Q1 2020 Earnings Call

Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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At this time all participants are in listen only mode. After the speaker presentation, there will be a question answer session.

Question. During this session you want me to press Star one on your telephone. Please be advised of today's conference is being recorded if you require any further assistance. Please press star Zero I would now we see in the conference over to your Speaker Ms., Mariah Shelton Senior Vice President and Chief Investor Relations. Please go ahead.

Thank you should read thank you all for joining us today for the Pacific ethanol first quarter Twentytwenty results conference call.

On the call today, our Neil Koehler, President and CEO Bryon Mcgregor CFO.

Yeah, we'll begin with reviewed a business highlights.

I will provide a summary of the financial results.

Then you were turned to discuss specific ethanols outlets.

In the call for questions.

So the ethanol issued a press release yesterday, writing details of the company's quarterly results.

The company also prepared a presentation for today's call. It is available on the company's website at Pacific ethanol Dotcom.

A telephone replay of today's call will be available through May 20.

Detailed which are included in yesterday's earnings press release.

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

Please note that information in this call today speaks only as of today may 13th and therefore, you're 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 side.

On slide two of the presentation available on line.

Does that some other comments in this presentation constitute forward looking statements and consideration that involve a number of risks and uncertainties.

Actual future results at 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 the company assumes no obligation to update any forward looking statement.

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

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

And believes these measures will assist investors and assessing the company's performance for the periods being recorded.

The company defines adjusted EBITDA as unaudited that income or loss attributable to pick ethanol before interest expense provision or benefit from income taxes asset impairment.

Loss on extinguishment of debt.

Because the accounting adjustments fair value adjustment depreciation and amortization expense.

What the company's review of non-GAAP information later in this call reconciling table was 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 I want to acknowledge those most affected by the pandemic I think our health care professionals and first responders fighting the effects of come at 19.

This is a challenging time for all and we appreciate the dedication work well frontline workers to help bring us through this crisis.

Citic ethanol isn't a central 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.

Been able to continue to work with physical just insane and other protective coating calls now it's part of our standard operating procedures.

The onset of the pandemic decimated demand for gasoline and ethanol same time spurred a greater need for Sanitizers and disinfectants. Our team responded proactively into areas first due to lower demand and then acute negative margin environment. We initially idled over 60% of our ethanol.

Capacity.

Second to respond to increase demand for pharmaceutical grade alcohol, we shifted production at our peak in Illinois facilities to substantially increase output 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.

The end of March due to government stay at home orders in response to the spread of cold at 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 idle and many others slowing to minimum production.

Instead of GAAP and all was also quick to idle ethanol production that was non cash flow positive based on increasing demand and improving margins. We are gradually increasing production and are currently operating at about 50%.

Total capacity through recovery has been significant in the last few weeks with recent stay at home owners, 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 man lows of April we have seen demand increases of over 40% and three consecutive weeks declines in overall ethanol inventories, while there's still has 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 U.S.P. great alcohol in high protein feed we produced at our peak, Illinois facilities have done very well diversification was a strategic driver when we purchased.

First the beacon wet.

And dry mills and he's plan in 2015 and two years later, when we purchased the adjacent.

No I 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 response to new demand for Sanitizers and disinfectants.

Also with the industry's overall reduction of ethanol production in dry distillers grains are high protein feed products are seeing increased demand and correspondingly higher prices.

We're pleased with the performance of our Pekin operations, which we expect will make a materially positive contribution in the second quarter.

On the export from the industry actually had a strong first quarter of over 500 million gallons export it which is 30% higher than the same period last year well exports have slowed in the second quarter with worldwide demand destruction due to the pandemic, we expect to exports to pick up as other countries reopened 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 one 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 a small refinery exemptions will be eliminated which would restore over 1 billion gallons of annual demand for renewable fuels going forward.

He properly and legally implemented RFS, both protect blenders and the mess up the current demand destruction as the annual blending obligations are converted two percentage blend rate of actual consumption.

And will also drive more demand and used to be 15, aftermarkets returned to normal levels following independently.

The support of low carbon fuel policies in market development, which reward fuels or technology based on their lifecycle carbon emission reductions remains a core strategy a pacific ethanol.

