Good day, ladies and gentlemen, and welcome to the Pacific Ethanol’s Second Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Kirsten Chapman, with LHA Investor Relations. Ma’am, you may begin.

Thank you, Ashley, and thank you all for joining us today for the Pacific Ethanol second quarter 2018 results conference call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of the business highlights; and 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 details for 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 Investor Relations at 415-433-3777. A telephone replay of today’s call will be available through August 16th, 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 the information in this call speaks only as of today, August 9th and therefore you are advised that the 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 the 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, President and CEO. Please go ahead, Neil? Neil, are you on mute?

Yes, in fact, that was true. Thanks, Christine, and thanks to everyone for joining us today. For the second quarter, net sales were $410.5 million up 1% from last year’s second quarter. Total gallon sold were $227.4 million. Production gallon sold were $144.4 million. Industry ethanol margins remain compressed in the second quarter, negatively impacted by questionable EPA practices and granting over 2 billion gallons of small refinery exemptions from the RFS over the last two years and trade tariffs that temporarily start U.S. ethanol exports to China. These actions have got significant demand instruction for U.S. ethanol resulting in higher than optimal industry inventory levels. Further negatively impacting our results were higher than expected corn basis and greater repair and maintenance expenses, including final boiler replacement cost at our Pekin facility, which Bryon will detail in his comments. As a result we had a $1.3 million gross loss for the second quarter compared to a gross profit of $1.7 million in the comparable quarter last year. Loss available to common shareholders was $13.2 million and adjusted EBITDA was $1 million compared to loss available to common shareholders of $9.2 million and adjusted EBITDA of $2.6 million last year. Despite the regulatory induced demand destruction, we believe, that the market fundamentals remain strong and should support better margins. Ethanol is a low-cost high-value, low-carbon renewable transportation fuel and a high-value source of octane. Blending ethanol into gasoline, drives down the price of gasoline to consumers, excuse me. These compelling blending economics will drive higher ethanol blend rates in both U.S. and international markets. We are encouraged by the change of leadership at the EPA has the former administrator was not supportive of the ethanol industry and did not reflect President Trump’s repeated support for the industry and for agriculture. We…

Thank you, Neil. For the second quarter of 2018, compared to the second quarter of 2017, net sales were $410.5 million, compared to $405.2 million. The decline in sales is attributable to a 28% decrease in third-party gallons sold, partially offset by a 20% increase in production gallons sold. The increase in production gallons sold is due primarily to the addition of ICPs production volumes and the reduction in third-party gallons was due to our intentional and successful efforts to improve the profitability of that area of our business. Cost of goods sold was $411.8 million compared to $403.5 million in the prior year’s quarter, resulting in a gross loss of $1.3 million for the quarter compared to gross profit of $1.7 million in the prior year’s quarter. This quarter’s gross loss was impacted by $8.8 million or $0.06 per gallon from our two extraordinary items worth noting. We incurred $5 million in higher repairs and maintenance costs, that included $1.5 million in final boiler repairs at our Pekin facility. With the boiler issues largely behind us, we look forward to lower operating expenses to the tune of approximately $9 million annually when compared to the last three years. We had $2.4 million of unrealized non-cash mark-to-market losses on our derivative position, $1 million of which has been reversed with recent increases in corn prices. And finally, from a regional perspective, our Westernmost plant saw a significant increase in freight and basis cost for corn, which was only partially offset by the benefits of favorable ethanol spreads between Chicago and the West Coast. This negative differential in crush margin at our Western plants added $1.4 million in additional costs. These variances in both ethanol and corn freight and basis have subsequently return to more historically normal levels. SG&A expenses were…

Thanks, Bryon. We continue to believe 2018 will be stronger than 2017. Our conviction remains firm in the fundamentals of long-term growth in ethanol demand, supported by the octane, carbon and cost benefits of ethanol. And we are confident that our differentiated strategy positions us well for profitable growth. With that actually, I would like to open the call for questions.

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

Hi, Neil, hi, Bryon.

Morning, Eric.

Morning. So maybe just, I guess I’ll start on the regulatory side. Would the new EPA chief, I mean, do you think that there is a path for that the RVP waiver could be done standalone, since that is the one area that seems like it could be done pretty quickly and wouldn’t have to go through a lot of administrative things, I mean, it could just be done, but that clearly wasn’t going to be done under the past EPA head?

