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Edited Transcript of PEIX earnings conference call or presentation 2-May-19 3:00pm GMT

Q1 2019 Pacific Ethanol Inc Earnings Call

FRESNO May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Pacific Ethanol Inc earnings conference call or presentation Thursday, May 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryon T. McGregor

Pacific Ethanol, Inc. - CFO

* Neil M. Koehler

Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director

* Moriah Shilton

LHA Investor Relations - SVP

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Conference Call Participants

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* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

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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. First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Moriah Shilton, Ma'am, you may begin.

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Moriah Shilton, LHA Investor Relations - SVP [2]

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Thank you, Lauren, and thank you all for joining us today for the Pacific Ethanol First Quarter 2019 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 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 till May 9. 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 the information in this call speaks only as of today, May 2. 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 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 believes these measures will assist investors in assessing the company's performance for the period 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 is now my pleasure to introduce Neil Koehler, President and CEO. Neil?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [3]

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Thank you, Moriah, and thank you everyone for joining us today. As discussed on our year-end call, we're pursuing a number of strategic initiatives. In late March, we amended credit related agreements with certain lenders to provide us with additional flexibility and liquidity as we continue our review of potential sale of production assets, reduction of our debt levels, further strengthening of our cash and liquidity, and opportunities for strategic partnerships and capital raising.

We continue to make progress on our plans and believe we're taking the appropriate steps to increase shareholder value, to benefit all our stakeholders and to provide greater financial flexibility to facilitate future growth opportunities. We look forward to providing you substantive updates as they develop over the coming months.

The ethanol market overall is emerging from the bottom of a cycle that occurred in the fourth quarter of 2018 when the crush margin was at a historic low. The first quarter of 2019 results reflect this improvement, resulting in a promising start to the year.

Our net sales of $356 million were up 6% sequentially. While loss available to common stockholders was [$13 point million], adjusted EBITDA was a positive $1.6 million for the first quarter. These results represent a significant improvement over the fourth quarter.

When looking at the overall ethanol industry, we continue to believe the compelling cost octane and carbon benefits of ethanol will drive new demand in 2019 above 2018 levels. Two significant drivers of this expected growth are new exports and E15.

First, in the export markets, we look forward to resolution of trade disputes with China, which will open up a large new market for U.S. ethanol as China continues on the path to incorporating 10% ethanol blends into its gasoline supply.

The steady retail adoption of E15 is reflected by a growing a number of large retailers who currently offer E15 at more than 1,700 stations across 30 states. Pre-blended E15 is now available at over 100 terminals in the United States. The EPA is expected to finalize a rule before June 1 that will facilitate the year round use of E15, which will result in incremental demand starting this summer, with material growth in the years to come.

Wholesale ethanol prices are currently trading at a $0.70 discount to wholesale gasoline prices, which also is helping drive both new domestic and export ethanol demand. The supply/demand balance is tightening with seasonal increases in demand and lower inventory levels, resulting in improved production margins.

The West Coast carbon markets continue to create strong premiums for our lower carbon ethanol. And with RIN prices now trading near 5-year lows, we see no rationale nor legal basis for the EPA to grant additional small refinery economic exemptions, which will support stronger domestic ethanol demand in 2019.

Before I turn the call over to Bryon for a financial and operational review of our first quarter 2019 results, I'd like to note that the Airgas Co2 plant at our Stockton facility is commencing commercial operations now and is expected to contribute more than $1 million in EBITDA annualized. Bryon?

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

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Thank you, Neil. For the first quarter of 2019, net sales were $356 million, compared to $334 million in the fourth quarter. This sequential increase in sales is due in part to an over 5% improvement in our average sales price per gallon of ethanol as well as an over 21% increase in third-party gallons sold, more than offsetting our reduction in production gallons of almost 11%.

Our lower production output was intentional and consistent with prior guidance. The increase in third-party gallons sold stems from our need to replace gallons not produced by our plants to fulfill first quarter contractual obligations.

