Alto Ingredients, Inc. (ALTO) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Pacific Ethanol First Quarter 2020 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, Ms. Moriah Shilton, Senior Vice President LHA Investor Relations. Please go ahead.

Thank you, Shari. And thank you all for joining us today for the Pacific Ethanol first quarter 2020 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 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 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 May 28th, 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, May 13th, 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 un-audited 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 I want to acknowledge those most affected by the pandemic, and thank our health care professionals and first responders fighting the effects of COVID-19. This is a challenging time for all, and we appreciate the dedication and work of all frontline workers to help bring us through this crisis. Pacific Ethanol is an essential business providing low carbon, renewable fuels, pharmaceutical-grade alcohol, and high-protein feed products. And I'm pleased to report that we have operated safely with our full workforce at our operating facilities. I'd like to thank our employees for their commitment. They have been able to continue to work with physical distancing and other protective protocols now as part of our standard operating procedures. The onset of the pandemic decimated demand for gasoline and ethanol, while at the same time spurred a greater need for sanitizers and disinfectants. Our team responded proactively in two areas. First, due to lower demand and an acute negative margin environment, we initially idled over 60% of our ethanol capacity. Second to respond to increased demand for pharmaceutical-grade alcohol we shipped to production at our Pekin, Illinois facilities to substantially increase output of this high value product. The overall market is recovering from a historic downturn. We entered the first quarter with a continued supply and demand imbalance, which negatively impacted margins. By the end of March due to government stay-at-home orders in response to the spread of COVID-19 across the country, demand for gasoline and ethanol dropped over a period of several weeks by as much as or more than 50% across our markets. With the collapse in ethanol prices and margins, the industry responded quickly through an unprecedented idling of approximately 50% of capacity with an estimated 75 plants completely idled and many others slowing to minimum production. Pacific Ethanol was also quick to idle ethanol production that was not cash flow positive. Based on increasing demand and improving margins, we are gradually increasing production and are currently operating at about 50% of total capacity. The recovery has been significant in the last few weeks with recent stay-at-home orders beginning to relax and states beginning to reopen for business the immediate effect has been positive albeit at production margins that are still challenging. Since the demand lows of April, we have seen demand increases of over 40% and three consecutive week declines in overall ethanol inventories. While there still is a long way to go in both demand and margins, we are encouraged by this trend. We will continue to monitor market trends and adjust our production levels in response to market signals. I'm pleased to report that our diversification strategy into high-value products is performing quite well. While fuel ethanol has suffered from demand destruction and negative production margins the USP-grade alcohol and high-protein feed we produced at our Pekin, Illinois facilities have done very well. Diversification was a strategic driver when we purchased first the Pekin wet and dry mills and yeast plant in 2015 and two years later when we purchased the adjacent Illinois corn processing plant all now functioning as an integrated campus. This strategy is producing positive results. We have produced high quality alcohol for sale nationally and internationally for many applications for years. As a result, we were in a strong position to increase high-quality alcohol production in response to new demand for sanitizers and disinfectants. Also with the industry's overall reduction of ethanol production and dry distillers grains our high-protein feed products are seeing increased demand and correspondingly higher prices. We are pleased with the performance of our Pekin operations, which we expect will make a materially positive contribution in the second quarter. On the export front, the industry actually had a strong first quarter of over 500 million gallons exported, which is 30% higher than the same period last year. While exports have slowed in the second quarter with worldwide demand destruction due to the pandemic, we expect exports to pick up as other countries reopen their economies. China is the first country to emerge from the pandemic and we believe China may step in later this year as a significant buyer of U.S. ethanol as part of the Phase 1 trade deal between the U.S. and China. On the regulatory front, while the EPA has gone to the sidelines until the appeals process of the 10th Circuit is over, we do believe inappropriate and illegal granting of small refinery exemptions, will be eliminated, which would restore over one billion gallons of annual demand for renewable fuels going forward. A properly and legally implemented RFS, both protects blenders in the midst of the current demand destruction, as the annual blending obligations are converted to percentage blend rates of actual consumption and will also drive more demand in use of E15 after markets return to normal levels following the pandemic. The support of low-carbon fuel policies and market development, which reward fuels or technology based on their life cycle carbon emission reductions remains a core strategy of Pacific Ethanol. We are working with multiple jurisdictions to expand low carbon markets across the country, which will provide value to the low carbon ethanol we produce. Finally, in mid April we took a significant step to reduce our debt, as we closed on our agreement to sell our 74% ownership interest in Pacific Aurora to Aurora Cooperative for a total valuation of $52.8 million. We are also in active discussions with multiple parties regarding the sale of strategic partnerships for various other assets. I'd now like to turn the call over to Bryon for a financial review of our first quarter 2020 results.

