Alto Ingredients, Inc. (ALTO) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Pacific Ethanol Incorporated First Quarter 2016 Financial Results. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Miss. Becky Herrick of LHA. Ma'am, please begin.

Thank you, [Genicia] (Ph) and thank you all for joining us today for the Pacific Ethanol first quarter 2016 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, Bryon will provide a summary of the financial and operating results, and then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions. Pacific Ethanol issued a press release yesterday providing the details of the company's quarterly results. The company also prepared a presentation for today's call that's available on their website at pacificethanol.com. If you have any questions, please call LHA at 415-433-3777. A telephone replay of today's call will be available through May 12, the details of which are included in yesterday's earnings press release. A webcast replay will also be available at Pacific Ethanol's website. Please note that information in this call speaks only as of today, May 5 and therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay. Please refer to the company's Safe Harbor statement on Slide 2 of the presentation available online, which says that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of risks and uncertainties. The actual future results of Pacific Ethanol could differ materially from those statements. Factors that could cause or contribute to such differences include but are not limited to, events, risks and other factors previously and from time to time disclosed in Pacific Ethanol's filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements. Also, please note 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 net income or loss, as an unaudited net income or loss available to common stockholders before fair value adjustments. The company defines adjusted EBITDA as an unaudited net income or loss attributed to Pacific Ethanol before interest, provision or benefit for income taxes, fair value adjustments and depreciation and amortization. To support the company's review of non-GAAP information later in 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. Good morning everyone and thank you for joining us on the call today. Yesterday afternoon, we reported first quarter 2016 net sales of $342.4 million, up 66% from the previous year, and 206.6 million total ethanol gallons sold. We also reported a gross profit of $1.1 million, GAAP net loss of $13.5 million and a positive EBITDA of $1.6 million. In addition, during the first quarter we paid off $17 million of our Pacific Ethanol term debt resulting in our four Western ethanol plants becoming completely debt free. The first quarter was negatively impacted by seasonally high production of ethanol versus demand, which resulted in high ethanol inventory levels and compressed production margins for the entire ethanol industry. While this is created a challenging margin environment, we executed well on our strategy to be a national leader in the production of marketing of low carbon renewable fuels. The first quarter of last year was the weakest margin quarter of 2015 and we expect this pattern to repeat in 2016, with recent reductions and production coupled with very strong ethanol demand, we're seeing significant margin improvement in the front end of the second quarter. We are uniquely positioned in the industry with production assets in two distinct markets the Midwest the large producing region and the West is the large demand region. With production in five states and sales of products both domestically and internationally we spread our commodity and faces risk across diverse markets. We are able to benefit from regional price opportunities as the market adjusted to supply imbalances logistical constraints and availability of feedstock. This diversity helps us partially mitigate the effects of the negative margin environment experienced during the quarter. Our ethanol marketing reaches across the U.S. and we're on-track to market more than 800 million gallons this year. With our expanded reach of 515 million gallons of production, we have improved our logistics through increase ethanol unit trend movements and maintained our leading position in the low carbon fuel markets in California and Oregon, which deliver premiums for the sales of our fuel produced in those markets. During the quarter distillers grains prices declined and we're impacted by year-over-year reduction in demand from China. However, our diverse portfolio of high value co-products including corn gluten meal and feed, corn germ, dry distiller yeast, CO2 and corn oil provided strong returns for the company and also helped mitigate the negative ethanol crush margin cycle experienced during the quarter. Corn oil production and yields have increased, this product currently adds over $0.05 per gallon of incremental operating income. As previously mentioned, the low carbon fuel standards in California and Oregon continue to support demand for the low carbon ethanol we produce at our facilities in those states. These regulations solidly in placed and well supported in these states, produce meaningful financial results for the company and are contributing significant carbon reductions to combat the acceleration of climate change. Under the newly authorized LCFS program, the California Air Resources Board has recently updated carbon scores for all participating ethanol facilities. Our Western facility that sell ethanol in California have improved based on both newly adopted life cycle analysis by CARB and through the adoption of low carbon technologies and practices we've installed at our facilities. Our Oregon facility has one of the lowest carbon scores of ethanol supplied to the Oregon market. Carbon pricing in California is currently trading at approximately $120 per metric ton up substantially from year ago. As the compliance tariff for marketer of gasoline increases, we continue to expect strong pricing for carbon and as our carbon intensity values improve, we expect to see carbon premiums upwards $0.10 per gallon for the ethanol we produced and sell into these markets. During the first quarter, we advanced our plant improvement initiatives to increase operating efficiencies, enhance deals, improve carbon scores and reduce operating costs. In February, we entered into a technology license and purchase agreement for our Madera facility for an industrial scale membrane system that separates water from ethanol in the plant's dehydration process. In addition to increasing operating efficiencies and lowering production cost this technology reduces the carbon intensity of ethanol produced. We expect to be in commercial operation of this unit in the third quarter. During the first quarter and continuing this quarter, we have initiated trials of Enogen corn at the Pacific Ethanol Aurora and Madera facilities. Enogen is corn hybrid produced by Syngenta that contained alpha amylase enzyme within the corn kernel, it is expected to improve our operating performance by reducing consulary viscosity and energy consumption. If trials are successful, we expect to be moving to commercial operations in parallel with a new corn crop later this year. Late in 2015, we've began producing cellulosic ethanol at our Stockton facility, using the combination of enzyme and mechanical processing of corn fiber, which we expect to increase production yields to produce up to one million gallons of cellulosic ethanol at our Stockton facility on an annual basis. This production has been operating since the beginning of the quarter, however, we are still waiting for final approval from the EPA to qualify the ethanol produced at cellulosic for D3 RIN generation. We remain on track for installation of cogeneration of technology at our Stockton facility. This technology converts process waste gas and natural gas into electricity and steam, which lowers air emissions and reduces energy cost. We expect to begin commercial operations by the end of the third quarter. At all of our plants, we continue to incrementally improve our yields, reduce our cost and prudently invest in technology and improvements that position us well for sustained profitable operations. And we continue to implement best practice initiatives to improve safety, inventory management and productions stability across our entire business. As I mentioned in the beginning of the call the industry was negatively impacted by compressed production margins seasonally lower transportation fuel demand and disproportionately high ethanol inventory levels. As margins are improving in the second quarter, we are poised to benefit from the value of our larger more diversified company. The improved performance of each of our facilities, the value of the technologies and initiatives at the plant levels and our strategic locations to take advantage of the emerging low carbon fuel markets. Further supporting a better supply in demand balance through exports. According to EIA ethanol exports for the first quarter were 250 million gallons, which was up 5% from the 238 million gallons in the first quarter of last year, which indicates an overall annual growth in ethanol exports to meet both the octane and low carbon demands at a larger number of countries. Exports in March at 95 million gallons were the highest monthly total in over four-years. In summary, we have demonstrated resilience to the seasonal commodity swings of the industry and we remain confident in the long-term demand for ethanol driven by ethanol's underlying economic fundamentals as a high octane, low carbon and job creating fuel. We continue to be focused on executing well on those areas within our control such as implementing plant improvement initiatives driving operational excellence and reducing our cost of capital. With the anticipated strengthening of the market environment, we believe we are well position to improve our financial performance and grow our share of the low carbon fuel market. Now, I would like to hand the call over to Bryon McGregor, our CFO for a review for the financials.

