Q3 2019 Earnings Call

Ladies and gentlemen, give a standing by and welcome to the Pacific Ethanol incorporated third quarter 2019 financial results Conference call.

This time, all participants I know listen only mode.

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I'd now like to hand, the call if instead of speaker today.

Shelton of L.A.J. Investor Relations. Please go ahead Madame.

Thank you well thank you all for joining us today.

I think ethanol third quarter 2019 results conference call.

On the call today, Aneel, Curlin, President and CEO Bryon Mcgregor CFO .

I will begin with review what business highlights.

Brian will provide a summary of the financial and operating results.

And then Neal returned to discuss specific ethanols outlook and open the call for questions.

I think ethanol issued a press release yesterday, providing details of the company's quarterly results.

The company also prepared a presentation for today's call.

Well on the company's website at the Pacific ethanol Dot com.

A telephone replay of today's call will be available through November 15th.

Because of which are included in yesterday's earnings press release.

A webcast replay will also be available at Pacific Ethanols website.

Please note that the information in this call speaks only as of today November Eightth.

And therefore, you're advised that time sensitive information made on longer be accurate at the time with any place.

Please refer to the company's safe Harbor statement on slide two or the presentation available on line.

Because at some of the comments. This presentation constitute forward looking statements that considerations that involve a number of risks and uncertainties.

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 disclose specific ethanols filings with the FCC.

Except as required by applicable law.

Company assumes no obligation to update any forward looking statements.

And management's prepared remarks, non-GAAP measures will be a reference.

Management uses these non-GAAP measures to monitor the financial performance of operation.

These these measures will assist investors and assessing the company's performance for the period being reported.

The company defines adjusted EBITDA as unaudited net income or loss.

Attributed to specific ethanol before interest expense provision or benefit for income taxes.

Asset impairment 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.

Reconciling table was included in yesterday's press release.

It's now my pleasure to new curler, President and CEO meals.

Thanks, Ryan Thank you all for joining us today.

As discussed in our third quarter results and the current state of the ethanol industry I would like to provide an update on our strategic initiatives to strengthen our balance sheet improve our liquidity and reduce our debt.

Well, concluding these potential transactions has taken longer than originally anticipated. We are supported by improving overall market and by stakeholders, who understand the ethanol industry I. Appreciate the closing transactions in this environment. It takes time and retain confidence in the Pacific ethanol team and strategy where does.

Gosh, it's with multiple parties around the sale of assets and other strategic initiatives and are working diligently on these transactions, we look forward to providing new subs update when we have agreements to announce.

We are in the process of document either short term extension moved cobank on are peaking credit facilities.

Further we are engaged in collaborative and productive discussions with all of our lenders regarding amendments and extensions.

Similar to our other strategic objectives. These activities take time to complete and we believe we will likely take a step approach initially beginning with shorter term extensions to aligned interest and that longer term agreements dofesa facilitate the effective implementation of our strategic plan.

During the third quarter, the ethanol industry experienced among the worst production margins in years due in large part to the EPA is excessive granting a small refinery exemptions and the continuing trade dispute with China.

Prolong negative margin environment resulted in industry production capacity going off line through plant idling and slowdowns.

Company, we continue to have one plant and shutdown and are running the rest of our facilities at less than full operating capacity for a combined run rate in the quarter, 82%.

The industry production costs have reduced inventory levels, bringing supply and demand more imbalance.

During this cycle of poor production margins in the last several quarters, we have maintained our focus on reducing operating costs and improving operating inefficiencies.

Starting at the end of the third quarter and continuing this quarter production margins rebounded to levels better than anytime in the last two years, resulting in positive margins.

He's improve margins can be sustainable with continued discipline on the production side and increased demand spurred by incremental EBIT Dean sales the reallocation of ethanol volumes from small refinery exemptions by the EPA and resolution of the U.S., China trade dispute, which has a press ethanol exports man.

On the regulatory front, we are confident that the final rule for the 2020 renewable fuel standard blending requirements will result in greater ethanol use in the domestic market.

Over the last three years the abuse of the small refinery exemption provision of the RFS has resulted in a defacto requirement of closer to an average at 13.6 billion gallons, which has been very damaging to the ethanol demand and economics.

With the Trump administrations stated commitment to prospectively redistribute any exempting gallons to the other obligated parties the agricultural and bio fuel groups are United impressing this as a threshold political issue in an election year cycle.

Given this and the continued compelling cost octane and carbon benefits of ethanol, we believe that the industry well be back on a growth trajectory.

Exports are on pace.

To reach just over 1.5 billion gallons this year, which while down slightly from last year. It will still be the second largest year for export volumes.

With an expected resolution of the China, China trade disputes and incremental growth in other export markets, we could set a new record for ethanol exports in 2020.

To support low carbon fuel policies and market development remains a core strategy of Pacific ethanol.

