Good day, ladies and gentlemen and welcome to Pacific Ethanol Second Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conclude a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host Ms. Becky Herrick, LHA.

Thank you operator, and thank you all for joining us today for Pacific Ethanol's second quarter 2017 results conference call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of business highlights, Bryon will provide a summary of the financial and operating results and then Neil will return to discuss the 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's available on the Company's 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 August 10th, 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, August 3. And, therefore you are advised that time sensitive information may no longer be accurate at the time of any replay. Please refer to the Company's Safe Harbor statement on Slide 2 of the presentation available online, which says that some of the comments in this presentation constitute forward-looking statements and considerations that involve the 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. In management's prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believe these measures will assist investors in assessing the Company's performance for the periods being reported. The Company defines adjusted EBITDA as unaudited net income or loss attributed to Pacific Ethanol before interest expense, provision or benefit for income taxes, asset impairments, purchase accounting adjustments, fair value adjustments and depreciation and amortization expense. To support the Company's review of non-GAAP information later in this call, a reconciling table was included in yesterday's press release. It's now my pleasure to introduce Neil Koehler, our President and CEO. Neil?

Thank you Becky, and thank you to everyone joining the call today. For the second quarter, we reported net sales of $405 million, gross profit of $1.7 million, a net loss of $9.2 million and adjusted EBITDA of positive $2.6 million. While Q2 is typically a seasonally strong quarter, this year ethanol margins were negatively impacted by elevated production volumes and high inventories across the industry. We currently are seeing an improved spread between ethanol and corn and better plant production margins when compared to the second quarter. Gasoline demand has picked up with summer driving is now running at levels at or above last year. In fact gasoline demand last week hit a record high as measured by the EIA. Blend days of supply have been moving lower supporting a better ethanol supply and demand balance. Also according to the EIA, ethanol inventories last week fell to the lowest level since the first week of this year. We expect demand to remain strong and continue to grow as domestic markets blend above 10% and as international markets grow to meet carbon targets and demand for octane. Across all our facilities we continue to implement initiatives aimed at increasing operating efficiencies, improving reliability, enhancing yields, improving our carbon scores, and reducing operating costs. Our 3.5 megawatt co-generation system at our Stockton facility is on track to reach full capacity by the end of the third quarter. The co-generation system will deliver steam and electricity into the plant while lowering emissions and we anticipate it will reduce our annual energy cost by up to $4 million. The Whitefox industrial scale membrane system at our Madera plant is operating very well and we expect a positive impact in energy savings, operating performance and in our carbon intensity score. We estimate the energy…

Thank you, Neil. Before I begin I'd like to note that as our acquisition of ICP closed on July 3, we will consolidate its financials beginning with our third quarter results. For the second quarter of 2017 compared to the second quarter of 2016, net sales were $405 million compared to $423 million, cost of goods sold were $404 million compared to $405 million, gross profit was $1.7 million compared to $17.7 million in the second quarter of 2016 which reflects a decrease in production margins compared to the prior year. SG&A expenses were $8.8 million compared to $6.1 million. The year-over-year increase in SG&A was primarily attributable to higher professional expenses associated with the ICP acquisition as well as increased benefits and non-cash compensation adjustments. We expect acquisition cost to also have some impact on SG&A in the third quarter. Interest expense was $2.7 million compared to $6.5 million. Net loss available to common stockholders was $9.2 million or $0.22 per share. This compares to net income of $4.7 million or $0.11 per share in the year ago period. Adjusted EBITDA was $2.6 million compared to $20.4 million in the year-ago period. For the six months of 2017 we increased our first half 2017 net sales by 3% to $792 million and we dramatically reduced our interest expense to $5.3 million in the first half of 2017 compared to $12.8 million in the same period last year. This is primarily due to the refinancing of debt in December 2016, which provided a significantly lower interest rate. Now turning to our balance sheet, cash and cash equivalents were $91.4 million at June 30, 2017 compared to $68.6 million at December 31, 2016. As part of our acquisition of ICP, we paid $30 million in cash. As the acquisition closed July…

Thanks Bryon. We remain encouraged by the long-term demand for ethanol that's supported by the growing need for high octane and low carbon renewable fuels in both domestic and international markets. While volatility in the ethanol markets persist, they're continuing to make operational and strategic improvements that lessen our exposure to such factors and position us to gain share in the renewable fuels market. We are focused on increasing operating efficiencies, improving plant reliability, enhancing yields, improving our carbon scores and reducing operating costs. Our acquisition of ICP in July provides multiple cost synergies further diversifies our production with high-quality premium priced alcohol products representing a less volatile revenue source and it increases our opportunities and access to export markets. Amanda with that we are ready to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Eric Stine from Craig-Hallum. Your line is open sir.

