily blended with ground corn for use as ethanol feedstock over the next year. As part of the U.S. Department of Agriculture Feedstock Flexibility Program sugar was purchased at a significant discount to the equivalent cost of corn. We have made minor modifications to our plants to accommodate this new feedstock now and in the future if further opportunities arise. At the same time, we hedged our position to lock in savings against the cost of corn that we expect will save us at least $3 million in feedstock costs over the next year. In addition we have received a steady supply of waste beverage products at our Stockton plants, which qualifies as advanced biofuels. These recent feedstock initiatives provide added flexibility in our sourcing and assist in lowering input costs. Production margins improved over last year’s third quarter and the supply and demand for ethanol are well balanced. The recently harvested corn crop is estimated at approximately 14 billion bushels according to the USDA. This is expected to provide an ample corn supply to address both U.S. and international demand for all sectors of the corn market for the next year. The long-term demand for ethanol remains strong due to its economic advantages as it continues to trade at a discount to the price of gasoline. The ethanol industry as a whole provides low carbon renewable fuels into the transportation fuel supply and stimulates investment in the domestic biofuels industry that creates jobs, reduces oil imports, lowers gas prices and reduces pollution. In addition advanced biofuels are expected to become increasingly necessary to meet required RFS levels. Our strategy to incorporate additional feedstock into our plants with a longer term goal of producing advanced biofuels puts us in a favorable position. The California low carbon fuel standard requires refiners to reduce the carbon intensity of their fuels by 10% between 2011and 2020 which introduces a significant amount of low carbon fuel in the state’s fuel supply. This benefits Pacific Ethanol as we produce among the lowest carbon ethanol commercially produced in the United States. More specifically at today’s current carbon value in California of $85 per metric ton, we receive an average of $0.07 per gallon in premium for ethanol produced and sold into the California market. The low carbon fuel standard contributes significantly to our product values and demand for our low carbon fuels. Joining California and British Columbia, Oregon and Washington recently agreed to implement their own low carbon fuel standards with a vision of building an integrated market for low carbon fuels on the West Coast. We believe this market will drive new investments and economic development opportunities within the region and represents a significant growth opportunity for the company. Setting aside any mandate ethanol continues to provide refiners and consumers the compelling value proposition as it is a clean burning high octane fuel that continues to trade at a discount to the price of gasoline. I will now turn the call over to our CFO, Bryon McGregor to review the numbers. Bryon?

Thank you, Neil. Our year-over-year results for the third quarter reflects the impact of our strategy to increase our ownership position in the Pacific Ethanol plants as well as the improved plant production margins on a year-over-year basis. More specifically for our third quarter 2013 financial results, we recorded net sales of $234 million, up $18 million compared to $216 million in the third quarter of 2012. Gross profits for the third quarter of 2013 was $3.5 million, a $5.9 million improvement over the $2.4 million gross loss in the third quarter of 2012. The improvement in gross margin was tempered by a decline in ethanol prices and commonly high corn basis costs and related derivative losses. In this regard you will note the addition of two new metrics to our commodity price performance disclosure in our press release specifically average basis and delivered cost of corn. Basis represents the difference between delivered corn cost and the future price – futures price for cargo delivery, because basis historically has not shown the same volatility as in the futures market. It hasn’t been an important factor for investors in quickly determining the margin between ethanol and corn prices. In the third quarter 2013, the market saw a significant drop in future corn prices in anticipation of the large corn harvest and concurrently experienced a sharp increase in corn basis in response to the actual tightness in the old crop supply. Our basis costs are a combination of corn basis at various Midwest corn origination points plus the freight for delivery into our plants in the west. Naturally, we pay a higher basis in the Midwest plants, which is offset by higher ethanol and feed product prices in our markets, which also trade around the Midwest plus freight basis. All corn buyers in the spot market experienced historically high corn basis prices in the third quarter. Since market information on basis while public is not as readily available to investors as corn and ethanol prices. It is important to note that corn basis has eased considerably from the third quarter highs and we believe basis will continue to decline as corn inventories grow from record harvest. SG&A expenses were $2.5 million or 1.1% of sales in the third quarter of 2013, a 14% reduction compared to $2.9 million or 1.3% of sales in the third quarter of 2012. Operating income was $1 million, a $6.3 million improvement over an operating loss of $5.3 million for the same period last year. Interest expense was $4.5 million, up $1.1 million compared to $3.4 million in the third quarter of 2012. The increase is attributable to increased corporate debt balances, including our senior and convertible notes. Loss on extinguishments of debt was $2.6 million due to significant convertible debt conversions during the quarter, which I will discuss more in a moment. Consolidated net loss was $5.4 million compared to a loss of $9.7 million in the third quarter of 2012. A $4.3 million improvement largely attributable to better commodity margins at Pacific Ethanol plants on a year-over-year basis. Net income available to common stockholders was approximately $5.3 million compared to a net loss of $6.3 million last year. And adjusted EBITDA was positive $3.4 million, a $4.3 million improvement over the third quarter of 2012. For the nine-month period ending September 30, 2013 net sales were $693 million, up $74 million compared to $619 million for the same period in 2012. Net loss available to common stockholders was $10.3 million, which improved by $4.2 million compared to $14.5 million for the same period in 2012. And adjusted EBITDA for the first nine months of 2013 was positive $10.4 million, which improved by $15.4 million compared to negative $5 million last year. Now, turning to our balance sheet. Cash and cash equivalents were $9.2 million at September 30, 2013. And as of September 30, we had over $13 million in availability on our lines of credit. We held our working capital position steady at approximately $44 million at September 30, 2013 compared to $45 million at the end of 2012. We reported current liabilities on capital leases of $5.1 million at September 30, 2013 reflecting the financing of the corn oil facilities at our stock in the Magic Valley plants. The payment on these capital leases are primarily based upon the revenue streams from corn oil sales. During the third quarter, we continue to make significant progress on our goal to strengthen our balance sheet. We retired $900,000 in senior debt and $7.5 million of our original $14 million convertible notes. You will recall, the proceeds of the convertible notes were used in the first half of 2013 to retire or extend the remaining plant debt that matured in June and consolidate additional ownership equity in the production facilities. An additional $2.3 million under our convertible notes has converted subsequent to the quarter end leaving only $250,000 outstanding. With that, I’d like to return the call to Neil.