Thank you, Neil. Our consolidated financial results for the first quarter whereas follows. We reported net sales of $342.4 million, up 66% compared to $206.2 million in the first quarter of 2015. Cost of goods sold was $341.3 million, compared to $207.2 million in the same quarter last year. Gross profit was $1.1 million, which compares to a gross loss of $1 million in the first quarter of 2015. SG&A expenses were $8.3 million compared to $4.9 million in the first quarter of 2015. SG&A was higher year-over-year as a result of our acquisition of the Midwest assets and higher than our guidance of $7 million, due to a seasonal increase of higher than anticipated professional fees. The conservative purposes we anticipate SG&A expenses to average $7.5 million per quarter through the remainder of 2016. Loss from operations was $7.2 million compared to $5.9 million in the prior year period. Interest expense was $6.2 million compared to $1 million in the first quarter of 2015. This increase is attributable to the term debt tied to the averaging assets and further reflects approximately $1.2 million and additional interest expense associated with our election to capitalize two months of the interest as permitted under the credit agreement. There was no provision for income taxes for the first quarter of 2016 whereas a $2.7 million provision was recorded in the first quarter of 2015. Net loss available to common stock holders was $13.5 million or $0.32 per share. This compares to a net loss of $4.7 million or $0.19 per share in the year ago period. Adjusted net loss was $13.6 million compared to $4.5 million in the first quarter of 2015. Adjusted EBITDA was a positive $1.6 million compared to a negative $2.7 million in the year ago period. Now turning to our balance sheet, cash and cash equivalents were $19.2 million at March 31, 2016 compared to $52.7 million at December 31, 2015. In tight margin periods we have found it most effective and efficiently managing our liquidity position including cash to focus on optimizing our working capital resource. We experienced a $12 million decline in working capital quarter-over-quarter probably to $5 dollars and capital expenditures and a $5 million reduction in our line of credit balance, the later in which does not impact the liquidity resources. These changes in addition to the $17 million retirement of term debt and then over $10 million increase in our inventory and accounts receivable accounted for the remaining decline in cash. The increase in inventory and receivables is not unusual and both are quickly reconverted to cash for excess availability under our revolving line of credit. To this point, we have seen the subsequent increase in our liquidity resources by approximately $10 million since the first quarter end. With regards to future capital expenditures, we remain focused on only investing in those projects that represent the highest near-term potential value for the company in terms of maintaining improving client performance and reducing carbon and initiatives. Accordingly we have budgeted $5 million of CapEx for 2016 and have paired our originally forecasted full-year 2016 spend from $26 million to $15 million. Further we expect to finance these capital expenditures through low cost leases to further reduce of cost of capital that in our joint investment profile with long-term value of assets and to properly preserve and improve our liquidity and cash resources. We also continue to evaluate and pursue opportunities to refinance our legacy Aventine term debt. Although our remaining term does not mature until September 2017, refinancing the debt and better terms remains a priority. With that, I'll turn the call back to Neil.