The California low carbon fuel standard continues to provide significant reductions in carbon emitted from transportation fuels and ethanol is the single largest contributor to reduce carbon levels. The Oregon clean fuels program is falling in the same path is California and above market. The carbon value continues to be at historic highs.

With the California price currently trading at over $200 per tonne, adding premium pricing to the low carbon ethanol, we produced at our west coast plants.

The industry is beginning to see additional support a carbon policies in Washington, The Puget Sound Clean Air Agency is proposing a draft Greenfield standard that would apply to transportation fuel supply or sold in the four county Puget Sound area.

In addition, other states and areas are evaluating new clean fuel standards, including Colorado, The regional Midwest and New York.

Near term, we continue to keep a close eye on operating costs across all our plants and remain focused on yield improvements energy reductions and reductions in carbon intensity.

I'd now like turn the call over to Brian for a financial review of our third quarter results.

Thank you Neil.

For the third quarter of 2019, net sales were $365 million compared to $346 million in the second quarter, but most of this growth most of this growth coming from third party gallons sold.

Cost of goods sold was $380 million.

The quarterly increase in average corn prices without a material corresponding increase in ethanol prices resulted in the gross loss of $14.8 million.

Our two a gross profit of $4 million in the prior quarter.

As you need expense.

Were $8.7 million compared to $6.7 million in the second quarter, reflecting an increase in professional services and employee medical benefits.

Well that's available to common shareholders was $27.6 million or 58 cents per share compared to $8 million or 17 cents per share in the second quarter.

Adjusted EBITDA was negative $12.4 million compared to 7.2 $7.2 million in the second quarter 2019.

Our capital expenditures through the first nine months of 2019 totaled.

$2.1 million.

Mostly attributable to ongoing repair and maintenance of our facilities.

Turning to our balance sheet at September Thirtyth, 2019, our cash and cash equivalents were $18.9 million compared to $16.5 million at June Thirtyth 2019.

As Neal mentioned earlier, we are working with our lenders to amend and extend our existing term loan facilities nodes.

These discussions are occurring in parallel with these strategic initiatives also highlighted.

Cobank isn't documentation to extend as forbearance and deferral for the peaking credit facilities in order to evaluate a longer term solution.

Which may 1st take the form short term extensions for by lenders with time to evaluate establishing execute a longer term solution.

With that I'll turn the call back.

Thank you Brian .

In closing we are encouraged by the positive margins, thus far in the fourth quarter industry ethanol inventories are near two year lows and supply and demand is more balance at anytime this year and regulatory and trade developments promised to increase the demand for low carbon high octane ethanol moving into 2020.

With this backdrop, we're working diligently on closing a number of transactions that will strengthen our balance sheet and position the company and its shareholders to benefit from the improving market environment and growth opportunities ahead.

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

Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question pressed upon key please standby Bobby composite can do roster. Our first question comes from Eric Stine with Craig Hallum. Your line is now open.

Hi, Brian .

We're going in there.

So just quick on the corner you know it looked like basis was elevated in the core and also a co product return or co product volumes a bit depressed versus you know some previous quarters. So maybe just some color on that some of those things that that occurred there drew.

During the quarter and then maybe an outlook for both going forward.

Sure. This has been it's certainly a.

Tough year on on corn basis, with the delayed planting concerns over the across itself, which actually is turning out to be just fine.

But certainly dislocations certain areas are better than others harvest is slow some areas of barely begun particularly in the upper Midwest.

So it has a create a situation where.

Farmers have not been as interested in selling pricing hasn't been as elevated as they would like to see you have a lot of on farm storage and with the concerns around supply a lot more holding onto onto that storage and and not letting go. So that has resulted in overall.

And basis levels that have been higher than average so that did impact the quarter.

For certain as we as we move into the late harvest, we've seen elevated corn basis that started in the in the quarter.

Certain areas worse than others, but it's had an impact.

We are still seeing that in in today's environment. So looking forward, we do believe that and if you look at some of the forward offers a once we get this.

This harvest in the bins and.

Well have an update from the the U.S. Dan This morning on their outlook, but it is still looking like a solid crop and projecting solid carry out.

Next year and potentially even greater ones in the year after with expected strong plantings and assuming a more normal not a production and yield. So we are seeing basis levels as you move to the ended the year and into the first quarter starting.

To relax and move to more historical normal levels.

On the co product return you have been some softness and in distillers grain and corn oil, we're seeing a little strengthening today. So I would say between the two the corn basis has been more of an impact than the the co product return in the quarter result.

Got it and then I'm just thinking about the overall market I mean, I said there is there kind of.

Differing views.

That production has come offline and you saw two more odd this week, but then also you know this kind of the concern that we as as plants kind of they come out of their turnarounds does that production ramp back up so I mean, where do you kind of stand in that in that debate what.

