Q2 2020 Pacific Ethanol Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Pacific Ethanol Inc. second quarter 2020 financial results Conference call.
At this time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
Last question during the session you will need a press star one on your telephone.
Please be advised that todays conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to hit the conference over to your Speaker today. This morning of children.
Hello, <unk> Investor Relations. Thank you. Please go head ma'am.
Thank you Daniel and thank you all for joining us today, because the Pacific ethanol second quarter 2020 results conference call.
On the call today on my Candice co CEO Bryon Mcgregor CFO.
Mike will begin with review of business highlights Brian will provide a summary of the financial and operating results then Mike will return to discuss specific ethanol outlook and open the call for questions.
It's a big 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's available on the company's website at Pacific ethanol Dot com.
[laughter] replay of today's call will be available through August 19th.
Details of 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 speaks only as of today August 12.
And therefore, you're advised that time sensitive information may no longer be accurate at the time that any replay.
Please refer to the company's safe Harbor statement on slide two of the presentation available on mine.
Except that somewhat the commented this presentation constitute forward looking statements in consideration that involve a number of risks and uncertainties.
The actual future results 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 from time to kind of close ethanols filings with the FCC.
Except as required by applicable law the company assumes no obligation to update any forward looking statement.
[laughter] paperwork non-GAAP mattress wasn't reference.
Non-GAAP measures to monitor the financial performance of operation I.
I believe these metrics will assist investors and assessing the company's performance, but the periods being reported.
The company defines adjusted EBITDA as unencumbered UN audited net income or loss attributed to Pacific ethanol before interest expense.
Vision or benefit for income taxes.
Asset impairment loss on extinguishment of debt purchase accounting adjustment fair value adjustments and depreciation amortization expense.
To support the company's review of non-GAAP information later in this call and.
Reconciling table, what's included in yesterday's press release.
It is not my pleasure to introduce my Kendra co CEO Mike.
Thank you Mariah. Thank you everyone for joining us today before I get started let me update you on our succession plan since Neil announced his retirement as CEO and maybe the two of US. It worked closely together as co Ceos to facilitate a smooth transition.
We would like to acknowledge Neil for his leadership since co founded the company over 17 years ago and wish him well on his upcoming retirement in September.
Now turning to our results for the second quarter.
I'm pleased to share with you our strong financial results, including net income of $14.6 million and adjusted EBIT D.A. of $28.8 million.
These results reflect the benefits of our diversification strategy and expanded production of high quality alcohol.
In the second quarter demand for our products used in Sanitizers increased significantly due to the ongoing cobot 19 crisis.
To meet this demand we focused on de bottlenecking production and other process improvements to generate additional production capacity of 25 billion gallons per year of high quality alcohol at our Pekin campus. Furthermore, as recently announced we're modifying and refurbishing.
Christine equipment to increase production capacity of U.S.P. grade alcohol by an additional 30 million gallons Buddy ended 2020.
Entering 2021, or Pekin campus will have to capacity to produce a total of 140 million gallons of high quality alcohol per year, the majority of which meets or exceeds U.S.P. specifications.
Well there are some incremental production cost to manufacture these higher quality products, they consistently achieve better EBIT da margins over fuel ethanol.
Further high quality alcohol is traditionally sold at fixed prices and volumes with longer commitments that happened. All this allows us to lock in our input costs over the contract term and better secure margins at favorable spreads.
Most of our high quality alcohol production is contracted through 2020, and we're building a strong sales book for 2021, as we add new contracts and renew contracts signed last fall.
It is important to note that the high quality alcohol market requires manufacturers to not only have specialized equipment systems, but also have strong quality controls experience and the operational capabilities to create products that meet customers' precise.
And unique specifications.
Because of the pandemic demand for hand, sanitizer outstripped available supply in response, the federal government temporarily lucent quality can find requirements.
This had the unintended side effect of allowing questionable products to enter the marketplace.
We expect this will eventually lead to the re tightening of quality can play regulations.
Given our capabilities and quality control, we will continue to meet or exceed customer and regulatory standards.
We have been at this for a long time, indeed, our pekin campus has been producing industrial chemical and beverage breed alcohol blame for 100 years.