Thank you, Neil. I'll begin with the comparison of the first quarter of 2020 results to the fourth quarter of 2019. For the first quarter of 2020, net sales worth $311 million compared to $358 million in the fourth quarter, the decline resulting from a decrease in our average price per gallon sold, and a reduction in both production and third-party gallons sold. Cost of goods sold was $324 million, which resulted in a gross loss of $12.9 million compared to a gross profit of $3.2 million in the prior quarter, attributable to the historic drop in fuel ethanol prices. SG&A expenses were $10.2 million, compared to $11.8 million in the fourth quarter, reflecting our cost-cutting initiatives. As previously noted, although, we expect general SG&A expenses to be significantly lower in 2020. Professional fees through at least the first half of the year will out of necessity be higher to facilitate our restructuring initiatives. Loss available to common shareholders was $25.4 million, or $0.47 per share. This loss is compared to $41.4 million, or $0.85 per share in the fourth quarter, the latter of which included a $29.3 million asset impairment charge, related to the sale of our ownership interest in Pacific Aurora and a $6.5 million loss on debt extinguishment related to the amendment of our secured debt obligations. Adjusted EBITDA was negative $12.3 million compared to positive $1.9 million in the fourth quarter of 2019. Turning to our balance sheet. At March 31, 2020, our cash and cash equivalents were $26.8 million compared to $19 million at December 31, 2019. The increase reflects our efforts to monetize our working capital. Subsequent to quarter end, we received $20.2 million in cash before fees and $16.5 million in promissory notes from the sale of our 74% ownership interest in Pacific Aurora. Approximately $14.5 million of the cash proceeds were used to make principal payments on our term debt. Regarding our efforts to restructure our existing debt, we continue to work positively and move steadily forward with our lenders. With the improving market conditions we believe these conversations will become more – even more constructive. Also noteworthy in May, through the Paycheck Protection Program under the CARES Act, Pacific Ethanol and PEP can receive a combined $9.9 million from the small business administration. The goal of the program is to maintain jobs in the small business sector. And we are using the loan proceeds to rehire and retain our employees and fund payroll integral to maintaining our operations to produce essential products. With that I'll turn the call back to Neil.

Thank you, Bryon. We are encouraged by the alignment of interest of our stakeholders, which is supported by the performance we are seeing, particularly at our Midwest operations. Our continued marketing and sales of ethanol to all our customers with our ability to manage costs at idled assets. Times have been tough during the ethanol margin squeeze. However, the substantial increase in demand for our production of high-quality alcohol combined with the PPP loans and sale of our ownership of Pacific Aurora have improved our liquidity as transportation fuel markets are now improving as well. As the market normalizes, we remain convinced of the compelling cost, octane, carbon and health benefits of ethanol and the related long-term demand. We are actively working to best position Pacific Ethanol through its diversified platform to capitalize on the opportunities ahead for the ethanol industry and our company. Shari with that, I'd like to now open the call for questions.

Thank you. [Operator Instructions] Our first question will come from Eric Stine with Craig-Hallum. Please go ahead.

Hi, Neil, hi, Bryon.

Good morning, Eric.

Good morning. You mentioned it a little bit in your comments there. But just on the strategic review maybe if you could give a little more color. I know last go around you talked about in active discussions with multiple parties. Curious how that's trended. And also curious, I know we've seen modest market improvement here. Is that something that – potentially that you've seen a pickup in terms of interest and discussions as a result?

Well, it's – I think with the significant downturn in the industry and the economy here and worldwide, not a surprise that even – not even having the ability to go look at ethanol plants let alone put in meaningful bids for them. They certainly slowed that process down and we've refocused it more on looking at the opportunities to partner and to look at other strategic relationships. Certainly open to continuing to monetize assets but that process has been pretty slow currently.

Got it. Yes. No surprise there. I mean, is it something where you feel – well it sounds like you feel like partnerships or other angles are sufficient to have to accomplish your goals there?

Yes. And as we're seeing the market improve, we're seeing better performance out of our assets as well. And so that's all positive.

Okay. Maybe just turning to the overall market. I know you – while the market you've also been very thoughtful on the production side. Just curious though this has been I mean easily the worst market that anyone's ever seen for a lot of reasons. Is this something that you think potentially means a structural change to the amount of production that's out there? Or do you think that what we've seen in the past market gets really difficult, things come offline and then the moment improves productions right back. Just thoughts does this time differ from the past or do you expect a similar dynamic?

Well, time will tell. I would say that we're cautiously optimistic that this has been so brutal and so many plants went down both hot idle and cold idle. Certainly, when you cold idle a plant and lay off workers it is -- you don't just dial it back up. So, I think given the financial damage that was done the -- just the complete falling out on demand and plants going down hard that we will see a more gradual increase in production and as markets improve both domestically and export we are cautiously optimistic that we can see a more balanced market going forward. New demand both domestically with the higher blends not sure we'll get back to total gasoline demand. So, that focus on no more SREs and encouraging that the introduction of E15 in key markets and getting back to growing exports into countries like China becomes important. What we're seeing today is very encouraging because we've seen gasoline demand come back to where -- now we're only just a little over 20% down from the pre-COVID levels of demand and that was after being down 50% so a pretty good rebound. Whereas ethanol has lagged significantly which we need to do, we need inventories to come down. So, if you look at annualized demand based on the numbers that were just released this morning of about 11.3 billion gallons of demand for ethanol and 113 billion gallon gasoline market annualized and assuming that even 1 billion gallon run rate on exports that would be annualized demand of 12.3 billion gallons and we were producing at about 9.5 billion this week, which is why we've seen a significant reduction in inventories over the last three weeks. In fact from the peak looks like we're down 13% on inventories. But still the cautionary pieces that were still 15% higher than last year. So, we need to continue to be in this position where we on an annualized basis are producing less than the demand is showing and for inventories to continue to drop and to reach a level that is a more balanced inventory and then to keep the production and the supply and demand in better balance. So, we are cautiously optimistic.