Thank you, Bryon. We are encouraged by the growing strength and demand for our low carbon fuel and our favorable position in this market. By the continued global demand for ethanol and it's co-products and by our continuous improvement in being a low cost, high value producer in the industry. We remain committed to the follow on initiatives to support our growth. First, we are focused on leveraging our diverse base of production and marketing assets to expand our share of renewable fuel and co-product markets. Second, we will carefully evaluate and implement new plant improvement initiatives that provide meaningful near-term returns Third, we are pursuing opportunities to further strengthen our balance sheet by minimizing our cost of capital efficiently managing cash and optimizing our overall liquidity position. And fourth, we will work to further lower our carbon score by modifying existing operations and investing in new technologies such as co-generation and aerobic digestion and solar power generation. Current and expected carbon pricing in states with low carbon fuel standard such as California and the Oregon, where we have production assets help support the investment case for these technologies. We believe we are very well position for success in the months and years ahead. [indiscernible] we are now ready to begin the Q&A session.

[Operator Instructions] And our first question will come from the line of Eric Stine from Craig-Hallum. Your line is open.

Hi Neil, hi Bryon.

Good morning Eric.

Maybe just kind of a question about the overall market clearly and you mentioned in your prepared remarks, but clearly seen improvements here in the second quarter. Are you starting to see - I know your utilization in the quarter was lower that's something that you had messaged. Are you seeing more rational activity by producers, clearly gasoline demand is a factoring here. I mean do you look at this and say “okay the market has improved here in the quarter” and people kind of go back to the ways that cause some of the pricing issues in the first place or do you think that the market is kind of on sustainable footing to more thoughtful in their production.

Well it's if you look at the current production levels, they are off about 7% from their peak, inventory levels are down about the same amount from their peak, the days or supplies down about three-days and that is significant and that is a supply demand rebalancing that is supporting better margins that we are seeing today. So the demand does continue to improve from here and through the summer months, so we are cautiously optimistic that we will maintain those balances. The one cautionary point is that some of the reduction in production that has come from seasonal maintenance and we are seeing those plants come back online, we had our own dry mill in Pekin that was down for a week while we were doing some maintenance work on that and that is back online. So we are seeing production increase and frankly production needs to increase to meet the growing demand. So it remains to be seen, but like last year as I mentioned where the first quarter was the toughest quarter and we saw a better environment through the balance of the year that is our current expectation.

Okay and maybe just sticking along those lines, I know you've talked about it and clearly industry consolidation seems to be needed, we really haven’t seen a whole lot of it to this point. Do you think that this recent market improvement and I know it's been a few week. But I mean is that something you view as maybe give us some more [indiscernible] to some other guys out there that maybe our prime Canada or do you still view it as this year progresses we likely seen more consolidation in the industry?

The M&A front has been relatively quiet of late, there are some assets that are currently on the market and we expect to see those trade. It is the case that over the last couple of years plants were successful in paying down debt, in the balance sheet generally the industry are stronger. So I think it's less a situation of stressed companies and more situation of return for shareholders and making them more rational industry that has the ability to maintain a better supply demand balance and just as you see in the so many commodity businesses that our - immature still is the ethanol business, consolidation is inhabitable. We've obviously think quite a bit of that already in the ethanol industry and we still believe there is more to come but the timing of that is little harder to call.

Right, okay fair enough. Maybe just last one for me, just quickly on exports it sounds like you expect some growth there this year maybe outside of the typical markets we think about that are going to be important for the export outlook. I've heard some rambling that China might up their imports and maybe in a big way, any thoughts on whether that is - if there some possibility timing in, what that impact could be?

