Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Pacific Ethanol incorporated fourth quarter in four years 2019 financial results Conference call.
At this time, all participants are in listen only mode.
So to speak a presentation there will be a question and answer session.
Good question Dan. This session you want me to press Star one on your telephone.
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I'd now like turn the conference your speaker today, right Shelton of L.A.J. Investor Relations. Please go ahead of them.
Thank you well thank you all for joining us today.
I think ethanol fourth quarter and full year 29, <unk> results conference call.
On the call today, I know, Carla President and CEO and Bryon Mcgregor CFO.
Neil will begin with a review of business highlights.
I will provide a summary of the financial operating results.
Then Neil will return to discuss specific ethanol outlook and open the call to question.
I think ethanol issued a press release yesterday, writing details of the company's quarterly and year end result.
Company also prepared a presentation today's call. It is available on the company's website at <unk> to the basketball dotcom.
The telephone replay of today's call will be available through April 3rd the details of which are included in yesterday's earnings press release.
A webcast replay will also be available at the Gulf and all website.
Please note that information on this call speaks only as of today March 20 set up.
And therefore, whereby the time sensitive information they no longer be accurate at the time with anything.
Please refer to the company's safe Harbor statement on slide two other presentation available on line.
Like says if some of the commented this presentation constitute forward looking statements and consideration and involve a number of risks and uncertainties.
Actual future results Pacific ethanol 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 [laughter] economic filings with the FCC.
Except as required by applicable law the company assumes no obligation to update any forward looking statements.
In management's prepared remark non-GAAP measures will be reference.
Management uses these non-GAAP measures to monitor the financial performance operation I.
I believe these measures will assist investors and especially in the company's performance for the period being reported.
The company defines adjusted EBITDA as unaudited net income or loss attributed to [laughter] ethanol before interest expense provision or benefits they can 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 in this call a reconciling table with included in yesterday's press release.
It is now my pleasure to introduce Neil Koehler, President and CEO Neil.
Thank you Mariah and thank you everyone for joining us today.
First as it is top of Hearts and minds for all on the country I'd like to discuss.
The nation wide spread the novel Corona buyers and how it is affecting our business.
The growing biases led to several stained might stay at home orders, which in turn has dramatically reduced overall fueled ma'am.
In all our markets, we've seen significant reductions in ethanol sales to our customers.
We expect in those markets, most impacted up to a 50% reduction or more during the pendency up to stay at home orders.
As a result was this demand destruction the market prices for unleaded gasoline and ethanol plummeted historically low levels.
Prices have also falling but less so on a percentage basis accordingly.
And all plant production margins across the industry are negative.
The pandemic is compounding the adversities 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 Ethanols idling plants during this period and expects to have reduced production.
Hi over 60% by the end of March.
Every plan as customers and commitments to meet fuel and feed demand so shutting down production needs to occur in an orderly manner with the objective of median our contractual commitments, while minimizing negative cash impacts.
In response to the Corona virus, our peak in Illinois, I see P. facility is producing and shipping record amounts of high quality alcohol as a key ingredient in the production of hand, Sanitizers. Our IC plant produces primarily high quality I'll call that is sold into industrial chemical and beverage grade Mark.
Yes.
Our sales into the hand sanitizer market historically accounts for approximately 10% of total I see peak production.
And with the now increased demand for the product, we're 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 in first responders in peek into producing donate hand sanitizer in that community to frontline health workers were tending to those impacted.
By the Corona virus.
This is a time when we all need to work together to help stock this pandemic.
Now, we'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 Twentyth, which gives us additional runway to complete additional strategic initiatives.
Well, neither our lenders nor the company expected to continue to now acute adverse market conditions extensions demonstrate the constructive relationship we have with our lenders to restructure our balance sheet and improved liquidity, while continuing to pursue our initiatives.
Support us in these efforts.
We also announced yesterday, we have engaged the chief restructuring officer Winston more 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, two Aurora co-operative elevator company for $52.8 million of consideration subject to certain working capital adjustments, we're working diligently.
To close this transaction as soon as possible.
We're in discussions with multiple parties regarding the sale or strategic partnerships for various other assets.
We were actively working on these transactions.
On the regulatory front, the EPA has decided not to appeal to 10th circuit ruling on the small refinery exemptions that if applied nationally as expected would eliminate the inappropriate granting of as salaries and will restore over 1 billion gallons of annual demand for renewable fuels going forward.
As an industry will be working to restore the volumes illegally loss 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. That's we recover from the current market crisis.
The final rule for the 2020 renewable fuel standard blending requirements was released in late December dimensional 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 usage.