I mean, it sounds like obviously things have improved quite a bit here in the fourth quarter, but where do you stand in the debate of how things trend with production for the industry.

Well, we we certainly.

Even with that the increase production over the last several weeks, we're still running about 5% to 6% below a year before levels and the same is true on inventory running about five or 6% below.

On the the margin environment has improved but it's not gotten to the point where.

And not enough forward clarity you still have the inverted market, where the forward curve is not showing the kind of profitability. We're seeing today, we think as we roll forward that we'll we'll continue to see it but if you're a plant that.

Shutdown today, you're going to want to see more clarity on that forward curve, where you're going to.

During the people back to work and and document that the working capital to fire that plant back.

I do think that we have an industry that is while we can do more work in this area.

As more disciplined than it's been in the past.

And that.

We are cautiously optimistic that we will we will see an industry that we'll continue to keep supply and demand in better balance, but you're right. There's always that risk that with the positive margins, which we have not seen and in quite some time that we.

We overdo it has industry and we ramp up production.

And we get back out of balance so I won't we also in the prepared remarks I wanted to know the where we see that Dan because it's really important that ultimately we do have an industry that is capable of producing more than the current market.

His demand and so an incremental demand is critical as we move into next year and we truly believe that with the EPA.

Still a bit of an arm wrestle on that on the final rule. We are confident that that rule is going to result in more domestic demand starting next year and and as we move forward and that we will see.

Continued growth in exports and.

With the China resolution that could be a real shot in the arm to where we quickly could move to where even running closer to full capacity, we will be struggling to meet that demand for ethanol.

Okay last one for me just on the strategic review and I can appreciate your you can't give specific this is underway, but I mean, it sounds like given the environment things, maybe getting a little bit easier on that front are there I mean can you speak to are there any potential sales or other things that you've got going.

That would be triggered say by a favorable 2020, our video or favorable movement in regard to China and trade.

Yes, as we said I mean, it's if everybody gets a bit myopic on these transactions and so when things are very bad as well how can we do this.

So have a favorable current market and a favorable outlook as we move into next year. It is is very helpful and conducive and being able to a complete transactions.

Okay. Thanks.

Thank you.

A reminder to ask a question you will need to press star one on your telephone.

Our next question comes from I meant they all with H.C. Wainwright. Your line is now open.

Thank you good morning, everyone.

Morning.

Just on the.

15 availability now in the market in a more sort of regular basis.

Has that impacted or how is that impacted you know from an industry perspective, the production demand side of things.

It's been it's been incremental but very modest to date and that's why the proper implementation of the RFS is critical.

We really need that that driver to say you have to blend more than 10% at least in some markets. We have nearly 2000 stations the economics of events and continue to be excellent performance you have virtually every car on the road today is approved for for using.

15, either through warranty or by the EPA. So all of the pieces are there, but we do need a little push to to get it into the marketplace and that's where I see a minimum of 15 billion gallons of conventional ethanol under the RFS. Its critical at a 143 billion gallon market that.

14.3 billion of of E 10.

Ethanol to produce Eaton and to find a home for another 700 plus million gallons. Because we did do believe that 15 billion as that is the floor not the ceiling that will necessitate higher blends both in the form of incremental 15 and Eeighty five so we do believe that.

Compelling economics of EBIT team with the proper regulatory signal, we will see a good increase in the the blending of the EBIT day next year near Scott.

Also note that were working.

Very collaboratively and expeditiously with state of California to prove the use of Efifteen in the state of California, which will be a very important tool for further compliance under the low carbon fuel standard. So we're very optimistic on higher blends not only 15 in that in the near to midterm, but a higher blends.

20, 530, as we move towards higher octane fuels and higher compression.

Combustion engines.

Understood.

Thank you for that and then.

The regulatory front new.

There were some expectations that some final ruling would have already come into play this kind of keeps getting pushed out.

Is there a timeline you have or the industry has on when something could come about or does this become a 20 for any type of thing.

No. It will it will quite definitely be this year. The EPA has has committed that presents committed to that.

And it because of the proposed supplemental rule, which is in play now which is how we get to the at least 15 billion gallons mean 15 billion gallons.

The timetable as slipped from the end in November two sometime in December but that the commitment and we believe.

It will be fulfilled as if this rule will be final before the end of the year and will be an effect in 2020.

Got it.

Lastly, just on the strategic initiatives.

Yes, this as well.

With sort of some of these improvements now taking place in the market.

Our all the options you have been considering still on the table or has anything changed for you.

Right now.

Opt all options are on the table and.

As we continue to work hard on an additional opportunities present themselves.

Got it that's what I. Thank you so much.

Yes.

I'm not showing any further questions at this time I would now like to turn the call back over to nail curler for any further remarks.

Thank you Joe Alan Thank you all for joining us today and your continued support of Pacific ethanol look forward to speaking with you soon have a great day.

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