Yes, we are definitely seeing that with China, if you look at the government numbers of China in the first quarter imported 75 million gallons of ethanol from the U.S. and that is 5 million more than all of 2015, in 2014 there were only 3 million gallons of exports to China from the U.S.. So that is clearly the trend and we're hearing the same which is that China, this is an important part of their energy and environmental program and we do anticipate to see continued strength in the exports of ethanol to China. Mexico was another country that has been rumbling about as they privatized the energy, the fuel system there that there will be more opportunities to displays MTV as an octane enhancer in that market and in other markets around the world. So we continue to be bullish of exports, the price of ethanol in the United States continues to be at the lowest cost source of octane and ethanol and world markets and that is very encouraging.

Got it. Thanks a lot.

Thank you.

Thank you. Our next question will come from the line of [indiscernible] from Cowen. Your line is open.

Thank you very much. Just a couple of quick ones for me. I just wanted to get kind of maybe an update on your thoughts about hedging given that if you think that the second half of the year is going to be strong. Do you hedge more or how would you see that playing out?

We continue to look at it upon a daily basis and take positions as they are available to us. This has been a market historically and no different today where the forward curve is actually not as good as the current market. There are some improvements in the very near-term and we'll look at that on by-week, by-monthly basis and do hedging around that. We do take longer positions on some of our co-products at fixed prices and we've hedged some of that out further. But on the ethanol side, the curve is still converted such that the margins today are significantly better than the margins out in the forward quarters and we're taking a very careful view of that and looking for opportunities and some time they emerge very quickly and we'll be there. But today, it's still is the matter of managing the margin and risk managing around that current spot margin.

Got you and how should we think then about DDGs maybe in the back half for the year, are you seeing some more strains or how do we think about that?

DDGs are steady, they come off a bit, as we mentioned in the prepared remarks with some of the decline in export which is an important part. So we had to increase inclusion rates in the U.S. and that has required some price incentive to do that. That's been done, the market is in equilibrium, we're actually seeing some strength in that market. It's fairly flat as we move out, but unlike ethanol which is actually has a fall in values as you move out that flat price opportunity as we see some basis and fixed price corn positions against that that are attractive has given us an opportunity to lock-in some of those values.

Great.

Corn oil as well.

Okay. Just two more quick ones, I just wonder, if you give us an update on the low carbon fuel substandard in Oregon, when did it start and when do credits start to be issued from that is there latency or a lag between that?

The Oregon program actually started in January 1, so the compliance period began for the 10% reduction over time in the Oregon. The market is still clarifying itself unlike California where the credits are traded, Oregon is playing catch up on that and has yet to establish a credit trading platform. We expect to see that in the next month or two, so while we're seeing some price discovery in the lower carbon ethanol sold and Oregon is commanding small premium values to surrounding markets that don't require that. And still we actually have credits actively traded, it will be hard to clarify what those values are, but we do expect that in the near-term.

Great, and just last one, given sales process for separate plants from me, EDM and [indiscernible] is that impacting you really to refinance debt, do you see it actually over the next year or maybe any strategic alternatives for modifying your own capital structure?

We actually don't see that as a factor, the bigger factor really has been the credit markets, which have been in a bit of deep freeze. We are seeing signs of that loosening up and so we're seeing opportunities to refinance that debt and we will be pursuing those and are pursuing those. And that combined within improving market environment in the ethanol industry and with assets being sold and further consolidation that only helps improve the forward view on the ethanol environment and that also will helps to facilitate refinancing of the debt.

Excellent. Thank you so much.

You are welcome.

Thank you. [Operator Instructions] Our next question will come from the line of Nathan Weiss from Unit Economics. Your line is open.

Hi good morning.

Good morning Nathan.

A couple of questions, first, as you virtually [indiscernible] under your belt with the new Aventine assets and presumably had some time to experiment with ethanol movements in the synergies of the combined business. Can you give us a little bit of insight not only on the cost savings, but some of the operational synergies you've seen in the flexibility having kind of two production regions in one umbrella?