15 in certain markets.
Exports were seasonally strong in the fourth quarter up 2019 and for the full year were down slightly from 2018.
At this time, we expect that sports to be about the same as last year, but the Corona viruses had a negative impact on worldwide trade and remains an evolving unknown.
The China being the first country to emerge from Corona virus impacts were optimistic that China may step in as a significant buyer of U.S. ethanol as part of the phase one trade deal between the United States in China.
The supported low carbon fuel policies in market development, which reward fuels, where technology is based on their lifecycle carbon emission reductions remains a core strategy of Pacific ethanol.
We're 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 turn the call over to Brian for financial and operational review, our fourth quarter and full year 2019 results Brian.
Thank you Neil.
For the fourth quarter of 2019, net sales were $358 million compared to $365 million in the third quarter.
Decreasing due.
To a reduction in total gallons sold offset impart 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.
As Jane Eyre expenses were $11.8 million compared to $8.7 million in the third quarter.
Reflecting an increase in professional services associated associated with our strategic initiatives.
Loan amendments.
Although we expect general as DNA expenses in 2020 to be significantly lower as we execute on our initiatives professional fees will out of necessity the higher through at least the first half of the year.
Loss available to common shareholders was $41.4 million or 85 cents per share.
And included a 29.3 million dollar asset impairment charge related to the pending sale of our membership interest in Pacific Aurora LLC.
And a 6.5 million dollar loss.
On debt extinguishment related to the amendment of our secured debt obligations.
This loss compared to $27.3 million or 58 cents per share in the third quarter.
We should 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 gross loss of $9.9 million compared to a gross loss over $15.2 million in the prior year.
As DNA 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 have secured and offset by professional expenses associated with our restructuring efforts.
Lots available to common shareholders was $90.2 million or $1.90 per share.
Compared to $61.5 million or $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 30, Onest 2019, our cash and cash equivalents were $19 million.
Compared to $18.9 million at September Thirtyth 2019.
Upon the close of the sale of our ownership in an ownership interest and believe it or L.C., we will receive approximately $27 million in cash.
And $16.5 million in promissory notes without I will turn the call back to Neil.
Thank you Brian.
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 industries long term growth process prospects, which is why we are working all levers, but the company in the best position to thrive in the future.
We have already taken a few key steps in our strategic initiatives, including restructuring agreements with our bank lenders and senior note holders and extending the payment terms.
We also signed a definitive agreement seller ownership interest in Pacific Aurora, and we're in discussions with multiple multiple parties around the sale or strategic partnerships of various other assets.
And we will provide updates as appropriate.
With that you all I'd like to open the call for questions.
Thank you.
No nine days to ask a question you want me to press Star one on your telephone to withdraw your question comes to Pankey. Please standby will be completed today roster.
First question comes from Exane with Craig Hallum.
Your line is now open.
Hi, Brian.
Morning.
Morning, just just wanted to confirm utilization at your plans and buy when and I assume that that would be for all plans other than I, CP, which I would guess you're going to run full out.
That is to some some level of idling that it that is correct and as we said in the prepared remarks, it it'd be a over 60% reduction at this time by the end of March on total production.
Okay got it and then I mean and ITC.
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 doing or there is demand in the market for that product.
We are doing everything humanly possible to to increase the capacity to meet the current demand.
Yes, we can sell anything we can produce there and we have been able to to make some incremental.
Improvements in that regard.
Okay. I mean as you look at obviously, you're doing you're doing it have seen some other plans shutting down but others that still have not made an indication that they are.
I mean is this is something that you think this environment as severe as it is.
Is what finally.
Tenant means for a structural change to production the industry, because I mean over the last year and a half or more there had been some pretty challenging environments. We just thought was production industrywide would come off.
And if it did it was very temporary.
How do you see once we come out and that's what do you see production will seem like in maybe the response.
Whether people stay off line.
Or come back as they have in the past.
That's it is good question, Eric I think.
As 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 to really get the capacity down obviously, it's down quite extremely I believe accordingly, our phases over.
3 billion gallons just as of the now that if our offline and it takes time you know as you run through for manners, and and let your customers adjust.
Take some sometime to shut plants down so there's a bit of delay, but it's just imperative because the the demand is not there for the product and the margins are so negative and that's what's happening a once plans to go down.
And it is.
You don't yet as opposed to what was happening let's say in in the summer when we did see it significant reduction that was mostly slowdowns some shutdowns, but a lot of it was no either companies with multiple plants, taking a plant or two down or just general slowdowns and.
