Alto Ingredients, Inc. (ALTO) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Pacific Ethanol Incorporated Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today Moriah Shilton of LHA Investor Relations. Please go ahead, madam.

Thank you, Joelle. And thank you all for joining us today for the Pacific Ethanol fourth quarter and full year 2019 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 details of the Company's quarterly and year-end results. The Company also prepared a presentation for today's call that is available on the Company's website at pacificethanol.com. A telephone replay of today's call will be available through April 1st, 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 on this call speaks only as of today, March 27th, 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 statements on slide two 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. 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 impairment, loss on extinguishment of debt, purchase accounting adjustments, fair value adjustments and depreciation and amortization expense. To support the Company's review of non-GAAP information later on this call, a reconciling table was included in yesterday's press release. It is now my pleasure to introduce Neil Koehler, President and CEO, Neil?

Thank you, Moriah, and thank you everyone for joining us today. First, as it is top of hearts and minds for all in the country, I'd like to discuss the nationwide spread of the novel coronavirus and how it is affecting our business. The coronavirus has led to several statewide stay-at-home orders which in turn has dramatically reduced overall fuel demand. In all our markets, we have seen significant reductions in ethanol sales to our customers. We expect in those markets, most impacted, upto a 50% reduction or more during the pendency of the stay-at-home orders. As a result of this demand disruption, the market prices for unleaded gasoline and ethanol have plummeted to historically low levels. Corn prices have also fallen but less so on a percentage basis. Accordingly, ethanol plant production margins across the industry are negative. The pandemic is compounding the adversity of an already oversupplied ethanol market. As a result, the industry as a whole is shutting down production to reduce supply and avoid negative cash flow operations. Pacific Ethanol is idling plants during this period and expects to have reduced production by over 60% by the end of March. Every plant has customers and commitments to meet fuel and feed demand. So, shutting down production needs to occur in an orderly manner, with the objective of meeting our contractual commitments, while minimizing negative cash impacts. In response to the coronavirus, or Pekin, Illinois ICP facility is producing and shipping record amounts of high-quality alcohol, as a key ingredient in the production of hand sanitizers. Our ICP plant produces primarily high-quality alcohol that is sold into industrial, chemical and beverage grade markets. Our sales into the hand sanitizer market, historically, accounts for approximately 10% of total ICP production. And with the now increased demand for the product, we are modifying production processes, and have more than doubled our sales in this application and are working diligently to do more to meet this critical need for high-quality alcohol. We're also working with local health organizations and first responders in Pekin to produce and donate hand sanitizer in that community to frontline health workers who are attending to those impacted by the coronavirus. This is a time when we all need to work together to help stop this pandemic. Now, I'd like to provide an update on our strategic initiatives. As we announced yesterday, we have deferred the payment of principal and interest of our secured debt through May 20th, which gives us additional runway to complete additional strategic initiatives. While neither our lenders, nor the Company expected to continue the now acute adverse market conditions, the extensions demonstrate the constructive relationships we have with our lenders to restructure our balance sheet and improve liquidity while continuing to pursue our initiatives. To support us in these efforts, we also announced yesterday we have engaged the Chief Restructuring Officer, Winston Mar on a consulting basis. We welcome him to the executive management team as an added resource to assist the Company in negotiating with lenders and implementing strategic initiatives. In February, we completed a significant step by signing a definitive agreement to sell our 74% ownership interest in Pacific Aurora to Aurora Cooperative Elevator Company for $52.8 million of consideration, subject to certain working capital adjustments. We are working diligently to close this transaction as soon as possible. We are in discussions with multiple parties regarding the sale or strategic partnerships for various other assets. We are actively working on these transactions. On the regulatory front, the EPA has decided not to appeal the 10th Circuit Ruling on the small refinery exemptions that if applied nationally, as expected, would eliminate the inappropriate granting of SREs and will restore over 1 billion gallons of annual demand for renewable fuels, going forward. As an industry, we'll be working to restore the volumes illegally lost over the past three years to be added to future annual obligations. This was the right and timely thing for the EPA to do and will be supportive for long-term ethanol demand as we recover from the current market crisis. The final rule for the 2020 renewable fuel standard blending requirements was released in late December. Conventional biofuel volumes, primarily met by corn ethanol will be maintained at the minimum 15 billion gallon target set by Congress for 2020. As markets return to normal levels after the pandemic, this will drive more demand and use of E15 in certain markets. Exports were seasonally strong in the fourth quarter of 2019, and for the full year were down slightly from 2018. At this time, we expect exports to be about the same as last year, but the coronavirus has had a negative impact on worldwide trade and remains and evolving unknown. With China being the first country to emerge from coronavirus impact, we are optimistic that China may step in as a significant buyer of U.S. ethanol as part of the phase one trade deal between United States and China. The support of low-carbon fuel policies and market development, which reward fuels or technologies based on their life cycle carbon emission reductions, remains a core strategy of Pacific Ethanol. We are working with other jurisdictions to expand low-carbon markets across the country, which will provide value to the low-carbon ethanol we produce. I’d now like to turn the call over to Bryon for financial and operational review of our fourth quarter and full year 2019 results. Bryon?