Although cost of goods sold was up $3 million sequentially to $358 million, gross profit improved by over $[80] million, reflecting the combination of improved crush spreads, reduced input costs and lower operating expenses, including labor and repair and maintenance. We reduced SG&A expenses by approximately $1 million sequentially to $8.2 million, largely a reflection of reduced professional fees and other operating expenses.

Loss available to common stockholders was $13.2 million or $0.29 per share, a $19 million improvement when compared to the $32.3 million or $0.74 per share in the fourth quarter. Adjusted EBITDA was positive $1.6 million, also a significant improvement over the negative $18 million in the fourth quarter.

Turning to our balance sheet. At March 31, 2019, cash and cash equivalents were $21.8 million, compared to $26.6 million at December 31, 2018. This decline is attributable to a combination of lingering tight margins, mandatory capital expenditures and amortizing debt payments. Although cash may appear tighter, better advanced rates under Kinergy line of credit alone improved liquidity further by nearly $8 million.

For the first quarter of 2019, our capital expenditures totaled $1.1 million, mostly attributable to ongoing repair and maintenance of our facilities. Consistent with prior guidance, planned capital expenditures for the year 2019 are expected to total $4 million, again, almost solely related to normal repair and maintenance of our facilities.

Finally, of note, in the first quarter, we adopted a new accounting standard for leases under which operating leases are reflected on our balance sheet, adding $43.8 million in right-of-use assets and lease liabilities. The preponderance of these leases consist of our operating railcar and land leases. The adoption of this new provision did not have a significant impact on our consolidated statement of operations. Additional details will be provided in our Form 10-Q. With that, I'll turn the call back to Neil.

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [5]

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Thank you, Bryon. In summary, we believe conditions in the overall ethanol market will continue to improve, and 2019 domestic and export demand will surpass the record total output and export volumes set in 2018. We are pursuing several strategic initiatives to strengthen our balance sheet and provide us with greater financial flexibility to take advantage of the expected improved conditions. We look forward to updating you on our progress in these areas.

With that, Lauren, I'd like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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So just thinking about the overall industry and I know as of late there has been modest market improvement. Just curious, well, first of all, how you envision your production or utilization levels here in Q2 and going forward? And where you see the industry? Do you think that the industry is going to be more thoughtful about this? Or as you get into summer driving season where potentially production comes back faster than it probably should?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [3]

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Well, that's always a challenge. I do think that the industry has -- on a relative historical basis has been more thoughtful. We have seen inventories decline by about 7% from what was a record high in March, and we're seeing the demand increasing.

So where we sit today, supply and demand, as I mentioned in the prepared marks is better balanced. And it's -- it is a market that still could use a catalyst, and China would be that catalyst in getting this final rule on E15 done, becomes a catalyst, because we do need that incremental demand.

Production, this last week running at about 15.7 billion. That's substantially less than the total capacity of the industry, which has shown that it can be closer to 17 billion.

So we are seeing some level of restraint. We as a company are doing the same, our run rates in the quarter we just reported on were about 83%. We've come up slightly from that, but now continue to run at lower levels and then have made up our contractual obligations by buying additional gallons from our third-party sources.

So that's -- it's shown the strength of our production marketing model being able to do that. And when others need to sell ethanol, we can be there to help, buy it, and support markets. So we're cautiously optimistic that with the catalyst of additional export demand from China, and E15, and some, as you say, thoughtful consideration on the part of producers that we will see a better margin environment as the year progresses.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Got it. And then just thinking about the overall market also, I mean, obviously Q1, there were some pretty big pockets of severe weather, but it doesn't seem like it really had that much of an impact or a lasting impact on production. It was more on logistics of ethanol and corn?

