Pacific Ethanol (NASDAQ:PEIX)
Q1 2013 Earnings Call
May 09, 2013 11:00 am ET
Rebecca Herrick - Assistant Vice President of San Francisco Office
Neil M. Koehler - Chief Executive Officer, President and Director
Bryon T. McGregor - Chief Financial Officer and Principal Accounting Officer
Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. First Quarter 2013 Financial Results Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Becky Herrick, LHA. You may begin.
Thank you, operator. Thank you, everyone, for joining us today for the Pacific Ethanol First Quarter 2013 Results Conference Call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with the review of business highlights, and then Bryon will provide details on the company's financial and operating results. Neil will then return to discuss Pacific Ethanol's outlook and open the call for questions.
Before we get underway, let me first inform you that Pacific Ethanol issued a press release yesterday that provides details of the company's quarterly results. The company also prepared a presentation for today's conference call that is available for download on the company's website at pacificethanol.net. If you have any questions, please call LHA at (415) 433-3777. A telephone replay of today's call will be available until midnight, Eastern Time, on May 16, the details for which are included in yesterday's press release. A webcast replay will also be available at Pacific Ethanol's website.
Please note that information in this call speaks only as of today, May 9, 2013, and therefore, you are 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 on Slide 2 of the presentation available online, which says that some of the comments in this presentation can constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.
Forward-looking statements are based on many assumptions and factors. Any changes in such assumptions or factors could produce significantly different results. Information about potential factors that could affect the company's financial results is available in the company's risk factors as updated in the company's SEC filings. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events.
Also, please note, the company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the reported financial results as determined in accordance with GAAP. The company defines adjusted EBITDA as unaudited earnings before interest, taxes, depreciation and amortization and warrant inducements and fair value adjustments. To support the company's review of non-GAAP information later in this call, a reconciling table is included in yesterday's press release.
It is now my pleasure to introduce Neil Koehler, President and CEO. Neil?
Neil M. Koehler
Thank you, Becky, and thank you, all, for joining us this morning. 2013 is off to a promising start, as we have accomplished key goals over the last several months that are augmented by improvements in the ethanol market. In particular, we have a plan in place to eliminate all our debt due in June 2013. The key components include the reverse stock split and shareholder approval of the recently completed convertible debt financing. These steps, in addition to the recent improvements made to our balance sheet and our increased ownership in the Pacific Ethanol plants to 83%, put us in a more favorable position to benefit as the overall market environment is strengthening. In fact, revenue was up 14% and gross profit increased by $8 million when compared to the same period last year. Improvements in gross and operating margins in the latter part of the first quarter contributed to a positive adjusted EBITDA of $355,000, a $3 million improvement over the same quarter last year.
Now I'd like to briefly review our recent accomplishments and progress. This quarter, we refinanced all but $4 million of the remaining plant debt. We executed on our strategy to buy additional plant ownership at attractive valuations compared with replacement costs and market valuations. With our ownership interest in the plants now at 83% and in the current crush margin environment, we can better benefit from these valuable assets and have secured a competitive and low-cost ownership basis for our shareholders. At the current production margins, the plants are operating profitably, and they contribute significantly to the overall financials of the company. At the plants, we continue to drive efficiencies and increase yields. This is integral, as every 1% improvement in yield will result in about a $3 million increase in gross margin annually at current margins and operating rates. We are also focused on reducing energy use, thereby improving the carbon intensity of our ethanol, which, in turn, sells at a higher value in the California Low Carbon Fuel Standard markets.
Feedstock for the plant continues to be a mix of corn and sorghum. We benefit from being able to source feedstock from Midwest, local and international markets. We are completing the corn oil separation projects at the Magic Valley and Stockton plants. We have experienced some construction delays related to customization of corn oil systems to meet the requirements of our plants. We are confident these units will operate efficiently and provide immediate incremental earnings to the plants as we sell into the feed and biodiesel markets. We expect to begin producing corn oil at Magic Valley in May and be fully operational in this second quarter. We expect to bring the corn oil system in our Stockton plant online early in the third quarter.