We're 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 close on our agreement to sell our 74% ownership interest in Pacific Aurora, two Aurora co-operative for a total valuation of $52.8 million.

We're also in active discussions with multiple parties regarding the sale or strategic partnerships for various other assets.

I'd now like to turn the call over to Brian for financial review on our first quarter 2020 results.

Thank you Neil.

I'll begin with a comparison of the first quarter 2020 results to the fourth quarter for 2019.

For the first quarter 2020 net sales.

Were $311 million compared to $358 million in the fourth quarter.

The decline, resulting from a decrease in our average price per gallon sold and the reduction in both production and through third party gallons sold.

[laughter] 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.

Yes, Jane Eyre expenses.

$10.2 million compared to $11.8 million in the fourth quarter, reflecting our cost cutting initiatives.

As previously noted, although we expect general as DNA expenses to be significantly lower in 2020.

Professional fees through at least the first half of the year will out of necessity the higher to facilitate our restructuring initiatives.

Loss available to common shareholders was $25.4 million or 47 cents per share.

Theres losses, compared to $41.4 million or 85 cents per share in the fourth quarter ladder of which included a 29.3 million dollar asset impairment charge related to the sale of our ownership interest in Pacific Aurora, and a 6.5 million dollar loss.

Our debt hosting 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 2019.

Turning to our balance sheet.

At March 31st first 2020, our cash and cash equivalents.

Were $26.8 million compared to $19 million at December 30, Onest 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 word positively and moved steadily forward with our lenders.

With the improving market conditions, we believe these conversations will become more even more constructive.

Also noteworthy in May two the paycheck protection program under the cares Act.

The biggest at all and PDP can receive to combine $9.9 million from this 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 re higher and retain our employees and Sunday roll integral to maintaining our operations to produce essential products.

With that I'll turn the call back to Neil.

Thank you Brian.

We are encouraged by the alignment of interests of our stakeholders, which is supported by the performance. We are seeing particularly in 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 normalize normalizes, we remain convinced of the compelling cost octane carbon and health benefits of ethanol and the rent 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.

Sure he with that I'd like to now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question Princeton Hunky. Please standby, while we compile the kiani roster.

My first question will come from Eric Stine with Craig Hallum. Please go ahead.

Hi, Brian.

Hi cleaner.

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.

I know last last go around you've talked about in active discussions with multiple parties.

You know 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 in discussions as a result.

Well, it's I think with that that significant downturn in the industry in the economy here and worldwide.

Not a surprise that even a nine having the ability to look at ethanol plants, not let alone put in meaningful bids for them certainly slowed that process down and we've refocused it more on looking at the opportunities to to partner and to look at other strategic relationship.

Yes.

Certainly open to continuing to to monetize assets, but that that process has been it's been pretty a pretty slow currently.

[noise] got yes, no surprise there I mean is it a is it something where you see well it sounds like you feel like partnerships or other angles are.

Our sufficient tags.

To to accomplish your goals there.

Yes, and as we're seeing the market improve you know, where we're seeing better performance out of our assets as well so that's a positive.

Maybe just turn into the overall market.

While the market you also been very.

Thoughtful on the on the production side just curious, though this has been.

I mean easily that the worst market that.

Anyone to ever seen for a lot of reasons is this something that you think potentially means a structural change should the amount of production that's out there.

Or do you think that what we've seen in the past market gets really difficult.

It's 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 upon idle and cold idle.

Certainly when you called out a little plan and lay off workers. It is you don't just dial it back up.

So I think given the you know the financial damage that was done the.

Just the complete falling out on on demand and plants going down hard that we will see more gradual increase in production and asked markets.

Improve both domestically and export we are cautiously omnis optimistic that we can see a more balanced market going forward.

New demand both domestically with the higher plans.

Not sure we'll get back to total gasoline demand so that that focus on no more MSR ease and encouraging that the introduction of the 15 in key markets and and getting back to growing exports and the countries like China becomes important I. What we're seeing today is is very and.

Courage and because we we've seen gasoline demand come back to where now we're only just a little over 20% down from the pre covenant levels of demand 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 on so if you look at.