Yes. We think that the change of leadership and the upcoming midterm elections does create that path. That being said, it’s still a bit muddled, clearly when the President was in Iowa, he stated that they were very close to getting the E15 done, but then, in that same sense, and it’s very competent well, it’s not a very competitive you just moving RVP rule making by itself. So there still is some pressure to connect it to something else. We think that is ridiculous, because plenty has already been given to the refiners through the small refinery exemptions and when prices are quite low, and we think that the – it’s time to get something. To agriculture into the farmer and the ethanol industry that is able to take incremental corn and moving into the market, which is good for the economy and the consumer and the environment. So very – definitely we’re pushing quite hard to between now and the end of the year and certainly before the midterm elections get in RVP rule making moving forward.

Yes. Got it. Okay. And maybe just turning to your outlook for the market here for the remainder of the year. I know you’ve got large producer who recently came out and said that they were done kind of moderating their production not to worry about that they were just going to run, I don’t know full out, but they were going to run and pretty high levels utilization and we’re sitting here and we’ve got production here at all-time high and entering some seasonally slower gasoline demand. I mean, when you add all that up, what is it – I mean, what is it due to your expeditions at least for the remainder of the year?

Well, it’s on – we’re cautious. It’s – we definitely have some excess inventory I would point out that it is not that out of whack, it’s you’re looking it call it, three or four days to get back to supply, demand ratios that correlate to pretty decent margins. So taking either some production down or demand up consult that very quickly. You point out that we’re going into slower demand season in the fall and that can be a tough time. At the same time, exports continue to be very strong particularly to Brazil, they’ve been taking more even in the summer and they have in the past and then they ramp-up in the fall. Their own ethanol demand given the compelling economics of ethanol blending everywhere, including Brazil, is up double digits year-over-year. So we anticipate Brazil to continue to be a very strong outlet for U.S. ethanol. We are seeing other incremental demand that China were to come back in and the tariffs were resolved, that could either catalytic as well, but there is no question that without some incremental event, which is why we are pushing very hard on the RVP, because that – that’s a single fastest way to relieve the supply demand imbalances to open up the year-round market for the E15. That opens up a potential market of 7.5 billion gallons. Clearly, we don’t have that kind of supply. but we think that once the E15 starts, we have a very note starts on a year-round basis and we have a much tighter market, but that is more of a 2019. So, it’s – we think that there are a couple of factors that could keep things in balance this year. but there are also some factors such as everybody running harder than they have been that could cause this market to continue to be out of balance.

Got it, okay. Maybe, last one, just for Bryon on the repair cost. So, just to be clear. So, those are done in Q2, should not impact results going forward? And then a follow-up is that something where you can update on the insurance situation given the problem equipment from the supplier?

Yes. So, that is correct. The boiler expenses are behind us just a legal cost to the unit to prosecute our position. I guess in the boiler manufacturer working with the insurance companies, I wouldn’t expect nor would I expect you to plan on insurance proceeds at this point. This is clearly, a manufacturer defect. And so that’s the position, where taking for all the insurance companies and we’re probably getting legal action that way.

I don’t think we have a very good case.

We do. Then, your second part of your question was…

I think you’ve covered it. I think we’re good.

Okay.

Okay. Thanks a lot.

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

Hi, good morning and thanks for taking my questions.

Good morning.

So, the one-time items – good morning, Neil. The one-time items that you mentioned in the press release, $5 million higher maintenance and then Bryon itemized the list for us. Can you maybe clarify for us what this was sequentially? And whether or not the numbers you re sharing were year-over-year increases? And sequentially, how much of that is likely to disappear as we move into the third quarter. Do we get the full mickle in EBITDA margin uplift?

Yes. So, it’s interesting there is both, a $5 million difference sequentially, but a part of that increase is. So, a year-over-year Craig correct, there was a $5 million year-over-year increase, but $2.5 million of that was related to ICP, which was not on our portfolio last year. So not to be confused with that, which is sequential increase quarter-over-quarter, which was what I was commenting on largely among, which was again, you had boiler costs, we also had additional repairs, unplanned repairs and maintenance and then on top of that, we had a couple of other expenses associated with that including the Western. The differential is spreads between court basis, rate basis and the premium that we’re getting for West Coast product.

So in some, yes, that’s $5 million that we do not believe will recur in a more normalized environment.