Yes, it's been very good both from the ethanol perspective and the co-product on ethanol, it’s just more Oregon points to spread our product more rail lines, more opportunities, because there is always going to be imbalances in the market where a certain destination will have a better net back than another and that moves quickly. And with our large rail fleet, large access to many railroads and many markets as well as truck and barge access at both our west and central facilities, Pekin in the central. And our Oregon product which moves by barge in the west, we have tremendous diversity of logistics. We've also been adding some opportunities to do unit trains out of Pekin] which did not exist before, so that's going to give us some access into the southeast market in a competitive way that we've not seen before. So we're very definitely seeing those opportunities and with just a larger production base to spread our overhead, there are cost savings both at the plant level, the logistics and at the corporate level. And then on the co-product side, certainly with the wet mill and the large production of co-products that are other than corn oil and distillers that we produced in the dry mills and that has given us not only higher co-product return, but some installation on that the price risks in the ethanol business, which tend to be as you know very volatile. So we're seeing those advantages and we're continuing to enhance those advantages every day.

And switching over to cash side, in terms of borrowing and debt restructuring, you has mentioned that your western plants are now that free in your earlier comments, you mentioned the possible lease transaction. Are you looking the sale in leaseback transaction of those plants, or what kind of options around the table outside of traditional debt restructuring or rolling over?

Yes Nathan, I don't think we're looking at a wholesale refinancing of those plants themselves, we would like to keep the money encumbered more so with regards to specific assets. So as an example, we have the cash generation facility and things like that led themselves unintended to a lease type structure where you can match up long-term lease with the value of that you derive from that asset. But more importantly its again focused, we think its beneficial as well to keep those encumbered not only because it helps match well our desire to keep up fairly conservative amount of debt on the balance sheet. But as well as we look to refinance the existing debt that it's appropriate message and in appropriate structure to have. Particularly as well to lend itself, as you look out into the future and there the financial markets are opened again will allow us to continue to pursue a structure that to make sense for the company in these assets that are core to us now

And I assume, you watch green plains partners with great interest. If you looked across your assets, if you were to do a similar $0.05 per gallon charge on your existing storage and internal plant marketing as well as at an additional revenue in earnings from your third-party marketing business. How big an EBITDA company could you carve out if you were interested in doing so?

We look at it, we're certainly not at the size green plains is and I think that's fairly manifest, but I think that those would be improving and growing up to lease to consider and then actual progression as demonstrated by green plains in being able to deploy resources and properly manage those resources across that line.

Clearly, Nathan it generates EBITDA obviously for every gallon and we can all do the math and at this point, it's a key part of our integrated producer marketing model and we like the way that behaves and operates today and certainly as Bryon mentioned we'll continue to look for ways to improve that in the future.

Yes. I think sometimes its better when you do the math, but maybe there could be a future call. And lastly just looking at big capital expenditures, you obviously have a lot of flexibility, because you have some very interesting strategic projects. Can you talk to us at a little bit high level about some of the laundry list of projects, kind of more flexible high return projects and what kind of payback periods including pretty [indiscernible] but the potential reactivation of the port at Stockton.

I'm sorry what was the last part about Stockton, the port?

Yes, the potential reactivation of the port there.

Right. Well starting with that. It is a deepwater port and it doesn’t currently have access to the water for petroleum products or ethanol products. That is something that we are looking at, we have access to both the mainline railroads the UP and BN railroads and the opportunity to capitalize the pipeline to the water and a dock to be able to export ethanol. We think that exports of ethanol from the west coast will be a reality as the global market continues to develop and were are pretty uniquely positioned there that is definitely a longer term project that's something that we are evaluating. As it relates to the laundry list, starting with the incremental just efficiency improvements, there is still a tremendous opportunity particularly in Nebraska to do what we've done out west and if you look at the yield differences between our plants. We do have much higher yields in the west given the fine grind and the chemical changes we've made and other just general operational switches that we've made. And we’re implementing that in the Midwest region both the dry mill in Pekin and Nebraska and those are paybacks that are less than a year and so were certainly exploring and implementing all of those. We have the larger projects that we've talked about the co-generation and then exploring now co-generation which is in process. The anaerobic digestion and solar power in the west where we have the low carbon value where we can reduce our scores by anywhere from four to 10 points and a penny of gallon. That's adds up very quickly and you can justify with two-year paybacks or less, some fairly large capital investment projects that we are looking at. We have the cellulosic, the fiber conversion that were doing at Stockton that as we - once we have the EPA D3 RIN and where could California to get the proper pathway treatment under the low carbon fuel standards that is definitely a technology we would like to roll out to the other facilities particularly where supplying the low carbon. So those are few examples and there are more as we move forward.

Great. Thank you.

You are welcome Nathan.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Neil Koehler for any closing remarks.

Again thank you all for joining us today. It was a difficult quarter for the company and the industry, but we do feel very good about the way that we managed through it and with the margin environment getting better, we are optimistic in Q2 and moving forward and appreciate your support of the company and look forward to talking to you next quarter. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, and you may now disconnect. Everyone have a great day.