Just curious in that light how you see the West Coast premium? I know that was in part a driver of results this quarter. I mean, it seems like it's come back in a little bit. It's still elevated. I mean, do you see that persisting for some time? Or do you see that kind of returning to normal levels here in the near future?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [5]

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Well, that's hard to clearly project, but I think certainly the history would be more normal, so something in that $0.20, $0.20 plus, we're running about $0.30 premium to the West Coast today. I think as you see the carbon requirements increase that that will support higher spreads as we get a tighter supply/demand balance on ethanol that can participate in those markets. So that is helpful.

Yes, it helped us in Q1. But that was offset by same sort of premiums on corn. We've seen those come in and we've seen the ethanol premiums stay out, so that's actually been helpful to us. But I think our expectation would be that we could see these premiums hold at slightly better than average, but they probably, if anything, will come in a bit.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. Got it. And then last one from me, just on the strategic process. And I know you may be limited as to what you can say. But if you're able to, any commentary on interest levels or confidence in terms of timing. I think you could kind of target it as a 6-month process, so maybe in the August time frame. Just any thoughts around that would be helpful?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [7]

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Yes, we have a number of initiatives and a number of interested parties that we're speaking to on these initiatives and are optimistic that we will meet our targets and that achieve our objectives.

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Operator [8]

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(Operator Instructions) Our next question comes from Sameer Joshi with H.C. Wainwright.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [9]

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In terms of the gross margin improvement quarter-over-quarter, was it driven more by increased third-party gallons or was it driven more by the crush spread?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [10]

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It was a combination of both. And I think, again, that is the advantage of our models where margins were generally negative in the industry, across the board, where we could reduce production and then go out and buy in at a small margin that was better than losing money on our own gallons. So that was helpful.

But we definitely did see an improvement in the overall crush margin. And then the third factor was the cost cutting that we did. So I think it's really a combination of all three of those.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [11]

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Okay. I noticed that the crush spreads are actually slightly lower as of today compared to what they were at the end of the quarter. Do you see the same?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [12]

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Yes, we do. It has certainly come off a few pennies here. And, again, we were a little surprised that there wasn't a more positive reaction to this week's report with the production down and inventories down slightly as well. So it's definitely the market that's hard to evaluate from week-to-week. But we do believe that the fundamentals do support a better margin environment going forward.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [13]

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Yes. And with the gas prices where they are, that certainly should help as well in adoption of the ethanol. But as far as E15 goes, the final ruling I know is expected before June, but what are the chances and what are the remaining steps before that can be implemented?

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [14]

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Well the comment period ended on Monday. And so it's up to the EPA now to consider the myriad of comments they received and to promulgate a final rule as you said before June 1. They've been very consistent in their public statements that that is their objective and intent. And we will take them at their word on that. And then its -- we're already seeing retailers starting to gear up and introduce E15 where they have not before because of the lack of ability to keep it in the stations year around.

We're not looking for this to be a watershed moment this summer. It's going to be slow and steady. But it will accelerate and where, if you look at this, the overall market, I mean, we do believe that over time, this market for good reasons, economic and environmental, carbon-based will -- economic development helps through the farmers, will migrate to these higher blends and that's a 7-plus billion gallon market opportunity. If E15 becomes 1 billion or 2 billion over the next 2, 3 years, that is achievable. And obviously, it would be very significant to the industry.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [15]

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Okay. And then just last one on SG&A. It's good to see the improvements there. Has -- does this also include the effect of lower legal costs that you had before?

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Bryon T. McGregor, Pacific Ethanol, Inc. - CFO [16]

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Yes. It does, Sameer. It is difficult to measure exactly, and it's actually why we haven't given much guidance, but if you want to be somewhere around -- somewhere between the numbers that we reported for Q1, and our kind of run rate of $9 million, probably not a bad number to be at.

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Operator [17]

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

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Neil M. Koehler, Pacific Ethanol, Inc. - Co-Founder, CEO, President & Director [18]

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Thank you, Lauren, and thank you all for joining us today on the call. We appreciate the interest and support of the company. And have a great day. And we'll speak to you soon.

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Operator [19]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.