Okay. Thanks for that color. Maybe last one for me and this is pretty recent. I just saw this morning. But I see a proposal an infrastructure proposal. I mean it looks like from Democrats I mean it's very early in the process but potentially $0.45 a gallon from the government for production from Jan 1 to May 1. Maybe not necessarily on this specific proposal, but do you think that eventually the ethanol industry does get some government assistance since I know that's been an area of frustration here over the last call it four to six weeks?

Yes. I mean, we are -- as we mentioned an essential business providing very needed goods, both on the fuel and the high-quality alcohol and protein to the economy. We have over 350,000 workers in this industry, many of whom are now not working. And it's hard for the farmers; it's hard for the biofuel producers. And, yes, we do believe that it's appropriate for government assistance to get this industry and others back on their feet. So we were encouraged to see that provision in the House bill, as you point out. It's just a -- there's not bipartisan support around that and it could be a process and who knows what a final form might look like. But, we do think it's appropriate and we do think that we will see some additional support for the ethanol industry.

Okay. Thank you.

Thank you, Eric.

Thank you. [Operator Instructions] Our next question will come from Sameer Joshi with H.C. Wainwright. Please go ahead.

Yes. Thanks, Neil; thanks, Bryon, for taking my question. I hope you're staying safe and healthy.

Thank you. I hope you are as well. We are.

Yes. Thanks. So the SRE EPA ruling that has not been challenged. Do you think it is going to be applicable nationwide, or is it not -- is it only going to be in those regions?

That's a good question. We think it will be very difficult to not apply it nationally. And the EPA, before they punted to the appeals process to play it out had indicated that they were inclined to apply it nationally. The principal certainly do apply nationally. As you point out, it was the Tenth Circuit, it only impacted those refiners. But if it were not to be applied nationally by the EPA, then there would be follow-up legal challenges to enforce that conclusion, because it's the only logical conclusion. So we're awaiting to see -- the court, Tenth Circuit very quickly unanimously refused to rehear the case and the next stop. And the only last next stop would be the Supreme Court. There has not yet been appeal by the oil companies or the EPA to the Supreme Court. They have until early July to do that. So, while it is the law of the land and it will be interesting to see how that's reflected in the EPA RVO proposals, the EPA has punted this to see if there is going to be an appeal to Supreme Court. We would think that it would be highly unlikely for the Supreme Court to hear that case, even if it were appealed, but we do expect, while, maybe not the EPA, but that the oil companies will attempt to appeal that case to the Supreme Court. So we will have to just wait and see on that.

Understood. So the ruling stands until appealed, right? I mean are there any extra SREs that you are seeing in recent past?

No. We have not seen -- there is a queue of, I can't recall, how many 20, high 20s maybe that were in front of the EPA for the 2019 year and they are just not -- they are basically saying, we're not going to deal with these until the appeal process has been completed. But it is in the Tenth Circuit and whatever it's, 30% of the refined product in the U.S., I believe, is in that Tenth Circuit. It is the law of the land and you could not grant an SRE. You'd be breaking the law if you're granting SRE to any refinery in the Tenth Circuit today.

Understood. Thanks for that color. On the balance sheet for PEIX, I think during the last call, you had talked about a Chief Restructuring Officer either a formal or informal role, but they were going to be in charge of negotiating long-term plans for servicing debt. Is there any more color you can provide on that?

I'd say Sameer outside of what we've indicated in our prepared remarks, just to add to that again that discussions and negotiations continue productively. And the recent improvements and also the strength of the products that we're making at our profitable plants are contributing and helpful towards those negotiations. So we'll give you more as we can.

Understood. And just one more housekeeping issue. There is a asset -- a long-term asset held for sale of around $16.5 million. Is that also associated with the sold plant, or is that something else?

Yes.

So we should not see that in the next Q statement?

That's correct.

Okay. Got it. Thanks, Bryon. Thanks.

Thank you. Speakers, I'm showing no further questions from the queue at this time. I would now like to turn the call back over to you for any further remarks.

Thank you, Shari, and thank you all for joining us today. I appreciate everybody's support. Hope everybody is staying safe and healthy. We will get through all this together. And we are encouraged by some of our recent developments and look forward to talking to you next quarter. Have a great day.

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