Thanks, Bryon. Since 2012, in anticipation of strengthening market conditions, we increased our ownership position in the Pacific Ethanol plants. The current improved crush margin environment is translating into improved financial results demonstrating the significant benefit these valuable assets provide. In summary, we have remained committed to our goals to build shareholder value. We are focused on improving operating efficiencies of the plants diversifying revenue and feedstock, reducing the carbon intensity of our ethanol and supporting sustained profitable growth. Our improved balance sheet provides us with the strong foundation from which to build upon our market share and take advantage of the market as it grows. I would like to now open the call for questions. Ashley, please begin the Q&A session.

(Operator Instructions) It looks like our first question comes from Paul Resnik of Uncommon Equities. Your line is open.

Good morning.

Good morning, Paul.

With regard to the beet sugar purchase, can you give me some sense of how that’s going to be moved into production over the years, that’s going to happen immediately or slowly or how does that working?

The current plan, Paul, is to blend that in and around the 15% rate into our corn stream at both of our Northwest plants. The sugar is all located most of it in Idaho. So our current plan while we can take into any of our plants is to move it principally through the Idaho plant and secondarily to the Oregon plant. We are installing equipment allow us to essentially in line blend the sugar with the ground corn up to that 15% rate. So pretty straightforward process and we think that’s about the right blend to maintain good operating efficiencies, not disrupt feed markets and that does provide a steady stream of sugar that we anticipate to be using by the end of this year through the balance of 2014 at those two facilities.

So as an inclusion into cost of goods sold, is that only happens as you use the sugar?

That is correct.

Okay.

And I would also note that given large sugar surpluses in the United States, that’s why we are excited about this program and it may in fact have a repeat performance as time goes on.

It’s an interesting government program, but I won’t complain. And with regard to your corn basis information, I think the transparency on that is very helpful. Now, you pointed out that the corn basis has declined it’s declined a lot, could you give any sense of the degree of decline in corn basis versus the third quarter?

Sure. So I mean, if you look at spot average corn basis in the Midwest, because that’s it all far Midwest and plus freight in the case of our model. That averaged in Q3 if you are just buying spot corn everyday about $1.60 over the futures market. Today, that price is anywhere from at the option price to $0.15 above. Freight to our market depending on the plant, depending on freight dynamics is anywhere from $1 to $1.30 a bushel. So that would give you a sense of the magnitude of the shift.

So we are not only looking at corn futures at record lows, but we are knocking at $1.5 of corn basis.

Correct. It’s interesting in the harvest times you expect to see corn basis even lower and typically goes below the futures price. And with this very rapid drop in the price of corn, farmers have been a little more resistant to selling and they do have quite a bit of storage. So there is a bit of arm wrestle between the inventory of corn and the view of the market between buyers and sellers and that has kept the basis frankly a little higher than it would historically be during the harvest, but still has come off very materially.

It’s kind of interesting after they have sort of dealt the power during the drought. It’s a little reluctant to just take the going price. Oddly enough, I have a question from a visitor to my website and I think I know the answer, there was a $5.9 million increase in property and equipment was most of that for the corn oil facilities?

That is correct, Paul.

Okay, the perennial question, the outlook for crush margins and with the corn basis going back to more normal levels, any new thoughts on Madera?

