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Edited Transcript of PEIX earnings conference call or presentation 5-Nov-15 4:00pm GMT

Q3 2015 Pacific Ethanol Inc Earnings Call

FRESNO Nov 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Pacific Ethanol Inc earnings conference call or presentation Thursday, November 5, 2015 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Becky Herrick

Lippert/Heilshorn & Associates, Inc. - IR Contact

* Neil Kohler

Pacific Ethanol, Inc. - Co-Founder, CEO and Director

* Bryon McGregor

Pacific Ethanol, Inc. - CFO

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Conference Call Participants

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* Eric Stine

Craig-Hallum Capital Group - Analyst

* Jeff Osborne

Cowen and Company - Analyst

* Katja Jancic

Sidoti & Company - Analyst

* Alex Kayvanfar

Redwood Capital - Analyst

* Craig Irwin

ROTH Capital Partners - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc.'s third-quarter 2015 financial results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Becky Herrick of LHA. Please go ahead.

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Becky Herrick, Lippert/Heilshorn & Associates, Inc. - IR Contact [2]

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Thank you, Candace. And thank you all for joining us today for the Pacific Ethanol third-quarter 2015 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 summer 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 results. The Company also prepared a presentation for today's call that is 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 November 12, the details of which are included in yesterday's earnings press release. A webcast replay will also be available at Pacific Ethanol's website.

Please note that information in this call speaks only as of today, November 5. 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 states that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of risks and uncertainties.

The actual future results of Pacific Ethanol could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, events, risks and other factors previously, and from time to time, disclosed in Pacific Ethanol's filings with the SEC. Except as required by applicable law, the Company assumes no obligation to update any forward-looking statements.

Also, please note that the Company uses financial measures not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP, to monitor the financial performance of operation. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the reported financial results as determined in accordance with GAAP. The company defines adjusted EBITDA as unaudited earnings before interest, income taxes, depreciation and amortization, and fair value adjustments. To support the Company's reviews of non-GAAP information later in this call, a reconciling table is included in yesterday's press release.

It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

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Neil Kohler, Pacific Ethanol, Inc. - Co-Founder, CEO and Director [3]

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Thank you, Becky. And thank you, everyone, for joining us this morning. The third quarter of 2015 was our first quarter of operating our newly-acquired assets in the Midwest. Financially, the quarter was challenging with a compressed margin environment, but we made great strides in integrating the former Aventine assets to build a solid platform for future growth and success.

Our net sales were $380.6 million, up 38% over last year's third quarter. Total gallons sold were a record at 211.6 million gallons, and GAAP net loss was $15 million, which included approximately $8.7 million related to one-time largely non-cash items stemming from our acquisition. Bryon will review these adjustments in more detail in a moment.

Our adjusted net loss for the third quarter was $7.5 million, and adjusted EBITDA was a positive $2.4 million. We believe our continued focus on optimizing our assets, expanding our market share, integrating the newly-acquired production facilities in the Midwest, and continuing to implement plant improvement initiatives, will bolster our financial performance moving forward.

We are now beginning to see the benefits of the acquisition. The added scale from the Midwest assets provides us with eight strategically located biorefineries in the US, with a total of 515 million gallons of annual production, and over 800 million gallons of annual marketing volume. This larger diversified platform yields significant benefits, including enhanced purchasing power, increased revenues, new product sales, projected synergy benefits of over $1 million per month, and an overall strengthened position as a low-cost producer and high-value marketer of ethanol and co-products.

In the quarter, we made significant improvements to the Nebraska operations, which were not performing well when we assumed ownership July 1. In addition, we had a productive yet costly scheduled week-long shutdown at the Pekin wet mill. While these issues had a negative impact on earnings in the quarter, both locations are currently running smoothly and generating positive operating margins.

Our ethanol marketing business performed well during the third quarter. Our third-party gallons sold increased sequentially to a record 102 million gallons, as we have grown our business into a national ethanol production end marketing company.

Now onto a review of the industry. Ethanol demand in the US market is very strong, reaching record levels, as low oil prices have led to higher consumption of transportation fuel. And exports continue to grow, as global markets incorporate the economic, environmental and octane benefits of ethanol. US ethanol capacity has expanded along with ethanol demand, and the industry continues to improve operating efficiencies.