Thank you for that. So, the second question that I had was related to the relocation of the spurious refinery, small refinery, waivers that you handed out, can you talk a little bit about how that’s likely to play out at least from your perspective. Do you expect the EPA to potentially relocate those gallons or is there something that’s going to be maybe, an unfortunate piece of history for the market?

I think the latter is the case. I think it’s a long shot to think that the 2016 and 2017 are gallons related to the small refinery exemptions would be reallocated. What we think is quite possible and administrator – administrator, dealer essentially indicated at a congressional hearing, a week ago, was that on a prospective basis that the EPA should come up with a mechanism to anticipate what those exemptions might be and relocate those gallons. So it is very focused on a go-forward basis to make sure that we don’t continue to experience the – here’s 15 billion gallons of the requirement that now has been reduced to 14 or less due to the other hand, given away that small refinery exemptions. So, that is the focus on prospective. We’re still working hard to remand as well the 500 million gallons that the courts have said, we’re inappropriately held back by way of implicating the inadequate supply. That issue we’re litigating. We don’t think that there is a chance that the –that will be the part of the final RVO, because it wasn’t part of the proposals, because it’s hard to put something in and that was not indicated in fact, specifically as not to be commended upon. So that also becomes something perspectively that legally, the EPA is going to be required to relocate those gallons and that might end up becoming part of the reset proposal that should be coming in 2019.

Great. And then last question if I may, do you have a view on the biodiesel tax credit and potential conversion for that credit from a lender’s credit to a producer’s credit, given that a producer’s credit would include nested from the California market and do good things for LCFS credit. Obviously, benefiting your West Coast production. Do you have a view like you’re sharing with your representation in DC as in association, is this something you think the ethanol lobby can get behind?

It’s not something we’re not currently a biodiesel producer. So, it’s not something that I spent a lot of time focused on. I know that when there was an effort to convert it to a producer payment that there was a lot of political headwinds on that. And so I think the most likely outcome is that there is an extension of the biodiesel credit, it would still be a blender’s credit.

Thank you. So that, I’ll take the rest of my questions offline.

Our next question comes from Carter Driscoll of B. Riley. Your line is open.

Good morning, gentlemen. First question, I think you made comment on prepared remarks talking about taking your marketing volumes down fairly aggressively, helping profitability. Can you just help me square that? It has been largely close to a break-even business for you. Why I continue to bring it down in this environment fairly dramatically and help you overall blended margin and just trying to get your thought process there?

Yes, fair enough. and you’ll see when we file the key; the marketing division was more than break-even. it was quite possible in fact. So, the strategy was to really move out of the market that we’re just so competitive. and we really didn’t have a competitive advantage and we’re trading dollars at West markets like Arizona for instance. So we have refocused that business on areas that are tributary to our production assets, which are very supportive, we have a competitive advantage, we have significant market share in all of the markets, where we have ethanol production assets, particularly at West, where we have a very significant market share beyond our own production capacity and that’s where we’re focused that business where we have production advantages as well as carbon advantages and that is created a well-reduced, a profitable platform.

So is it – should I think about it as a new run rate or is it a temporary adjustment?

That’s a fair question. I would say for the moment, I would say a new run rate.

Okay. Obviously, there has been a lot of discussion on policy. Do you feel that the waivers have stopped over or materially slowed since the change in administration and then do you think that would or could have a positive effect on getting approval for [indiscernible] and is there a realistic expectation that the tariff's – the increasing tariffs problems with China could go away – I mean it seems like export markets is actually been healthier, because Brazil stepped in and hasn't been kind of down situation we saw and run-rate basis, it looks like we’re tracking towards the high end of the 16 to 18 base at this run rate right now. Just trying to square the different parts of what this administration clearly impacting on the biofuels policy of the biofuels industry in this country?