Thank you, Neil. For the fourth quarter of 2019, net sales were $358 million compared to $365 million in the third quarter, decreasing to a reduction in total gallons sold offset in part by an increase in average price per gallon sold. Cost of goods sold was $354 million, which drove a gross profit of $3.2 million compared to a gross loss of $14.8 million in the prior quarter. SG&A expenses were $11.8 million compared to $8.7 million in the third quarter, reflecting an increase in professional services associated with our strategic initiatives and loan amendments. Although we expect general SG&A expenses in 2020 to be significantly lower as we execute on our initiatives, professional fees will out of necessity be higher through at least the first half of the year. Loss available to common shareholders was $41.4 million or $0.85 per share and included a $29.3 million asset impairment charge related to the pending sale of our membership interest in Pacific Aurora LLC and a $6.5 million loss on debt extinguishment related to the amendment of our secure debt obligations. This loss compared to $27.3 million or $0.58 per share in the third quarter, which did not have such a charge. Adjusted EBITDA was positive $1.9 million, compared to negative $12.4 million in the third quarter of 2019. For the full year 2019, net sales were $1.42 billion, compared to $1.52 billion in 2018, which declined year-to-year due to fewer gallons sold, partially offset by higher average sales price per gallon. Cost of goods sold was $1.43 billion, resulting in the gross loss of $9.9 million, compared to a gross loss of $15.2 million in the prior year. SG&A expenses were $35.5 million, an improvement from $36.4 million in the prior year, due to our ongoing effort to lower overhead costs. As previously noted, these improvements are currently obscured and offset by professional expenses associated with our restructuring efforts. Loss available to common shareholders was $90.2 million, or $1.90 per share, compared to $61.5 million or a $1.42 per share in the prior year, the principal difference being earlier mentioned asset impairment charge. Adjusted EBITDA was negative $1.7 million, compared to $5.1 million in 2018. Turning to our balance sheet, at December 31, 2019, our cash and cash equivalents were $19 million, compared to $18.9 million at September 30, 2019. Upon the close of the sale of our ownership interest in Pacific Aurora LLC, we will receive approximately $27 million in cash and $16.5 million in promissory notes. With that, I will turn the call back to Neil.

Thank you, Bryon. These are challenging times for our country and for our Company. Even so, given the continued compelling cost, octane and carbon benefits of ethanol, we firmly believe in the industry's long-term growth prospects, which is why we are working all levers to put the Company in the best position to thrive in the future. We've already taken a few key steps in our strategic initiatives including restructuring agreements with our bank lenders and senior noteholders and extending the payment terms. We also signed a definitive agreement to sell our ownership interest in Pacific Aurora, and we are in discussions with multiple parties around the sale or strategic partnerships of various other assets, and we will provide updates as appropriate. With that, Joelle, I'd like to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum. Your line is now open.

I just wanted to confirm, utilization at your plants and by when. And I assume that that would be for all plants other than ICP, which I would guess you're going to run full out?

That is -- to some of level of idling that is correct. And as we've said in the prepared remarks, it would be over 60% reduction at this time by the end of March on total production.

And then, I mean, at ICP, is there any ability -- I mean, even if it's for a short term to run that above nameplate, given that you've obviously got there would be demand -- or there is demand in the market for that product?

We are doing everything humanly possible to increase the capacity to meet the current demand. Yes, we can sell anything we can produce there. And we have been able to make some incremental improvements in that regard.

Okay. And then, as you look at -- obviously, you're doing -- you're doing it, have seen some other plants shutting down but others that still have not made an indication that they are. I mean, is this something that you think in this environment as severe as it is, is what finally kind of means a structural change to production in the industry, because over the last year and a half or more, there have been some pretty challenging environments where the thought was production industry-wide would come off. And if it did, it was very temporary. I mean, how do you see -- once we come out of this, what do you see production looking like and maybe the response, whether people stay offline or come back as they had in the past?

That’s good question, Eric. I think, as painful as it is, this is probably the -- to your point a shock to the system that the industry in some respects needed to really get the capacity down. Obviously it's down quite extremely I believe. According to RFA it is over 3 billion gallons, just as of now that are offline. And it takes time, as you run through fermenters and let your customers adjust, takes some time to shut plants down. So, there's a bit of delay, but it's just imperative because the demand is not there for the product and the margins are so negative. That's what's happening. Once plants go down, it is -- you don't -- as opposed to what was happening, let's say in the summer when we did see a significant reduction, that was mostly slowdowns, some shutdowns, but a lot of it was either companies with multiple plants taking a plant or two down or just general slowdowns. And you're right, when the margins came back, the industry then overreacted and increased the production, even before the coronavirus to levels that were above the demand, and we started to see the margins fall in December and in January and then obviously exacerbated by the recent events. Once plants are down and they’re called idled, bringing them back is a different case. And I think that there is a reasonable expectation that we will see a more balanced market coming out of this crisis. And we will come out of it. It’s just a matter of when we really are able to get the spread of the pandemic under control, lift the stay-at-home orders and probably be a lot of kind of demand for people to travel around, and we'll see gasoline demand come back to normal.