Strong margins in 2014 led to investment in technologies and processes to expand output at existing facilities. While these capacity expansions improved plant performance, they have also led, at times, to excess supply in the market. This was particularly true at the beginning of 2015. As the year has progressed, ethanol demand has increased, ethanol production has moderated, and the ethanol stocks-to-use ratio is near the lowest in a year, contributing to improved production margins.

Turning to a review of the regulatory environment, regarding the renewable fuel standard, by November 30 of this year, the EPA is expected to finalize its volume requirements for 2014 and 2015. We believe there will be an upward adjustment from the proposed rules targets. We also believe stronger RFS is consistent with Congressional intent, and the capacity of the biofuels industry will expedite a move to higher-level ethanol blends and new production of advanced biofuels.

The California Low Carbon Fuel Standard, which requires a 10% reduction in overall carbon emissions by 2020, continues to provide important value to our Company. The program has established a functional carbon market that benefits our low carbon ethanol production. Currently, Pacific Ethanol receives a premium over the Midwest ethanol in each California production gallon sold into the California market.

The program was reauthorized by CARB in September, with a new compliance curve that is resulting in higher values for the carbon credits we generate. Additionally, the Oregon LCFS program begins January 2016, which will extend our low carbon advantage to our Oregon facility.

We have a strong track record of investing in yield and lower carbon projects at our plants, and have several either installed or underdevelopment for each of our eight facilities. We will continue to invest in these assets to improve their performance. Corn oil production is installed and operating at all of the Company's dry mills.

We are on schedule and budget for the installation of cogeneration technology in our Stockton facility. By using a gradual oxidizer, we will convert process waste gas and natural gas into electricity and steam with lower air emissions and at reduced operating costs. We expect to begin commercial operations by the end of the second quarter of 2016. We are exploring the feasibility of duplicating this effort at our Madera, California facility.

We have also begun production in sales of CO2 at our Colombia facility. And with the ongoing production of CO2 at our Pekin facility, we expect this to contribute incremental operating income for the Company going forward. We sell close to 1 million gallons a month of industrial grade ethanol from Pekin, and we expect demand for this product to increase. Due to its higher quality, we sell the product at a premium to chemical companies.

We have completed a trial at our Madera facility with Whitefox to implement technology that lowers the carbon intensity of our ethanol and increases throughput capacity in distillation. We are planning to implement this technology on a commercial scale. We have completed trials and are commercially producing cellulosic ethanol at our Stockton facility with the Edeniq pathway process.

Together, with the cellunator technology already installed at the Stockton facility, the pathway process converts cellulosic fibers in the corn into ethanol. We are working with Edeniq and the EPA to qualify these gallons for generating D3 cellulosic RINs, which carry a premium over conventional ethanol.

These are just some examples of the initiatives we are currently working on to improve yields, lower carbon intensity, diversify revenue streams, and produce advanced biofuels. Across our production platform, we continue to maintain a disciplined approach to calibrate production levels, to optimize yield and match supply with demand in both fuel and feed markets. We have made material progress in operating our plants more efficiently over the last several years, and we believe this positions us well for profitable growth.

With that, I'd like to turn the call over to Bryon for a review of the financials. Bryon?

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Bryon McGregor, Pacific Ethanol, Inc. - CFO [4]

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Thank you, Neil. As a reminder, our financial results for the third quarter of 2015 reflect the addition of the recently acquired Midwest assets. In the third quarter, we reported net sales of $380.6 million, compared to $275.6 million in the third quarter of 2014.

As Neil previously noted, net sales were impacted by the one-week shutdown of our Pekin wet mill facility for major maintenance and upgrades. The shutdown reduced production by 2 million gallons, lowering revenues and increasing cost of goods sold by approximately $2 million in the form of additional repair and maintenance expenses.

Also, during the third quarter of 2015, we recorded purchase accounting adjustments that further increased cost of goods sold by approximately $8.7 million. The one-time largely non-cash items resulted from required mark-to-market adjustments on acquired inventory and commodity contracts on the acquisition date that happened to be at or near the highest commodity prices in the quarter.