In the latter half of the first quarter and so far in the second quarter, production margins have recovered to more favorable levels while the supply and demand for ethanol have achieved a much better balance. We are optimistic about the second quarter as April production margins demonstrated an even greater improvement, especially when compared to the historic lows experienced in 2012.
Our financial and operational achievements, combined with recovery in the industry, contributed to better financial results. In view of these improving results and steps we have taken to improve our balance sheet, we are better capitalized and positioned to execute on our current initiatives. The near-term industry outlook is improving, and the long-term outlook remains positive. Fundamental industry drivers demonstrate the sustainable opportunity for ethanol production, as the renewable fuel standard or RFS supports a steady growth in ethanol demand.
In addition to reducing the U.S. dependence on foreign oil, the RFS stimulates investment in domestic renewable energy, which diversifies the nation's energy sources and results in reducing greenhouse gas emissions from transportation fuels. The additional gallons of renewable fuel required to meet the RFS will primarily come from advanced biofuels, which can be well integrated within existing ethanol plants. An important part of our long-term strategy is to process corn, other grains and cellulosic feedstocks for production of advanced biofuels. It is our goal to produce advanced biofuels at each of our facilities.
Also, ethanol prices continue to trade at a discount to gasoline prices. Increasing ethanol blends, as supported by the RFS, is a practical and immediate opportunity to reduce the price of gasoline for consumers. Demand for ethanol will be supported by increasing the blend level to 15% as supported by the EPA's E15 approval. We are confident, as consumers are given true choice at the pump and refiners blend E15 to meet the requirements of the RFS, we will see higher inclusion rates of ethanol and other renewable fuels in the nation's fuel supply.
I would like now to turn the call over to our CFO, Bryon McGregor, to review the numbers. Bryon?
Bryon T. McGregor
Thank you, Neil. For the first quarter of 2013, we reported net sales of $225 million compared to $198 million in the first quarter of 2012. The growth in net sales reflects an increase in average sales price per gallon of ethanol sold from $2.34 to $2.60. Gross profit for the first quarter of 2013 was $850,000 compared to a gross loss of $7.5 million in the first quarter of 2012, due to improvements in crush and commodity margins in the latter part of the quarter.
SG&A expenses were $4 million in the first quarter of 2013. SG&A would have been materially lower but for onetime professional expenses incurred to complete our financing transactions. Consolidated net loss was $6.6 million, a 53% reduction from loss -- from the loss of $14 million in March 2012, driven by significantly better margins. Although consolidated loss declined 53% because our ownership in Pacific Ethanol plants increased from an average of 34% last year to an average of 80% this year, we absorbed more of the current quarter losses incurred at the Pacific Ethanol plant level, resulting in a net loss available to common stockholders at $5.8 million compared to $5.3 million last year. Adjusted EBITDA, which excludes warrant inducement and fair value adjustments, was a positive $355,000 in the first quarter of 2013 compared to a negative $2.5 million in the first quarter of 2012.
Turning to our balance sheet. Cash and cash equivalents were $4.2 million at March 31, 2013, compared to $7.6 million for -- at December 31, 2012. This reduction in cash is attributable to our decision to use $2 million to retire senior debt and an additional $2 million to purchase plant debt and equity, thereby strengthening our balance sheet and lowering interest expense. As of March 31, we had a total unused lines of credit of over $22 million, with immediate access to $13 million in availability. Working capital for the company declined $2.7 million to $42.3 million at the end of March from $45 million at the end of 2012. Our still-strong working capital position reflects the benefits of our ongoing efforts to maintain a solid liquidity level.
I'd like to provide additional perspective on the increased ownership of the Pacific Ethanol plants from 34% to 83% over the past 12 months. Although increasing our equity interest in plant assets by almost 2.5x in a poor margin environment negatively impacted earnings, we believed last year's margins were unsustainable and that the spread between corn and ethanol prices would improve. Consequently, as opportunities arose, we increased our ownership interest in the plant assets at a significant discount to market and replacement value.
We also refinanced significant portions of short-term debt with lower-cost, longer-maturing facilities while addressing the company's liquidity and working capital needs. Although this has required the periodic use of equity with inherent dilution, these actions have always been done with the shareholders' best interest in mind and with the intent to increase the earning potential of the company, establish greater control over core assets and improve long-term returns for shareholders. In the current positive operating margin environment, we are beginning to see the multiple benefits from these actions and expect, with sustained or improved commodity margins, to produce increasingly positive results.
Last week, we announced our decision to adjourn our special meeting of stockholders from April 30 to May 10. While a significant majority of the votes received are in favor of the proposal, insufficient votes have been received to achieve a majority of the outstanding shares required to effectuate a reverse split. We strongly believe this proposal is the best -- is in the best interest of Pacific Ethanol and its shareholders, as a reverse split is necessary for the company to retain its listing on the NASDAQ capital market by raising the trading range of the company's stock above $1. The minimum bid price needed to remain compliant with NASDAQ's listing standards.
Our shareholders benefit from an active liquid market and well-regulated exchange in which to trade our stock. Retaining a liquid market for our stock is important to our shareholders and to the company, and retaining our listing on the NASDAQ capital market is a condition of our senior lenders and integral to our plans to service the plant debt due this June. Independent governance advisors, ISS and Glass Lewis, have both recommended that shareholders vote in favor. ISS recently reaffirmed their recommendation in response to the recent adjournment. Shareholders who have not yet voted are urged to review our press release issued on April 30 for directions on voting by telephone or over the Internet. These directions are also posted on our website.
In summary, we are focused on shareholder value. Decisions to raise equity and equitize debt have been made only after pursuing all viable alternatives and determining the path that either best preserves or enhances shareholder value. Having done so, we have been able to increase plant yields, reduce costs, improve operating margins and comply with our debt obligations. Any decisions in the future to use equity will be, as always, with a focus toward accretive investments.
With that, I'd like to return the call to Neil
Neil M. Koehler
Thanks, Bryon. We are off to a strong start so far in 2013, and we are cautiously optimistic that the improved production margins will continue and ethanol demand will increase, bringing growth to the industry and our company. Furthermore, we believe Pacific Ethanol presents a compelling value proposition to investors. First, the long-term demand for ethanol remains strong. Federal and state regulations, such as the RFS and California Low Carbon Fuel Standard, require the increased use of renewable fuels. In addition, ethanol continues to trade at a discount to that of gasoline, providing a clear economic incentive to refiners and consumers. Refiners are further incented to blend at higher levels, as ethanol's high-octane content establishes it as the highest performing fuel in the market.
Second, our destination model and West Coast locations are distinctive competitive advantages. Our model enables us to reduce costs related to transporting ethanol and co-products, lowers our carbon footprint and provides low carbon fuel into California markets, for which we receive today an approximate $0.035 per gallon premium. In addition, our proximity to local markets provides quick and reliable access to ethanol and feed customers, as well as optimizes the quality and supply of our feedstock. Third, Pacific Ethanol is poised to capitalize on growth in our market. We have taken a number of steps recently to address debt obligations, improve our balance sheet and increase our ownership in the Pacific Ethanol plants. We are confident that the steps we have taken to-date have put us on strong footing for profitable growth as the markets continue to improve.
We remain committed to our strategic goals for 2013. We intend to continue to improve operating efficiencies at the plants, diversify our revenue and feedstock, increase product values by further reducing the carbon intensity of our ethanol and return the company to profitability. We look forward to keeping you updated on our progress.
With that, Mercy, I'd like to open the call for questions.
[Operator Instructions] Our first question is from Paul Resnik from Uncommon Equities.
With regard to corn oil, what level of production would you expect from a 60 million gallon plant?
Neil M. Koehler
That is -- works out to be, I believe, about 5 million gallons. If the -- so the industry average in target and we expect to hit this and above, would be about 0.6 pounds of corn oil per bushel of corn used.
Okay. And what were the -- what's the current price of corn oil in the marketplace?
Neil M. Koehler
It is running at $0.40 a pound. That would be a FOB value at our plants. Really, it's that or slightly above. It's been a very strong market, and we see great opportunities in both the feed -- but also as we look forward in California, the value of biodiesel is becoming very material in meeting the low carbon fuel standard.
All right. It's been noted that you're diversifying your feedstock. Now corn prices -- and of course, now we're waiting for drier weather to hit the Midwest. But assuming the crop does progress, corn prices are now in the out months down to $5.30, $5.40, $5.50. If corn were to go below $5, how competitive would the sorghum be as a feedstock?
Neil M. Koehler
Sorghum, historically, trades at a discount price to corn, regardless of where the corn price is. So we would expect that to continue. We also view sorghum as very integral into our efforts to reduce our carbon intensity in California and to put us on a pathway to qualify for advanced biofuel status at the federal level. At which point, even if we were paying the same price for sorghum, it would be a significant advantage. We are very optimistic about the corn crop. You pointed out getting into the fields, that's, in many respects, a good problem to have that we have as much soil moisture, and the expectations are still very, very strong on a record corn crop.
Yes, it looks like next week might be a little sunnier in the Midwest. And with regard -- in your presentation, you support the concepts of RFS. And of course, the flip side of that is that there are people who oppose it. Could you give a little color on what's going on in Congress this spring?
Neil M. Koehler
Sure, I actually was back in Washington, D.C., a week or so ago, and there have been bills introduced to modify or eliminate the RFS. It is our strong view and the view of our industry experts and advocates that there really is no appetite for modifying the RFS this year, that a bill will not make it through the Congress. It may make it through a committee or 2, and that would be the end of it. The RFS continues to be the best energy policy we have ever had in reducing our dependence on foreign oil. There continues to be very strong bipartisan support, I think as we are seeing a very strong corn crop and seeing $1 come off the price of corn in the last month or so. And as you pointed out, the forward curve shows another $1 coming off that, that undermines a lot of the arguments against the RFS. So we remain confident the RFS stays in place and is a strong engine of growth for the company and the industry.
With regard to ethanol, I noticed the May 3 supply inventory levels, ethanol stocks are like 16.8 million barrels, and that's the lowest since November 2011 and seasonally way off the 20 million, 21 million in the past couple of years. Is there any possibility that -- this is mind-boggling, that some markets may find themselves with a kind of a tight ethanol supply?
Neil M. Koehler
Well, we -- with a very tight supply of railcars, and this has benefited us, where we don't use railcars to move our ethanol that we produce, we have seen some tightness. And that's why we've seen some very strong ethanol prices out West. The market is being supplied. The market will continue to be supplied there. We always see some imports when the market does domestically get so tight that there are issues in regards to meeting the demand. So we are very confident that the industry will continue to meet the demand and the growing demand for ethanol. What you point out though is true. We have -- inventories are lower than they've been in 18 months. We finally have hit an inventory level that matches a 20-day supply, that is considered to be a relatively tight supply/demand balance. That is why we are seeing good margins in the business. We hope that the industry continues to maintain the discipline so that we don't expand those inventories back to levels that tend to depress margins.
We have no more questions in queue. I will turn the call over to Neil Koehler for closing remarks.
Neil M. Koehler
Mercy, thank you, and thank you, again, everybody for joining us. We appreciate your interest and support of Pacific Ethanol, and we look forward to speaking with you again soon. Have a great day.
Ladies and gentlemen, this does conclude today's conference. You may now disconnect.
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