We have new as well as many long standing relationships with key domestic and international customers benefit from our quality product service and logistic has advantages, which includes our ability to ship products via truck rail or barge.
Turning to our high protein meal and dried east business.
We continue to experience strong demand for these products, which are pekin facilities have manufactured for over two decades.
Examples of this include a unique high quality east used in pet and human food and a high protein corn meal used in poultry pet food and Aqua culture.
Despite the slow down a fuel ethanol production and associated co products during the past damning, we've been able to consistently maintained production of these valuable products and our Pekin campus, resulting in strong co product returns.
Finally, let me provide some color on our fuel grade ethanol operations industrywide ethanol production had declined by more than 50% at the beginning of the second quarter.
Although we have seen some resurgence in both demand and production. The current market continues to be volatile and uncertain with overall demand off by over 10% from a year ago.
Further ethanol production crush margins remained variable without long term forward predictability.
Given these conditions, we do not expect to reopen our idled fuel ethanol plants until we can better secure positive forward operating margins for the facilities reopening would be achieved through either re purposing restarting with high value complementary or defer any.
Good products further we continue to consider all options for maximizing or monetizing the value of these plants and we are in discussions with various parties in this regard.
I'll now turn the call over to Brian to review the financial results in further detail.
Thank you Mike.
For the second quarter 2020, net sales were $212 billion compared to $311 million in the first quarter.
The decline, resulting from the reduction in fuel ethanol production gallons sold.
More specifically and as previously reported last quarter.
We responded quickly to the decline in ethanol them, but idling the majority of our fuel ethanol production.
This remains the case today in our production gallons were down 32% year over year for the second quarter.
Most of our commitments for ethanol were met through third party margin business.
Resulting in no material change in third party gallons sold.
Year over year for the same period.
Cost of goods sold was $181 million, which result in the gross profit of $31.2 million.
Compared to a gross loss of $12.9 million in the prior quarter.
The profit was attributable.
To the increased sales of high quality on call it carries a significantly higher price and corresponding margins.
Cost of goods sold also included onetime idling costs.
And labor cost disproportionate to expenses associated with idled production, but supported by and consistent with the purpose of RPP loan.
We expect these costs to be lower going forward for item operations.
As you and then SDN expenses were $8.6 million.
Compared to $10.2 million in the first quarter, reflecting our ongoing cost cutting efforts.
While year over year. This reflects professional fees in our part of our restructuring initiatives.
We expect to general as Ginny expenses to be lower in the second half of 2020, as we continue efforts to resolve our debt issues.
Ill speak more on these efforts in a minute.
Income available to common shareholders.
Was $14.6 million or 27 cents per share.
Compared to a loss of $25.4 million or 47 cents per share in the first quarter.
Adjusted EBITDA was positive $28.8 million compared to negative $12.3 million in the first quarter 2020.
As a majority of our high quality alcohol has been contracted through year end, we are expecting to generate solid results for the second half of 2020.
With adjusted EBITDA expected to range between $50 million to $70 million or between 66 and $86 million for the full year.
Moreover, as we complete contract for next year's alcohol production over the coming months, we expect to continue to produce positive adjusted EBITDA.
The 2021 as well.
Turning to our balance sheet.
At June Thirtyth, 2020, our cash and cash equivalents were $29.8 million compared to $26.8 million at March 31 2020.
In the second quarter Weve received net proceeds of $19.9 million in cash 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 a term debt.
For the quarter, we reduced our total debt outstanding by $34.4 million, including $18.7 million paid on our lines of credit and $25.5 million paid on our term debt.
This aggressive schedule, a reducing our debt obligations is consistent with our efforts to improve our balance sheet and we continue to work with our lenders to satisfy our continue to continuing obligation to agree on a plan to eliminate or refinance our term debt.
To this in our goal is to reduce our total term debt outstanding at year end by at least $70 million.
With that I'd like to turn the time back to Mike.
Thank you Brian.
Before we open the call for today I'd like to express my appreciation to all the employees and staff the company and commend them for their performance ingenuity and dedication to excellence.
