Scott H. Pearce - Chief Executive Officer, President and Director
Kelly G. Maguire - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
BioFuel Energy (BIOF) Q3 2012 Earnings Call November 14, 2012 11:00 AM ET
Welcome to today's BioFuel Energy Conference Call titled, Earnings Release for Third Quarter 2012. [Operator Instructions]. Thank you for your attention. I would now like to turn the conference over to your host, Mr. Scott Pearce, company President and CEO.
Scott H. Pearce
Please bear in mind that we will be making a number of forward-looking statements on today's call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of BioFuel Energy’s management, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, our actual results could differ materially from management’s expectations. Information about the risk factors that could cause our results to differ from our expectations are also referred to in this morning’s earnings press release and are described in greater detail in our annual report on Form 10-K and in other periodic filings.
Good morning, everyone, and thanks for joining us for our third quarter earnings call. Kelly Maguire, our Chief Financial Officer, is with me on the call today; Doug Anderson, our Chief Operating Officer, who normally joins us, is on a well-deserved vacation. We will cover our financial results, and then once Kelly is done, we'll share an update on our 2012 plan and views on the industry.
However, let me start by highlighting a couple of key points to be made. As you are aware from our public disclosures, the most significant occurrence of the third quarter was our operating subsidiaries not making their principal or interest payments at the end of September. This event of default will likely have significant consequence to the company and its shareholders.
As discussions with our lenders are ongoing, we are limited in what we'd be able to share today. However, you should bear in mind that our discussion today of our past result and our current operating plants are not an indication that BioFuel Energy Corp. will remain in control of its settlement plans.
As to our results, it was yet another challenging quarter where the ongoing weakness in ethanol prices, as reflected in the narrow ethanol corn crush margin, remained a key driver behind our net loss. During the quarter, local basis levels and limitations in our ability to hedge also came into play in our weak results.
We did realize some benefits from strong storage pricing and our corn oil revenue, but not enough to overcome low ethanol prices, tight corn supply and the associated weak crush spread. A decline in margins during the quarter led to our decision to shut down our Minnesota ethanol production operation. And while margins have improved somewhat, we continue to evaluate best operating strategy as the industry remains oversupplied and the economics for running are hardly compelling.
At the start of the year and for our 2012 plan, we anticipated the industry's normal cycle of margins improving during the second half of the year. As noted on our last call -- and has continued this normal cycle has not materialized. We did not expect the ongoing overproduction in the U.S., which has been compounded by higher Brazilian imports, driven by -- and some would say, subsidized by our advanced biofuel mandate under RFS2. We'll discuss this further when we share our thoughts on the industry.
Finally, as to operations, the company's assets performed well during the quarter. Our plants continued to hit significant milestones, realized improved corn ethanol and corn oil yields the primary focus of our ongoing pursuit of operational excellence.
I'll get into some additional detail on plant operations after Kelly covers our financial results. And yet, now I'm going into turn it over to him.
Kelly G. Maguire
Thank you, Scott, and good morning, everyone. As Scott mentioned earlier, the company had another challenging quarter resulting in an $11.3 million net loss. We recorded revenues of $116.1 million for the third quarter of 2012. This represents a 29% decrease when compared to the same period in 2011, and it is driven primarily by a 37% decrease in ethanol revenues. Decline in ethanol revenues was a result of both lower production and sales volumes, previously mentioned, combined with a lower price per gallon received.
On a positive side, corn oil revenues continue to increase, generating $4.4 million in revenues in the third quarter of 2012 versus $4 million in the second quarter of 2012. We also saw a slight increase in our distillers revenue over the prior year of $0.1 million as lower production of sales were offset by higher per unit prices received for our distillers products.
Our cost of goods sold was $124.2 million for the third quarter of 2012, a decrease of 20% when compared to 2011 and was primarily due to less corn ground as we slowed plant production.
On a per bushel basis, our cost of corn was 13% higher in the third quarter 2012 versus the same period in 2011. We generated an $8 million gross loss for the third quarter of 2012, which was $15.1 million worse than the same period in 2011. Our operating loss was $10.1 million for the third quarter of 2012 as compared to $4.5 million of operating income last year. In addition, our interest expense was $1.9 million during the quarter or $0.1 million lower as compared to last year.
Our depreciation expense was $6.8 million for the quarter, most of which $6.5 million is included in cost of goods sold with the remainder in G&A expense. The end result was a net loss attributable to BioFuel common shareholders of $9.8 million or $1.88 per share compared to net income attributable to BioFuel common shareholders of $2.2 million or $0.36 per diluted share in the same period in 2011.
For the quarter, earnings before interest, taxes, depreciation and amortization, or EBITDA, which is a non-GAAP financial measure management uses to monitor the company's operating performance, was a negative $2.6 million compared to a positive $11.3 million in the third quarter of 2011. A reconciliation of EBITDA to our net loss for the quarter is included with the supplemental materials that accompanied our press release this quarter.
Our cash balance at September 30, 2012, was $10.8 million as compared to $15.1 million at December 31, 2011. Our total debt balance at September 30, 2012, was $178.2 million or $0.77 per gallon.
And with that, I would like to turn the call back over to Scott.
Scott H. Pearce
Thanks, Kelly. So to recap, our plan for the year has been to continue our focus on yield and coproduct returns, while continuing to be disciplined on running smart, keeping costs in line and operating safely.