I was just wondering if we could start on three Q and obviously I know this can change pretty quickly, but you mentioned starting to see it in the EIA data. Just in terms of conditions here going forward, I mean is this is a trend you see continuing given seasonal plant shutdowns and also have heard some industry participants talking about shifting production to industrial grade.

I think the shift to industrial grade is, there's some of that's happening obviously, we've acquired some of that, I think that's less of a factor in the overall supply demand. But what we are seeing is strong gasoline demand. We really worked off an overhang. The problem with Q2 was that we left Q1 with quite a bit of inventory because gasoline demand in Q1 was fairly anemic relative to the year before running about 2.5% behind. And now we're running at levels that are above a year earlier. So strong domestic demand, strong exports, decline in inventory is getting down to days of supply that are pretty well correlated with better margins and we are seeing that. We do anticipate that that should continue to be the case. We do have a little less exports in Q3, so that would be one negative, but they should come back stronger in Q4. But we believe that the strong gasoline demand will pick up the slack here in the summer months. And we also have a stable corn prices that was a bit of a factor as well in Q2 as these corn markets trade on the weather and there was concern about the heat and some areas in particular, Dakotas with declining growth and yields. So we saw some spikes in corn prices where ethanol didn't really follow, we're seeing a pretty stable corn prices, it's become clear that we will have a just a fine crop maybe slightly lower yields than the USDA is predicting, but still a good strong crop. So we are constructive on the second half of the year, certainly more so than the first half.

And maybe just start or just sticking with the demand side. First, a lot of noise out of Brazil and potential for either tariffs or quotas, I mean I know that - well, I mean just curious what your thoughts are there and what you think a potential outcome is. And I know that they're targeting maybe a month from now when that decision is made. So any thought there is helpful.

Well, they've deferred that decision twice. I don't really think Brazil wants to instigate a trade war with the United States and that would be a way to do it. So there is that factor and the other factor is that Brazil continues to be on an annual basis, structurally short of ethanol and they need the gallons. So it may impact the economics to some degree. It may shift trade flows, but they still need the gallons and that becomes a factor in the overall global supply and demand. So we continue to see Brazil as a strong market for ethanol. The other factor is that they have the swing between sugar and ethanol. Sugar prices were declining in and around the $0.13 a pound and back now close to $0.15 a pound. So that's another factor supporting the shift to as much sugar production as possible in Brazil and impacting their levels of ethanol production, which creates even more of a demand for importing our ethanol.

Last one for me, just coming back to corn, any color you can give on basis. I know that corn had had touching that $4 range for a bit, has pulled back, but hearing that in certain parts of the country, you can get corn well below the board price, so just how - what you're seeing from basis here in 3Q and is that something that you may lock in.

Yes. Certainly, there is a bit of an inverse relationship between the board and the basis. So when the board goes up, you tend to see farmers stepping out and selling and that does create an opportunity to lock in basis and we have locked in some basis for Q3 that is better than current market. So that is encouraging. Basis generally has been fairly friendly towards ethanol producers, particularly in Illinois. We've seen some of the lowest basis than we've seen in years, typically that market trades closer to option price and we've seen numbers that have been closer to $0.10, even $0.12, $0.14 under the board. We also are seeing good supplies going west and have been able to lock in a decent basis for our Western plant. So it's a pretty good position that we're in on corn and looking at a good crop with a good strong carry out going into next year.

Your next question comes from the line of Craig Irwin from Roth Capital Management. Your line is open.

So Neil, I was really happy to hear you mention the DC Circuit Court case or court decision from last Friday. Earlier this week, I was at the EPA hearing in DC and a few people politely reminded EPA, hey, you guys broke the law. Your position with RFA gives you a really good view sort of on the broader strategy of the ethanol industry and a lot of people really look to you for your leadership as far as how to approach some of these complicated problems. So the arguments on the other side haven't changed. They are all tired and old and we only need to look at Brazil to see that 27.5% ethanol isn't going to cause all the gas tanks out there to rot and all the car to fail on the road. So can you maybe describe for us the path forward after this circuit court decision what it would look like as far as industry actions to make sure EPA follows the law, the way the Congress wrote it and that we see RVOs for the whole biofuels industry that are more in line with the spirit of the law rather than what we've seen under the Obama administration over the last number of years?