We have a fantastic opportunity to grow the business profitably and thrive where more work ahead of us and we are all energized and excited about our future I'd now like to open the call for questions.
[music].
As a reminder to ask the question you will need to press star one on your telephone.
Withdraw your question press the pound cake.
Please standby, while we compile the key on a roster.
Our first question comes from Eric Stine with Craig Hallum.
Line is now open.
Hi, Mike I, Brian.
Hi, Craig.
That's right.
Hello.
[laughter].
Good morning.
Well, obviously, great performance here in the second quarter I'm, just wondering as we think about Q2.
If you're willing to kind of break down may be spot.
Versus contract volumes and then maybe as you look forward I mean, what is kind of the right number in terms of mix. When you think about what you want to have under an annual or a multiyear contract and what you would like to have avail available to take advantage of potential nice pricing in spot market.
Hi, Eric I don't know that will comprise of the exact details of what we did provide in the in the.
Had remarks, as we indicated that we've increased our.
Industrial grade production in the second quarter. So in essence, converting what would otherwise been fuel ethanol and are peaking campus into industrial grade.
And that was on there were 25 million gallons per year.
That would be that would be volume that wasn't materially contracted for so that would have been probably more of your slot product production.
And the rest would have been representing more was your your annualized of your long term.
Hi quality in beverage great product that we produce you're in Europe.
Okay.
And then I mean, I guess, when we think about.
The guide for the.
The second half in the 50 million to 70 million in EBITDA.
I mean, obviously, you're still going to have that spot.
Spot contribution, but you're really I mean again, you're you're factoring in the remainder of that is under contracts.
That likely reflects pricing from 2019 or prior to that.
And I would assume given where the market is and the reason for it.
That you're seeing.
Quite a bit better pricing for what that next contract or contracts might be.
Yes, I think Thats probably fair.
[music].
The it's normal for.
During the contracting period, usually occurs after harvest.
And.
So you would expect to have prices, where you would expect to see pricing in negotiations around what would be the current markets and reflections of.
Results harvest.
Essence customers and and producers alike.
Take all that information to account as it look out towards the next 12 12 month period.
And do you think that.
Given what's going on right now and the increased demand and I think correct me if I'm wrong, but I think these have been typically annual contracts is that something or you foresee potentially being longer than an annual contract.
Yeah I mean.
I would say that would probably be outside the norm.
There's nothing normal about the world today.
And so it's difficult to say I mean, if I were just putting on my hat as a as a.
As a buyer I would also be rethinking how a highly purchase product at same time also on high quality good.
Good reliable product as well I want to make sure they lock that in especially if you had long standing relationships you've gone through your certifications and everything else you need to go through.
I think it'll be.
It's tough to say exactly but I know that we're in discussions now.
Certainly it would be.
I think it would probably be more of the norm than that.
Then the exception with regards to.
Your longer term or shorter term contracts.
Okay.
Got it and then.
And so from your commentary I mean should we assume basically that all all of your western plants are either idled or varying at are running at very low numbers and.
As Mike had mentioned in his remarks.
You are looking at all options there those are potentially part of the strategic plan going forward, but also you could come back with.
Those providing or producing a higher higher quality product to them in perhaps that is alcohol. I mean is there a way to think about it.
The type of investment that that would require I mean, I know the near term it's about the deck.
But as you look a little bit longer term and what this potentially means for your business, maybe thoughts on what it might take to upgrade some of the western plants.
Yes ill take that one Eric.
As as we said we are considering every option that's out there.
You know we.
The one thing we know for sure is after a decade of struggling with fuel ethanol in the west.
And then Bob is pure fuel ethanol facilities.
Probably is not in our our future we need to come up with a differentiated.
Strategy for those locations to be able to open them up we want to have predictability of.
Positive margins going forward, if we do open them up and we have been very actively looking since we idled those facilities what those options may be so right now I don't have anything definitive for you we have a lot of interest different ideas and as we know more we'll certainly share.
With that.
Okay. Thanks, a lot I'll jump back into line.
Thank you as a reminder, ladies and gentlemen that Star then one to ask the question.