With respect to coproduct returns, we specifically focused on having superior product quality and optimizing our corn. We steadily realized a 0.9 pound per bushel yield from our modified corn oil extraction design and believe this has placed us well at the top of the industry. This is also a clear demonstration of our team's process engineering and operating capabilities.
Over the past 2 years, with the core operating plant teams largely intact, and yet, with several key leadership changes, including the addition of Doug Anderson, our Chief Operating Officer, we've repeatedly conceived plans, completed preliminary engineering and economic assessment and picked the winning projects that we have executed on in a timely fashion and delivered meaningful revenue improvement or cost savings.
As to this year's operating results, through the third quarter, our year-to-date ethanol yield is 2.76 gallons per bushel on an undenatured basis, a 1% improvement over last year. Corn oil yield has improved by 35% from the first to second quarter and another 50% from the second to the third quarter. We do believe that we've gotten the optimum that we'll get out of corn, at least for the time being.
And then finally, just as another example with one of our main cost drivers, our year-to-date natural gas consumption is 27,000 million BTU per gallon, a 9% reduction over last year and well ahead of anyone running the type of assets we run. All this while keeping our costs in line and operating with a reduction in headcount.
Unfortunately, however, with all this, the market is largely been moving away from us faster than the benefit of these realized improvements. As noted earlier, we ceased ethanol and coproduct production at Fairmont at the end of September due to poor economic conditions in the industry.
A bright spot, however, is with this decision our operations team was able to work with Cargill, continue to run the elevator and honor purchase contracts we have with local farmers and then also provide what was -- what has been and continues to be historical outlet for corn during harvest.
Today, we have retained all our employees, continue to operate the elevator and are currently evaluating the optimal operating strategy for the balance of the crop year. We are doing this with a view towards maximizing enterprise value, which means that we will continue to monitor the margin environment, including local corn pricing, and we'll seek to optimize yield and coproduct recovery to realize the lowest possible production cost and maximize margins.
Since we shut down Fairmont, several other plants have closed representing an incremental 550 million gallons per year and another 54 million gallons, which are expected to be shut at the end of November. We've seen a varying margin picture and one that continues to evolve based more on regional economics as been experienced in the past. We remain perplexed that certain plants continue to run, particularly in drought-stricken areas.
An additional challenge to this is that the market -- the export market that we have historically competed directly in due to our ability to make low-moisture product, which relatively few plants have, has been perplexing as well. We remained active in the export market during the quarter, net obligations that had been booked early in the year. However, we continue to pass on a number of new opportunities as the premiums were not strong enough to offset the incremental production cost. It's our view that certain plants, either by not paying close enough attention to their production cost or because their ethanol marketer got caught long, continue to give away the price premium that they should have realized on a product that has higher production costs.
As to further explanation of the continuation of poor margins, the drought certainly played a role. It drove corn and ethanol prices higher with an estimated added $0.45 a gallon advanced RIN made Brazilian sugar base ethanol cost competitive, supporting higher imports to the U.S., as I had mentioned earlier. Yet while the drought has captured headlines and provides a ready explanation for some of the industry's challenges, we look at the fundamental issue of supply and demand and for ethanol production capacity and the related issue of inventories. Over production in early 2012 lead to excess inventories, and stocks have still not returned to the level associated with broadly profitable production.
The situation has been exacerbated by gasoline demand that has been flat compared to 2011 and then decreased imports as I touched on before. While U.S. exports remain globally competitive, export volume year-to-date is running about 100 million gallons behind 2011. Not surprisingly, the result has been idling of capacity, as mentioned earlier.
Just a couple of other additional insights to share on the industry. 10% blending has become the de facto standard across the U.S., and we anticipate that domestic demand will track gasoline demand going forward. E15 plants have been slow to come online, and we do see more potential in 2013 and beyond. Our plants have been registered for E15 sales, and we're active in the national fuel survey to support ongoing implementation of E15 blending and selling.
Brazil has announced its intent to increase its required ethanol blend and gasoline C from 20% to 25% in May or June of next year. This should help the global supply demand balance. And on the corn side, the USDA's latest supply/demand estimates increased the projected carryout for the 2012, '13 crop year, and prices have moved downward. A lot has changed since bouts [ph] of corn prices back in the August, September time frame due to a little better crop than people had expected, and yields being in the 120 versus 110 range.
As far as looking ahead, we see some positive indicators. Idling capacity is help on the margin to reduce inventories. The RFS2 continues to call for increasing biofuel consumption in the coming years. Expecting that this fundamental energy policy will remain in force, the category generally associated with corn ethanol will increase from 13.2 billion gallons this year to 15 billion gallons in 2014.
At least as importantly, in coming years, most observers believe that blenders will no longer be able to bank and roll over credits from excess blending as these credits are consumed.
Finally, ethanol continues to sell at a $0.30 to $0.40 a gallon discount to [indiscernible]. And with the product -- the ethanol product, as the best replacement to octane refiners [ph] have selling at a $0.50 discount or any other octane source being 50% more expensive. This combination supports ongoing demand for ethanol.
In wrapping up another difficult quarter in which we continue to respond to the challenge that was presented to us, at least, to that which was in our control; and as you can see, we are continuing to get more efficient.
Looking towards the end of the year, we are focused on the ongoing discussions with our lenders; the results of which I said earlier cannot be predicted at this time. As to the industry, we anticipate that the current situation will pass. There will be more shutdowns of plants, consolidation and rationalizing of the currently unsustainable weak margins.
This concludes our third quarter earnings call. Thanks to each of you for your continued support.
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