Sure. Well, it's really up to the EPA to take the vacating of the 2016 and decide what to do with it. We think that a very straightforward path would be for them to go back and add the 500 million gallons back to the 2016 RVO and require and maybe give refiners a little extra time to retire an additional 500 million RINs. So by law, you're right. They did break the law and the Court of Appeals determined that and the industry and the market needs those 500 million gallons back in one way shape or form. They could appeal it the Supreme Court, don't expect that they will do that because I think there is a very good straightforward path that is not draconian, it's not going to be disruptive to markets, but will which is why this is a very large victory for the industry, will absolutely help accelerate the introduction of higher level blends. We've already seen a reaction in the RIN market, RIN prices have been moving up since that decision and it provides that much more incentive to buy that gallon of ethanol that has a RIN attached that actually sells with that RIN attached at a price that's at or below the price of gasoline, take advantage of the octane, have a cheaper product as E15 on the street than going out and having to buy 85, 90 cent RIN. So we are seeing the infrastructure in place, we continue to see resistance from the major oil companies, but we have a lot of support from large chains of independents that are starting to implement the higher blends and we think that this case will be absolutely catalytic in helping accelerate that development and also very importantly, just takes away any future threat that the EPA could come back and again use the very flimsy claim of, not legal claim that inadequate infrastructure is tantamount to inadequate supply and invoking the supply waiver under the RFS, they can no longer do that. That's been made very clear. So we do see it as a very positive development. And as an industry, we will, to your point, advocate very strongly and did in Washington as you heard from all areas, the biofuels industry, it was a very united voice from all biofuel participants that it's great that you please follow the law, do what is supposed to do, which was to expand markets for clean burning biofuels. Great that you're protecting the conventional number, but you need to increase the advanced biofuel number, because we are ready and able to produce more advanced biofuels than the current RVO proposal is suggesting.

Second question I wanted to ask is about, a little bit about geography. So as one of the primary suppliers of ethanol into the state of California, you have a neighbor that's pretty interesting. Mexico seems to be taking the right actions to move towards 10% ethanol blend rates with the approval of a 10% blend, just back a number of weeks ago. How do you see this impacting ethanol demand in California? I know there's complexities in there because of LCFS scores and what people are choosing to deliver into the state, but as Mexico was to take 300 million to 500 million gallons more over the next few years, how would you see this impacting development of demand across the state of California?

I think the real impact is just the overall global, domestic and global supply demand. I mean, clearly in the US, until we get past the 10% and see wide adoption of higher blends and continue to see growth in international markets, we have a little bit of a supply demand concern, given that the industry continues to increase its capacity through creep and even some new plants are now being built. So we need new markets, we need them domestically, internationally and Mexico is one of the bright spots. It could be as much as 1 billion gallon market if 10% ethanol were to be in all the blends. I think you're 300 million to 400 million. Right now, it's a reasonable target, because the MTB crowd down there is still hanging on to their market share and have at least for the time being, locked ethanol out of the large urban markets, but the early adopting areas outside of those do represent that 300 million, 400 million gallons and many of them are closer to the US border. California, specifically while we continue to have the LCFS, which we anticipate be well beyond 2020, it's going to continue to be more of a specialty market. So I don't see a lot of California produced gallons going to Mexico, but certainly we look at Aurora and Nebraska and the logistics of being able to rail product down to Mexico from there. That's an immediate opportunity for us. We are down there, taking a look at the opportunities and talking to the blenders, infrastructure has been put in place. As the overall supply demand balance tightens and we see growth markets like Mexico, that does tend to support a higher ethanol basis to destination markets like California. So I do think that you'll see a positive impact on the overall industry and you will also, as markets expand, see a stronger ethanol basis and ethanol pricing in California.

[Operator Instructions] Your next question comes from the line of Sameer Joshi from Rodman & Renshaw.

So most of my questions have been answered, but just a couple. One related to the cost savings. I think when it was announced, the ICP acquisition, the number $3 million as cost savings was mentioned, but on this call, I think I heard a 4.5 million number. Was I hearing wrong back then or how do you reconcile that?

You were not hearing wrong. That was the number. We were being, until we got deeper into it, were being very cautious and as we have dug in deeper and no more, we are seeing additional advantages and opportunities. It's both in SG&A as mentioned and other cost savings in terms of being able to consolidate one corn buying position. We think we can get a lower corn price that way and then we really have in both our feed, distillers grain, yeast and ethanol identified a tremendous amount of savings in logistics and how we move products to market and that probably is what singularly increased that number as we've explored opportunities to take out third-party costs that we have been paying on all three of those areas and internalizing it and are now very efficient and integrated complex there.