Our next question comes from Amit Dayal with H.C. Wainwright. Your line is now open.
Hi, Thank you guys. Good morning, Mike remained Brian congratulations on another strong quarter.
With respect to the alcohol sales is there any revenue concentration.
On that side right now.
I think it's pretty well distributed and certainly doesn't look like what you would normally see in the in more of the fuel ethanol space.
And I would say that also as I mentioned on the prior.
In some of the prior questions and answers this is.
Anything but normal so you would take not only are existing relationships, but then you would add to not only incremental additional volume that you would be providing your existing customers.
But then many many new customers that have come about as a result and.
So I think the general answer is no.
Got it. Thank you then.
From a certification point of view, Brian and Mike.
Is that don't have.
Right, So litigation et cetera.
Should we assume they probably are locked out of the market.
Now that you're signing up we'll discuss it was in some sense some nine grab taking place right now.
At least for the next few quarters are you going onto the mid 2021.
Yes.
You know the certifications the back office.
As we indicated in the remarks. This is a heck of a lot more than just producing product.
There are all kinds of audits certifications laboratory resources that you need behind the scenes to be able to deal with the higher quality customers they demanded and.
We again, we've been doing this for an awful long time, and we have those resources and even with that.
We're continuing to develop.
Further resources and certifications to even be able to apply play at a higher levels. So I can't tell you how critical it is and I think it is a differentiator going forward in terms of the people that really do have the skill set the history the culture.
And the back office to be able to handle those kinds of things and deal with customers going forward, we're being very selective.
We've had a lot of new customer interest, obviously over the last quarter and our commercial group and Pekin has been very selective in terms of looking forward to what kind of customers, we want to engage with on a go forward basis and.
Again, I think it will bear fruit it also.
Is making us stronger mekinist take a harder look at ourselves, but again, we've been doing this for a long time and I think we have a leg up on most.
Understood.
Again, just a follow up on the outside is this all going to your domestic customers or is there some international contribution is.
Okay.
Yes, both I would say that the predominant there theres significant amount that's probably divested.
We also have a number of international customers that we would expect also in the future.
That that market, we continue to grow board daily for the likes of industrial grade.
Alcohols.
And I would add to that again.
We met like we mentioned we are perfectly positioned to.
Deal in the export market.
At that time comes with our barge capability out of the Beacon campus.
Yes thats.
The infrastructure edge definitely is positive.
Just one last one on the.
On the high value feed side.
Did something change relative to prior periods with respect to this business line given that you saw some stronger demand if thats, maybe I'll just wondering is more sales and marketing effort.
Thank you.
Yes, I mean, I don't I Wouldnt say, so I mean, certainly it's getting a lot more headlines lately I know that a lot of.
Losers in in the asset in the fuel ethanol space have been focusing on.
For.
Just an economy awards trying to convert dry mills to wet mills.
We've been producing as mikes and precise.
Doing it for long time in over two decades of producing use and and.
With the stability of that original facility.
Certainly an area of focus for us in the future we've got a lot of late.
Product that we can further extract and we'll be focusing on that so to the earlier question of is are we committed clearly we're committed to reducing our debt obligations, but we're also committed to reinvesting in our assets.
And we'll certainly take this opportunity to do that.
And improve our production.
Capabilities there.
Continue to augment but I guess, one last thing I'd add is you'll recall that we talked in the past about co product normally this this proteins and.
That's usually referred to in this space is co products.
As intended to be yet.
A less.
The interesting part of the business, but it's awfully just offset against your your input costs of corn.
You will recall that on the web builder, you're looking at coproduct terms, well in excess of 50% as compared to what would be a normal dry mill, which should be around 30%.
So you see those in our numbers continue to see that.
Certainly you will see a greater number of that it will it will be it will stand out more clearly because your denominator.
Less number of.
Of plant in production.
Going into that denominator.
To show you that.
Return.
Yes.
But thats all our guys. Thank you so much appreciate it thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to my Kendra co CEO for any closing remarks.
Thank you and thank you for joining us today and your continued support of Pacific ethanol, We really hope everybody is staying safe and we look forward to speaking with you soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].