You're right when the margins came back or the industry, then overreacted and increase the production even before the chronic rider high risk to levels that were up above the the demand and we started to see that the margins fallen in December and January and then obviously exacerbated by the recent.
That's a once plants are down and our cold idled, bringing them back is a is a different case and I think that there is a reasonable expectation that.
We will see more balanced market coming out of this crisis, and we will come out of it I'm just a matter of when.
We we really are able to get the spread of the pandemic under control lift the standing orders and probably be a lot of pent up demand for people to travel around and we'll see gasoline demand come back to normal.
Yeah got it.
Maybe last one for me I mean, good to see that the deferment for for two months on the interest and principal your commentary certainly does imply that you know that assumes things on the front burner and could be potentially near term, but just on the chief restructuring Officer. In addition, there and just maybe.
Some of the out other options you're looking at as part of that processes, it's kind of hand in hand with the strategic initiative.
Yes, I mean, it's as we publicly announced.
With that the actual announcement of the Pacific Aurora sale looking at the potential other other sales of assets and and partnerships.
And working with lenders to outline the best terms going forward that meet the needs of of all stakeholders.
I don't think this offline thanks.
Oh.
Thank you as a reminder to ask a question you when you press Star one on your telephone. Our next question comes from I meant they all with H.C. Wainwright. Your line is open.
Thank you and good morning, you'd one Brian.
Good morning integration.
Thank you very interesting Steve.
This every decision not to view the man we're moving.
I was like a good first and then began leasing underlying issues that seemed to be resolved before the benefits begin to.
Yes.
Could you share your views on how this.
Okay.
As next steps.
Yes.
Good question them at the.
The ruling takes effect immediately when it was a when it when the.
When it came down so in the 10th Circuit, which I believe is about 30% of all that they refined gallons, mostly in them and that's in the central part of the southwest.
The the country or that the small refinery exemptions granted have to be only refiners that received exemptions when the automatic blanket estuaries back in early 2012.
Were eliminated there's only two refiners that qualified on for that so basically says there'll be no small fine 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 the principle that was put down in this case.
Yes, it's clearly national and its implication and at the paper and not to do that then there would be an additional legal action to.
Apply it nationally it would also put one refiner it.
Competitive disadvantage to another so theres a fairness issue.
And in discussions with EPA that was our indication that they agreed with that so there are steps.
That is the.
Two refiners have appealed for a rehearing and the 10th circuit less than 10% of those requests are granted so just to the law of averages. There would suggest there will be no rehearing on there could be an appeal to Supreme Court, we find that to be unlikely as well.
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've expected fairly immediately but given that krona virus or maybe some delays in that two to say how they are going to apply this nationally and.
What's 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 the.
This ruling.
Will not be granted and as you recall they we already have had a victory on the regulatory front when the the EPA said that they would reallocate the anticipated small refinery exemptions gallons and they essentially added about 770 million gallons to the RV owners for 2012.
Okay, because that was what they anticipated based on the three years of deal. We average is 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 RPL then.
Then was.
Passed with the 2020.
Our views so positive there are steps along the way, it's really up to the EPA now to.
To indicate how they are going to manage this new laws the land going forward.
Thank you for that new members reveal too.
Yes, and we will we will continue obviously as the industry and with our champions to to be very diligent on this point because it's a critical issue.
Right understood.
On the operating side do you have visibility right now in terms over joke ashburn could be for 22 any.
It's really just question I mean, it's really difficult to assess at this point.
As Neil.
Said in his prepared remarks, our focus is on.
Operating plans that are that are profitable right. So our expectation is too.
Our efforts are to produce.
Ill Casper and that we need.
Two.
Switching profitability.
That will combat and with efforts as well and working with RCR Roe and with our lenders.
Two.
With regards to restructuring our debt next cutting on or other initiatives.
So.
It's difficult at this time to actually give you a.
And it kind of an estimate.
But working hard to limit cash burn and also as part of that is too.
Reduce our overhead so the cost that we can control, we're very focused on reducing those costs.
Understood maybe just one last one from me.
In closing the order transaction has this the criminal Myers issue.
During the impact on the timing so closing this on two things still on track.
Hi, this still on track, it's you know there certainly.
Uncertainty in all aspects of the economy with the current a virus, but at this juncture. It is on track.
Okay.
That's all that occurs I appreciate it thanks.
Are you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to near killer for closing remarks.
Thank you all for joining us and.
Specialty is difficult times, we appreciate your support.
Of the company and.
We hope you all.
Stay safe and together, we'll we'll get through this.
Current 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.
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