That's actually great. So on the SG&A alone basis, should we expect your annualized or other quarterly operating expenses to be in the $7 million range going forward once the operations are integrated, right now, they are around six.

Yeah. Sameer, I think we've provided guidance and be historically at around 7.5% for ICP. That was before ICP. But I don't have a number for you yet. We still need to finish our integration analysis, so I'll probably have a number for you next quarter. As we mentioned on our prepared or in my prepared remarks, indicated that the numbers were higher this quarter due to the acquisition and some other adjustments. So I think hopefully that gives you enough to go on at least for a quarter and then we'll give you some more details later on.

At the macro level, we saw the announcement of ADM trying to focus on their [indiscernible] operations to industrial and beverage grade and of course your ICP acquisition has been lying with that, but do you see industry wide more such move towards these kind of adaptations or at least acquisitions similar to yours?

We really don't. That is a, you look at the US market for fuel at 14.5 billion gallons, the market for the high grade ethanol in the US is a little over 400 million gallons. So it's a very small market, very few number of producers that produce the grade for those markets, particular the higher quality beverage opportunities and one plant deciding to ship 50 million gallons into that market could really see the premiums eroded very quickly. And it's a significant investment. That's why we felt so good about our acquisition, we're just owning, a, a plant that produces the high alcohol that already had a market, so it's not as if we're expanding into that market, we're just replacing it with ownership. And so it will be very difficult for us as a company to justify going to another plant and saying, yeah, we're going to put in $15 million, $20 million and $30 million and that's the kind of number you're talking about to produce a high grade ethanol to then have the consequence be seeing pricing erode in that area. I would point out that I think some people misunderstood what ADM was saying, as I understand their announcement and a follow-up question that was asked, it's not as if they are shifting production to beverage, they are taking 100 million gallons offline of fuel grade immediately. So that's a great contributor to helping to tighten up the supply demand balance and they are going to refocus just on the higher grades that they're already producing at that plant. Maybe there will be some incremental growth, but the real announcement was they're reducing capacity at that plant to take out the fuel and to support and simplify the process there and focus on the high grade.

Actually, I just have one more if I may. Bryon, the number, 16 million for CapEx that you mentioned, does it include any expense at the ICP side?

No. So I guess my story is, hold on, be patient, wait till the third quarter. We're working through that. We'll give you back, we'll come back with some ideas as to what we think we would be spending, but I think that you should expect that consistent with our message of being conservative and given where numbers are today that we expect that number to be fairly small.

Your next question comes from the line of Chris Souther from Cowen. Your line is open.

Hey. It's Chris on for Jeff. Thanks for taking my call. Most of my questions have been answered. I just want to see if you could provide a bit of color on the third party sales, as it relates to the ICP merger, having kind of better access to export markets potentially makes those third party margins more attractive. Could you guys see the, going higher than kind of the 110 million to 120 million gallon per quarter range that we've seen lately?

I think it's possible, particularly in a market that has been a bit long, the third party business has been very competitive and in some areas, just not worthy, the cost of capital. So we have not been as focused on growing that part of the business. It's very important that we protect the business we have, because it's so synergistic with our production, the whole production, marketing model to really trade around our assets and so to your point, we are evaluating what opportunities this creates. To make money in the third party business, you really need to have something, some hooks, some differentiation, whether it's terminals, whether it's access to the water, which this gives us. So it is possible, I would say that's not a high priority right now for us, but it is certainly an asset that can be leveraged to look at those sorts of opportunities.

And then it kind of seems like you were kind of alluding that the two-third one-third, alcohol to ethanol mix would probably stay pretty static within the ICP. I just wanted to see though when you're talking about kind of the co-products between alcohol and ethanol, how does - do they have kind of similar returns.

Yeah. So it's a dry mill. So where the added investment of that plant has been is in the fairly extensive equipment to produce that very high quality ethanol, but in terms of coproducts, it's the same coproducts, dry distillers grain and corn oil. We actually see an opportunity to improve the performance in that area, particularly on the corn oil side, the output has been a little less than what we consider to be standard for our plants and we're addressing that to increase corn oil, but it's more or less the same coproduct platform that you have in any dry mill.

[Operator Instructions] We have no further questions at this time. I will turn the call back over to Mr. Koehler.

Thanks, Amanda and thank you all for joining us today. We appreciate your support and interest in the company and we look forward to speaking with you soon. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.