Since the inventory was sold and contracts fulfilled in the third quarter, our cost of goods sold was negatively impacted by the higher basis cost. Gross loss was $7.4 million this quarter, which compared to a gross profit of $18 million in the third quarter of 2014. SG&A expenses were $7.4 million and included approximately $3 million of SG&A related to Aventine's operations.

This compares to $8.9 million in the third quarter of 2014 on a pro forma combined Company basis, or $4.4 million for the Company prior to the merger and $4.5 million for the acquired assets on a standalone basis. This represents a $1.5 million reduction year-over-year. We are targeting a $7 million quarterly run rate in SG&A through the remainder of the year and throughout 2016.

This quarter, operating losses was $14.8 million compared to an operating income of $13.6 million in the prior-year period. Interest expense was $5.2 million compared to $1.1 million in interest expense in the third quarter of 2014. In addition to the normal interest and fees paid on our loan and lease commitments, this line item also now includes approximately $300,000 in non-cash debt discount amortization related to the $145 million in acquired term debt.

Our effective tax rate for the third quarter of 2015 was 21% compared to 40% for the third quarter of 2014. As the losses generated by the Midwest plants cannot be carried back, we received less benefit to the provision on a pretax basis, resulting in a reduced tax rate. For the fourth quarter, we expect the rate to be in the range -- in the 25% to 35% range. That loss available to common stockholders was $15 million or $0.36 per share compared to net income of $3.7 million or $0.15 per share in the year-ago period.

Adjusted net loss was $7.5 million or $0.18 per share compared to adjusted net income of $8.1 million or $0.33 per share in the year-ago period. Adjusted EBITDA was $2.4 million compared to $15.5 million in the third quarter of 2014. For the nine months ending September 30, 2015, net sales were $814.4 million compared to $851.3 million in the same period last year.

SG&A was $16.3 million compared to $12.4 million in SG&A in the nine months ending September 30, 2014 for Pacific Ethanol standalone, and $29.1 million on a pro forma combined basis. Net loss available to common stockholders was $19 million or $0.63 per share compared to net income of $7.8 million or $0.35 per diluted share in the same period in 2014.

Adjusted net loss was $11.7 million or $0.39 per share compared to adjusted net income of $49.9 million or $2.26 per diluted share in the same period in 2014. And adjusted EBITDA was $5.1 million compared to $78.7 million for the 2014 period.

With regards to our previously stated benefits we expect to see from the synergies of the acquisition, we are already experiencing savings related to reductions in redundant staff, and increased efficiencies in accounting, IT and professional services. We expect this to continue as we complete the integration of the IT and accounting systems. We have removed over 300 basis points in interest spread by consolidating and refinancing our revolving line of credit, while at the same time extending and improving terms.

We are making significant progress on leveraging our marketing practices across all of our production facilities, as we transition sales from third-party marketers to refiners and other end-users, improving our realized ethanol prices. We continue to see progress in coordinating any best practices throughout all operations. The anticipated benefits that include improved safety practices, better inventory management, and greater stability and production, will bear fruit in the coming months and years.

Now turning to our balance sheet. Cash and cash equivalents were $53.1 million in September 30, 2015 compared to $62.1 million in December 31, 2014. Our working capital was approximately $107.3 million at September 30, 2015 compared to $114.1 million at December 31, 2014.

Our total liquidity position, including cash and excess lines of credit, subject to availability, remains solid at $100 million as of quarter-end. In addition, we have been prudent with our capital spending in light of the lower margin environment. Planned capital expenditures for the third quarter was approximately $7.7 million, $2.3 million below forecast.

For Q4 2014, we have reduced our anticipated expenditure from $10 million to $5 million. Further, we're using the opportunity to take a fresh look at our capital projects and make adjustments to optimize our use of cash on projects with the highest return on investment. We expect to provide more insight into our 2016 capital budget on our 2015 fourth-quarter earnings call.

With that, I will turn the call back to Neil.

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Neil Kohler, Pacific Ethanol, Inc. - Co-Founder, CEO and Director [5]

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Thank you, Bryon. With the long-term growing demand for ethanol and co-products supporting ongoing investment in the industry, we remain very confident in the future prospects for Pacific Ethanol.

We remain committed to our growth initiatives, which include maximizing the...


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