Annualized demand based on the numbers that were just released this morning.

About 11.3 billion gallons of demand for ethanol and 113 billion gallons gasoline market annualized and assuming that even a 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.

Seeing a.

Significant reduction in inventories over the last three weeks.

Back from the peak looks like were down 13% on inventories, but still the cautionary pieces there were still 15% higher than last year. So we need to continue to be in this position, where we are 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 that production and the supply and demand and better balance. So we we are cautiously optimistic.

Okay.

So that color.

Maybe last one from me and this is pretty recent I just saw this morning, but I see a proposal and infrastructure proposal I mean, it looks like from from Democrats and it's very early in the process, but potentially 45 cents a gallon from the government for production from Jan one to May one.

Maybe not necessarily on this specific proposal, but do you think that eventually.

Given 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 the in essential business, providing very.

Needed goods, both on the on the field and high quality alcohol and protein and to the to the economy. We have over 350000 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 fee. So we were encouraged to see.

That.

That provision in the house Bill as you point out it's just.

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 as a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then one our next question will come from Sameer Joshi with HC Wainwright. Please go ahead.

Yes. Thanks, Thanks, Neil Thanks, Brian for taking my question hope, you're staying safe and healthy.

Thank you you are as well we are.

Yeah. Thanks.

So the.

So the.

Ruling.

That does not being challenged due to get to is going to be up you cable nationwide or that.

Last if it's only going to be in those regions.

That's a good question, we think it would be very difficult to not apply it nationally and the EPA before they pay upon it to the appeals process to play it out had indicated.

That they were inclined to apply it nationally.

It's the principal certainly do apply nationally I as you point out it was a 10th circuit and only impacted those refiners, but if it were not to be applied nationally by the EPA isn't there would be follow up legal challenges to to enforce that conclusion, because it's the only logical.

In conclusion, so we're waiting to see that the court 10th circuit very quickly unanimously refuse to re here the case and the next stop.

And the only glass nexstar would be the Supreme Court. There is not yet been appeal by the oil companies are the EPA to the Supreme Court. They have until early July to do that so while it is the law the land to handle the interesting to see how that's reflected in EPA ARVO proposals. The EPA has pointed us to.

Hey, if there is going to be an appeal to Supreme Court, we would think that it would be highly unlikely Supreme Court.

Two here.

The that case, even if it were a deal but we do expect I'll, maybe not the EPA, but that the oil companies will attempt to appeal that case to the Supreme Court. So we will have just wait and see on that.

Understood. So so the ruling stance until.

Fuse right. So many.

There any extra.

Huh.

This idea that you're seeing a in recent past.

No we have not seen.

There is.

Q of I can't recall, how many 20 high Twentys, maybe that were in front of the EPA for the 2019 year and they are just not.

They're basically saying, we're not going to deal with these until.

The appeal process has been completed but it is in the 10 surrogate and whatever it's 30% of refined product in the U.S. I believe isn't that 10th circuit.

It is the law of the land and you could not grant and sorry, you'd be breaking the law fewer granting sorry to any refinery in the 10th circuit today.

Understood Thanks for that.

Color.

On the balance sheet.

Thanks.

I think during the last call you had talked about.

As Chief restructuring Officer officer, either to form a lot of insulin in July.

But they were going to be in charge of negotiating long term plans for before so we think that.

Is that any more color you can provide on that.

Now I'd say Samir outside of what Weve indicated our prepared remarks.

Just to add to that again that discussions and negotiations continue productively.

And.

The the recent improvements and also the strength of the.

Of the products that we're making.

Our profitable plans are contributing unhelpful towards those negotiations so.

We'll give you more as we can.

Hi this.

And just one more housekeeping issue then.

Acid lumped them acetone, let's see.

Also on 16.5 million.

Is that also associated with the thus the solar plant or is that something else.

Yes.

So so we should not see that.

In the next Q a student.

That's correct.

Okay got it thanks, Brian 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 in my.

Thank you Sri and thank you all for joining us today.

Appreciate everybodys support.

Ladies staying.

Safe and healthy.

We will get through all this together and.

We are encouraged by some of our 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.

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