Got it. Maybe last one for me. I mean, good to see that the deferment out for two months on the interest and principal. Your commentary certainly does imply that there are some things on the front burner and it could be potentially near term. But, just on the Chief Restructuring Officer addition there, just maybe some of the other options you're looking at as part of that process, is it kind of hand in hand with the strategic initiative?

Yes. I mean, it's -- as we've publicly announced and with the actual announcement of the Pacific Aurora sale, looking at the potential other sales of assets and partnerships and working with lenders to outline the best terms going forward that meet the needs of all stakeholders.

[Operator Instructions] Our next question comes from Amit Dayal with H.C. Wainwright. Your line is now open.

With this EPA decision not to appeal the waiver ruling, it seems like a good first step, but there appear to be several underlying issues that still need to be resolved before the benefits begin to accrue at least materially. Could you share your views on how this will play out as next steps?

Yes. That's a good question, Amit. The ruling takes effect immediately when it was -- when it came down, so in the 10th Circuit, which I believe is about 30% of all the refined gallons, mostly in the central part of the southwest of the country that the small refinery exemptions granted have to be only refiners that receive the exemptions when the automatic blanket SREs back in, I believe 2012, were eliminated. There is only two refiners that qualify for that. So, basically, it says there'll be no smaller fund exemptions. The real question now is, will the EPA take this legal precedent and apply it nationally? And it's hard to imagine that they wouldn't because that's the principle that was put down in this case is clearly national and its implication. And if the EPA were not to do that, then there would be an additional legal action to apply it nationally. It would also put one refiner at competitive disadvantage to another. So, there's a fairness issue. And in discussions with EPA, that was our indication that they agreed with that. So, there are stats. If the two -- refiners have appealed for a rehearing in the 10th Circuit, less than 10% of those requests are granted. So, just the law of average is there, which suggests there will be no rehearing. There could be an appeal to Supreme Court. We find that to be unlikely as well. So, now, it's about how does this get implemented? And that's going to be up to the EPA to provide indications that we -- would have expected fairly immediately. But, given the coronavirus there may be some delays in that to say how they are going to apply this nationally and what the implications are. The most immediate action will be how the EPA acts upon the small refinery exemptions that are in front of them, retroactive to 2019. And, we would expect that most of those, because of this ruling will not be granted. And if you recall, we already had a victory on the regulatory front when the EPA said that they would reallocate the anticipated small refinery exemptions gallons, and they essentially added about 770 million gallons to the RVOs for 2020, because that was what they anticipated, based on the three years of DOE averages, the recommendations that they would be granting. Our view now is that they will have a very hard time granting any of those small refinery exemptions. And that would then translate into a higher RVO than was passed with the 2020 RVOs. So, positive. There are steps along the way. It's really up to the EPA now to indicate how they are going to manage this new law of the land going forward.

Thank you for that, Neil. That was really helpful.

Yes. And we will continue obviously as an industry and with our champions to be very diligent on this point, because it's a critical issue.

Understood. On the operating side, do you have visibility right now in terms of what your cash burn could be for 2020?

It's a really good question, Amit. It's really difficult to assess at this point. As Neil has said in his prepared remarks, our focus is on operating plants that are profitable, right? So, our expectation is to -- our efforts are to reduce anyhow cash burn that we need to get to achieve profitability. That will come with efforts as well, working with our CRO, working with our lenders to -- with regards to restructuring our debt and executing our other initiatives. So, it's difficult at this time to actually give you any kind of an estimate.

But, working hard to limit cash burn and also as part of that is to reduce our overhead. So, costs that we can control, we are very-focused on reducing those costs.

Understood. And maybe just one last one for me. On closing the Aurora transaction, has this coronavirus issue -- is there any impact on the timing for closing this or are things still on track?

It’s still on track. There's certainly uncertainty in all aspects of the economy with the coronavirus. But, at this juncture, it is on track.

Okay. That's all I have, guys. I appreciate it. Thank you so much.

Thank you.

Thank you. I'm not showing any further questions at this time. I'd now like to turn the call back over to Neil Koehler for closing remarks.

Thank you all for joining us and especially in these difficult times. We appreciate your support of the Company. And we hope you all stay safe. And together, we’ll get through this crisis. Thank you and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.