Yes, the RIN prices are in the $0.27 range so there's no question that have come down significantly, which undermines obviously, it's undermined depends on our products as we have FX supply of RINs due to the small refinery exemptions. So that is taken some pressure of which is what we think the rational is stronger than ever to move forward with the RVP parity for the E15. And as E15 enters the market more blending to the statutory numbers of the 15 billion gallons for conventional without any numbers there for small refinery exemptions and reallocated, if they're granted. That would continue to keep RIN prices low if more product is blended into the marketplace, because of the RIN prices are lower, we do a assume, although there's still a lack of transparency form the ETA, but we do assume that those exemptions have slowed down and hopefully I have not been graded at all. If you look at the public announcements from oil companies and record profits, you don't see a lot of economic hardships there either. So we are optimistic net debt has slowed and also optimistic that on a go forward basis, that any exemptions will be reallocated. On the question of exports, you're right, I mean, that's incrementally were up strongly. At some point, your tariffs with China will be resolved. It's hard to, doesn't look like anytime soon, but it will happen. And that would be a huge catalyst. I mean, if you look at where the exports are today and you add China back in, we were expecting 300 million to 400 million gallons from China, we’re way left than that, because they pretty much seized taken any product, after the first quarter. That alone, would get this market, very much in the balance and tighten up to where you would see are very different margin structure today, if China, we’re taking the amount of ethanol that. Frankly, the market would like to be taken. So number of catalyst there, that we see timing on when they kick in, is a little less certain.

Okay. Maybe just a follow-up. Bryon, so you said most of the issues with the [indiscernible] behind you just referring to legal uncertainty in terms of, are you go after the cost, the actual installation is completed and expected to be performing [indiscernible] how we run it on a run-rate basis going forward, performance wise everything's back to normal it's really just the question of inventory damages, is that correct?

Yes. So it's only legal that's left.

[Operator Instructions] Our next question comes from Sameer Joshi of H.C. Wainwright. Your line is open.

Hey, Neil. Hey, Bryon. Thanks for taking my question. Of the cost savings that are attributable to ICP. Have they been completely legalized at that $4.5 million level? And are these reflected in the recent quarters results?

The $4.5 million probably isn't fully reflected in Q2, but it will be going forward.

And I think Neil mentioned the Madera solar plant is operating at 70%, because of some substation requirement that something that needs to be done at substation level. What is the expected timeline on that and when do we expect that $1 million savings on annual basis to be fully realized?

We expect this substation work with low utility PG&E to be completed by the end of the year. So from this point forward, so for Q3 and Q4, it will be more 70% of that million dollar savings on an annualized basis as well as the additional carbon benefit, which will see once we are up and running, but we expect that to be better than a point of carbon score. And then going forward, in 2019, we would expect the full 100% benefit million dollars in the additional point plus of carbon benefit.

Understood. In terms of capital expenditures that your budgeted for rest of the year. Are there any priorities that take residence or others in case you decide not to spend as much?

Most of the capitals expenditures that we have are commitments from prior periods or I wouldn’t that they include really any material commitments this year. So, it’s just seeing through the rest of the way. As far as prioritization, they're going to be really focused, if you do make any additional capital expenditures, we have a number of projects that are sitting in the wings that have really phenomenal payback and it's just the decision is to deployment of capital and making sure we are carefully disciplined about this.

Is there any of this plan budgeted for further low carbon for your initiatives?

Yes. There are a number of projects that works and we’ll announce to the extent that they will be able to build those into your analysis, but yes, there are number of capital projects that are available to us that would have significant benefits from a carbon intensity perspective.

But under the current balance of the year capital expenditures that's related to just finishing projects that have already been disclosed, announced and repairs and maintenance CapEx is keeping the platform efficient.

Understood. Going back to the macro level. How do you see E15 penetration for the rest of the year? And part two of that question is, is there any – do you see any further industry consolidation and your participation in such consolidation going forward?

Yes, on E15, there's approximately 1,500 stations that are distributing that today. And we anticipate that to be 2,000 by the end of the year. The volume numbers are probably 100 to 150 million gallons of incremental demand as you get to that 2,000 stations. And/or better and as stations are added it could go to $200 million plus in 2019. If you open up the E15 year-round and the summer blending, that number becomes incrementally lot larger and you then have an into the incentive for more players to get into the mix and if the EPA is enforcing the RFS, so a lot of the law that is going to be huge incentive for more E15 blending and that's why we are so focused on the RVP parity, because that's inappropriate and valuable game changer. The consolidation, we have one large players that announced the selling plans, ones are buying them remains to be seen. We will look at assets, but today, we are focused on continuing to improve our own platform and continue to diversify the product mix and to continue to add value through the existing assets that we have.

Great. Thanks for taking my questions.

And I'm showing no further questions at this time. I'd like to turn the call back to Neil for any closing remarks.

Thanks, Ashley, and thank you all for joining us today and your continued support to Pacific Ethanol. Have a good day, and look forward to speaking to you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect.