US BioEnergy Corp. Q4 2007 Earnings Call Transcript

Mar.17.08 | About: US BioEnergy (USBE)

US BioEnergy Corp. (USBE) Q4 2007 Earnings Call March 17, 2008 11:00 AM ET

Executives

Gordon Ommen - US BioEnergy CEO

Rich Atkinson - SVP and CFO

Analysts

Pavel Molchanov - Raymond James

Kelly Dougherty - Caylon Securities

Brian Milberg - Piper Jaffray

Operator

Good morning, ladies and gentlemen. Welcome to the US BioEnergy's Yearend Results Call. On the call today is Gordon Ommen, US BioEnergy CEO; and Rich Atkinson, Senior Vice President and CFO. Today's call is being recorded. If you have any objections, please disconnect at this time. (Operator Instructions). The company will begin brief prepared remarks and then we'll open it up for a question-and-answer session.

Mr. Atkinson you may now begin.

Rich Atkinson

Thank you. This is Rich Atkinson, US BioEnergy's Chief Financial Officer. I'm joined this morning by Gordon Ommen, our Chief Executive Officer and I'd like to welcome all of you to our fourth quarter and full year 2007 Earnings Call.

Earlier this morning, we released financial results for the quarter and 12 months ended December 31st. Before getting started, I would like to remind you of the Safe Harbor disclosures regarding forward-looking statements that we make during this call, or that may be contained in our earnings release. The earnings release is available on our website at www.usbioenergy.net. The applicable Safe Harbor disclosures are presented at the end of that release and in our Form 10-K for the fiscal year ended December 31st, 2007, filed with the SEC this morning.

With that, I would like to turn the call over to Gordon Ommen.

Gordon Ommen

Thank you, Rich and welcome everyone to our call today. As you know by this time, we will soon be merging with VeraSun Energy. As a result, we expect this will be the last conference call US BioEnergy holds as a publicly traded company. I will start with a brief review of our financial and operating accomplishments and then update you on the progress of the merger.

In the February of 2008, we commenced operations at our Marion plant. This was the Millennium Ethanol Project we acquired in August. Now, including Marion, we have five operating plants with a combined production capacity of 420 million gallons per year. This compares with 250 million gallons of operating capacity at the end of 2006, representing a 68% increase year-over-year.

In addition to our five plants in production, we currently have three plants under construction. Our Hankinson plant is expected to start producing in the second quarter of 2008. Our Dyersville and Janesville facilities are expected to start producing ethanol in the second half of 2008. Hankinson, Dyersville and Janesville are all 110 million gallon facilities. Combining these with our operating plants will bring our production to 750 million gallons per year by year end.

Now, let me update you on our merger with VeraSun Energy. We initially announced intention to merge the two companies on November 29, 2007. In January, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act. The special meetings of the shareholders of both companies are scheduled for March 31, and we are currently anticipating closing the transaction on April 1.

We are extremely excited about the transaction. Upon completing the merger, the combined company will have nine ethanol production facilities in operation and seven additional facilities under construction. By the end of 2008, the combined company is expected to have total production capacity of more than 1.6 billion gallons per year from 16 bio-refineries, making us the largest ethanol producer in the US.

Following the merger, I will assume the role of Chairman of the Board of the combined company, and Rich Atkinson will be leaving the company to pursue other opportunities.

Now, I would like to turn the call back to Rich who will review the financial performance during the fourth quarter. Rich?

Rich Atkinson

Thank you, Gordon. Before I go into more details on our financial performance, I would like to remind everybody that for most of 2006, our revenues were derived principally from our marketing and services businesses. Since that time, the sale of ethanol and distillers grain has become the primary source of US BioEnergy's revenues. As a result, our financial results for the periods after April 30, 2006 are not comparable to the results for the prior periods.

In addition, due to steep ramping of ethanol production since April 2006, the actual production figures for 2006 are not indicative of future operating results. Also, one additional reminder is that our ethanol is priced FOB the plant. So when you look at our actual revenues and look at our price of ethanol per gallon, that does not include compensation for transportation or commissions, which, as reported in our form 10-K were approximately $0.17 both for the fourth quarter and the full year.

Our fourth quarter 2007 reflected the second full quarter of operations for our Ord, Nebraska facility, and as Gordon already mentioned earlier, at the end of the fourth quarter, we had four plants in operation with total production capacity of 310 million gallons per year.

SG&A increased in the quarter from $10.8 million in the third quarter to $12.5 million. In addition, a $2.8 million expense related to our pending merger with VeraSun is included in other income. We reported a net loss of $7.1 million or $0.09 a share for the quarter ended December 31st, 2007.

As noted in our earnings release, net income for the fourth quarter of 2007 included a $13.9 million unrealized loss related to the company's hedging activities. This is predominantly due to ethanol hedges for the first and second quarter of 2008, which we put in place in October. The effective prices for these positions range from approximately $1.60 to $1.75 per gallon and we are mark-to-market effective on December 31st, at price levels in excess of $2 per gallon. In combination with our corn positions at the time, these prices protected positive [gross] margins.

The ethanol volume hedged at these prices, works out to about 2 million gallons per month for the first two quarters of 2008. Our current expectation is that we will sell approximately 85 million gallons of ethanol in the first quarter of the year, so this represents a little over 7% of first quarter volume and less than that in the second quarter. These mark-to-market impacts are included in cost of goods sold in the fourth quarter and all things being equal, these contracts should have minimal impact on the company's future income statements that will result in slightly lower ethanol revenues and cash flows.

To put that in perspective, in the first quarter, we expect our average cash prices for ethanol, inclusive of these contracts, will be between two and two-tenth FOB the plant. Adding back our average transportation and commission costs, that would be equivalent to market prices of $2.17 to $2.27. To round out the picture, we anticipate the cash cost of corn for the quarter to be in the range of $4.30 to $4.50.

Now let me update you on our construction in progress activities. On December 31st, our construction work in progress totaled approximately $550 million, that included the Marion facility which began operating in this past month.

The cost to complete these projects as of December 31st, was estimated at just over $174 million. Completion of these projects including startup working capital, is fully funded through our current cash on-hand and existing credit facilities. At December 31st, 2007 total cash and cash equivalents were $54.4 million compared with $170.1 million on December 31st, 2006. None of the company's cash is or was invested in auction rate securities.

Total debt as of December 31st, 2007 was $430 million, compared to $150 million on December 31st, 2006. Equity, as a percentage of total capitalization, was approximately 59% as of December 31, 2007.

Before closing, I would like to make a quick note about the impact of the merger on future financial results. I need to precede this comment with a quick disclaimer, that I am not an expert at merger accounting. With that in mind, at the close of the merger, US BioEnergy's assets will be recorded on the books of the new company at fair value. This fair value determination will include among other things, contracts for foreign purchases, that are not normally mark-to-market in our normal course of business. The reason I want to bring this to your attention is that we have a number of contracts for corn to be delivered to our plants over the next 12 months, that are priced in the low $4 range. At the time of the merger, these contracts will be recorded on the books, and will ultimately flow through the cost of goods sold on the income statement, at a fair value price reflecting the current market for corn, which today is in the $550 range. At current price levels the differential by which these contracts will be written up in value, is between $30 million and $40 million. The cash cost will remain as contracted in the lower $4 range and the future financial benefits will show up in cash flow and EBITDA calculations.

As Gordon mentioned earlier, I will not be joining the new company once the merger is completed. I would just like to say, that I am very proud of everything that the people here at US BioEnergy have achieved in a short period of time and I will miss them.

With that I would like to turn the call back to Gordon for some final remarks before taking your questions.

Gordon Ommen

Thank you, Rich. In conclusion, I would like to say thank you to all the employees and business partners, whose hard work and dedication helped us build US BioEnergy Corporation into the company it is today, the company of which I am very proud. With that, I would like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

Hi. First, just a quick follow-up. You mentioned you have some favorable corn hedges; do you have any ethanol sales hedges that you will also be bringing as part of the merger?

Gordon Ommen

None that I'm aware of. The Ethanol market, as you know, is going very far out on an extremely limited cash basis, and so to the extent that we rely more on the futures market, those are normally mark to market in normal course. So the difference is our cash contracts for corn are viewed as normal purchase, normal sales in the course of business and so other than an event like this they do not get mark-to-market.

Pavel Molchanov - Raymond James

Got it. And then, just more of a commentary from you guys with regard to what we are seeing in the agricultural space year to date with $550 corn, $0.60 plus soybean oil. Where do you think acreage shifts will go to as we go near to the USDA projections for the planting season?

Rich Atkinson

I'll take that one. There is a lot of, a lot of people that are watching that closely. We really don't have any additional color that we're in a position to add on prediction of acres. We continue to read the same sources you do and watch it closely.

Pavel Molchanov - Raymond James

Okay, fair enough, thanks guys.

Gordon Ommen

Yeah

Operator

Your next question comes from the line of Kelly Dougherty with Caylon Securities

Kelly Dougherty - Caylon Securities

Good Morning, Gordon and Rich. I'm just wondering if you can give us an update on the build out of unit train capabilities, especially in some of the newer markets? And then also if you could talk about your unit train capabilities, wonder if you have them yet, because I do know that they are a big part of what VeraSun is focusing on?

Gordon Ommen

Well, I'd be happy to take that question. First of all, all of our large scale plants were built from the ground up for unit trains. So that's a common infrastructure that we've put in place at all facilities. So yes, we definitely have that. On the receiving end, we're continuing to see more and more unit train facilities be built out and one of the things that we liked about the merger transaction with VeraSun, is they have been very focused on developing unit train receiving facility relationships, kind of, on the sell side and that fits nicely with our production facilities that have unit train origination capabilities. So we think that's a good fit.

Kelly Dougherty - Caylon Securities

Great, thanks very much. And I am also wondering if you could talk a little bit about -- it's a bigger picture question, I guess. But about the independents versus the majors, and who's really driving demand and what you think needs to happen before the majors really get on board, given that the economics of discretionary blending really have been pretty compelling for some time now?

Gordon Ommen

That's a complex question. Sometimes you will see the independents drive change into a market in front of the majors. They sometimes appear to be little more nimble. But we are seeing both majors and independents work on blending infrastructure and opening up markets. But if I had to suggest who will sometimes lead, sometimes the independents will lead.

Kelly Dougherty - Caylon Securities

Okay great. Thanks again and congratulations on the merger.

Gordon Moore

Thank you.

Operator

Your next question comes from the line of Brian Milberg with Piper Jaffray.

Brian Milberg - Piper Jaffray

Good morning.

Gordon Moore

Good morning.

Brian Milberg - Piper Jaffray

I am sorry I missed the first few minutes of the call. First thing, are you going to be reporting a Q1?

Rich Atkinson

No.

Brian Milberg - Piper Jaffray

For 2008? Will it just be wrapped in or --?

Rich Atkinson

At this point we are anticipating that the merger will close on April 1st. And so US BioEnergy, as an independent entity, won't be required to file a Q on earnings and because it will be closing after the end of the quarter, I am sure there will be some pro forma information reported by VeraSun. But the company won't technically be a part of the VeraSun that exists on March 31st.

Brian Milberg - Piper Jaffray

Okay. And then in terms of the current borrowing that you have in place. I am assuming that’s all just going to transfer over as it is?

Rick Atkinson

Yes.

Brian Milberg - Piper Jaffray

None of it will have to be renegotiated?

Rich Atkinson

That’s correct.

Brian Milberg - Piper Jaffray

Okay. Very good. Thank you.

Gordon Ommen

You’re welcome.

Operator

(Operator Instructions). And at this time, there are no further questions.

Gordon Moore

We would like to thank everybody for joining us this morning and I think that is it. Thank you very much.

Operator

This concludes today's conference call. You now disconnect.

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