We certainly have the same thought, which is that is a great asset and with the growing demand for low carbon fuel that plant should be running. And so it is, we continue to refine the plant, there recently has been getting past this basis as you are getting past the corn harvest and now we need to get past what the EPA and their infinite wisdom has to say about the targets for 2014, which has injected some uncertainty into the market in the face of quite a number of other ethanol plants opening up. Supply demand continues to be well-balanced with growing exports and a strong domestic demand. We continue to believe that to be the case and think that, that will create an opportunity to startup Madera, but we have no specific plan to announce at this time.

You brought up EPA, I was going to ask about that, they are expected to set the RFS levels for 2014 any day now, but there were may not be any day now, who knows. But I keep looking at the law and it says they can reduce those mandated levels because of supply issues, which of course has been the case in cellulosic ethanol and understandable or because of impending economic harm. Given those criteria, what would legal criteria be for any significant reduction in corn-based ethanol mandate?

I am not a lawyer, Paul, but I see none.

Yes.

So there was a leak document that whether it’s real or not whether it’s stated or not did come up with a creative thought that the inability of the infrastructure to deliver elevated volumes due to the slow rollout of E15 could be tandem out to a supply issue. And personally I don’t believe that to be the case. We know that two-thirds and growing of the vehicles on the road can use E15. Short of that, we have enough E85 infrastructure out there to absorb quite a bit of increased volume of the ethanol. So we do not see a supply issue and it would be our view that the industry is prepared to deliver very efficiently into the marketplace, the 14.4 billion gallons that would be suggested by the target for 2014 in the RFS.

It strikes me of the orphan defense, I killed my parents, but have pity on me, I am an orphan, the oil industry has put E15 tooth and nail and now complaining that E15 rollout is slow.

Yes, disagree.

And lastly, there was a fair amount of debt reduction during the quarter, do you have any –could you provide any guidance on future interest expense relative to the third quarter?

Well, clearly, we would expect to see is a continued reduction in that interest expense, in the cost of debt. As you know over the last 12 months, we have made a conservative effort to try and lower the overall cost of our obligations. As you know, it’s fairly expensive at the plant level. And so what we have done is try to alleviate some of that and by doing so, through senior debt obligation at the parent level have reduced that almost more than two times. So we would expect what you will see is actually the amount of debt total outstanding at the end of this quarter or Q3 is lower than prior quarters. And we would expect for that to continue.

Paul, I would also add that we had interest that was in excess of million dollars related to our convertible debt, which is now almost entirely extinguished. So that would be a natural reduction right there.

So between the extinguishment of debt charge and another elimination of the convertible debt interest, we are talking about well more than 50% of your loss disappearing – your reported loss disappearing even before we get started with anything else?

That’s correct. It was obviously frustrating to have a loss like that, but it is important to focus on the EBITDA and then in understanding which was quite positive in understanding that loss to look at those extraordinary and non-cash items that we incurred.

Very good. Thank you very much.

Thank you, Paul.

Thank you. (Operator Instructions) Our next question comes from Nathan Weiss of Unit Economics. Your line is open.

Good morning.

Hi.

So couple of questions, I guess spending a little more time on the corn basis, it sounds like from what you have said you are seeing roughly a dollar or so decline from third quarter levels?

Yes, actually more than that.

So I know you don’t traditionally release your yield numbers, but assuming you are running roughly 2.87 gallons of ethanol per bushel of corn, you consume just north of 13 million bushels of corn per quarter?

Yes.

Correct?

Yes.

So I guess simple math that we can take something north of $1 then times 13 bushels of corn consumption would be the corn savings side versus Q3, I understand ethanol prices move and can change, but just on the input cost side, is that the type of reduction we should be looking for?

That is correct.

Okay. And then switching gears completely on the Stockton corn oil installation, what type of uplift in terms of margins per gallon do you expect over that?

What we have projected on that and publicly stated and it appears to be bearing fruit is that it is in the range of $0.05 per gallon operating income uplift. It’s obviously – it displaces some of the distillers grain. So there are variables, distillers grain versus corn oil. What we have seen in the market is distillers grain have actually stayed fairly strong. Corn oil has declined some in the market. And then there is obviously how much of it we are producing, but as we stated in the prepared remarks, we are getting good yields. So that’s – it is a moving target, but we feel confident that on an operating income basis, there is at least a $0.05 per gallon uplift.

Okay, that’s a pretty meaningful uplift when you multiply it over the gallons?

Yes, it is.

Excellent. Alright, well thank you.

Thank you, Nathan.

Thank you. I am not showing any further questions in the queue. I’d like to turn the call back over to management for any further remarks.

Ashley, thank you and thank you all of you for joining us today. We very much appreciate the interest and support at Pacific Ethanol and look forward to speaking with you again soon. Have a good day. Thank you.

Ladies and gentlemen, this does conclude the program for today. Thank you for your participation. You may all disconnect. Everyone have a great day.