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BioFuel Energy Corp. (NASDAQ:BIOF)

Q2 2012 Earnings Call

August 10, 2012 11:00 am ET

Executives

Scott Pearce - President & CEO

Kelly Maguire - EVP & CFO

Doug Henderson - EVP & COO

Analysts

Operator

Welcome to today's BioFuel Energy conference call entitled earnings release for second quarter 2012. During the presentation, all lines will be in a listen-only mode. A question-and-answer session will follow the presentation and instructions for asking questions will be given at that time. Thank you for your attention. I would now like to turn the conference over to your host, Mr. Scott Pearce.

Kelly Maguire

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 therefore, 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.

Scott Pearce

Good morning everyone and thank you for joining us for our second quarter earnings call. On the call today, with me are Kelly Maguire and Doug Anderson, our Chief Operating Officer.

With another challenging quarter for the company, ongoing weakness in ethanol prices has reflected in the narrow ethanol corn crush pressure margin remained a key driver behind our net loss.

All of our assets performed well during the quarter, and the benefit we had from strong ditillers pricing and as well our corn oil revenue that was realized over the full quarters did help to mitigate the loss during these historically low crush margins.

Later in the call, we’ll talk about the ongoing drought, but we do expect to have advantage as the harvest progresses here in the next month or so as the local crop around both of our plants remaining in good shape. In Nebraska, it is irrigated all around our facilities and southern Minnesota has some decent moisture levels and has not experienced the drought going on throughout most of the corn belt.

There is a little question in our view that the key reason for the continued lag in the industry's profitability and low crush margins, the high level of ethanol inventories that were carried over from the previous quarter and the industry continued to over produce well in to the second quarter.

Towards the end of the quarter, we did finally see a pullback in production, which has continued in to the third quarter. We also saw corn basis levels that rose through the quarter, exceeding historical averages.

We believe that this in part is a result that farmers increased on farm storage, spreading out their corn sales across the year in limiting supply.

Because the Chicago board corn ethanol crush spreads remained range bound, this trend towards rising local corn bases put additional pressure on margins as the quarter progressed.

This basis pressure was a key driver in our decision to scale back in mid-June which I will also cover some of the rationale behind that later. But I am going to turn it over to Kelly to go through the financial results for the second quarter.

Kelly Maguire

Thank you, Scott and good morning everyone. As Scott mentioned earlier the company had another challenging quarter resulting in a $12.4 million net loss. We recorded revenues of a $122.8 million for the second quarter of 2012. This represented a 27% decrease when compared to the same period in 2011 and was driven primarily by a 34% decrease in ethanol revenues.

The decline in ethanol revenues was a result of both lower production and sales volumes combined with a lower price per gallon received. On the positive side, corn oil revenues continued to increase generating 4 million in revenues in the second quarter of 2012 versus 2.7 million in the first quarter of 2012 which was our first quarter of corn oil sales.

We also saw a $2.5 million or 9% decrease in our distillers revenue over the prior year as the decrease in our production and sales volumes was only partially offset by increased unit pricing received. Cost of goods sold was $131.1 million for the second quarter of 2012, a decrease of 24% 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 10% lower in the second quarter of 2012 versus the same period in 2011. We generated an $8.3 million gross loss for the second quarter of 2012 which was $4.5 million worse than the same period in 2011.

Operating loss was $10.7 million for the second quarter of 2012 as compared to $6.3 million last year. In addition, our interest expense was $1.7 million during the quarter or $300,000 lower as compared to last year. Depreciation expense was $6.8 million for the quarter, most of which $6.5 million is included in costs of goods sold with the remainder in G&A expense.

The end result of this challenging quarter was a net loss attributable to BioFuel common stockholders of $10.6 million or $2.05 per share compared to a net loss attributable to BioFuel common stockholders of $7 million or $1.38 per share in the same period in 2011.

It should be noted that the company affected a 1 for 20 reverse stock split on June 15, 2012 and therefore the per share amounts just mentioned reflect this reverse stock split. 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 $3.9 million compared to a positive $400,000 in the second quarter of 2011.

A reconciliation of EBITDA to our net loss for the quarter is included in the supplemental materials that the company in the press release this quarter. Our cash balance at June 30, 2012 was $9.2 million as compared to $15.1 million at December 31, 2011 and our total debt balance at June 30, 2012 was down to $178.2 million or $0.77 per gallon. And with that I would like to turn the call back over to Scott.

Scott Pearce

Thanks, Kelly. So for our plan we continue to believe that focusing on yield and co-products return while being disciplined on production decisions with the latter being key during periods like this are instrumental to our plan forward.

During the quarter, we fully optimized our corn oil systems and we were able to realize an improved yield by grinding finer and process consistency while at the same time keeping costs in line and operating safely. Doug is going to talk a little bit more about these in a second.

As we noted in our release, we again pull back production against our initial 2012 plan during the month of June due to weakness in ethanol prices and particularly the tightness in corn supply around our local plants. Running this way allowed us to focus on yield while at the same time driving more slowly through corn ownership that was favorable against then escalating premium markets.

We also deployed and additional 50 tanker cars to higher value services as we continue to optimize our rail fleet and then finally during the quarter, we formally announced a collaboration with Gevo who we believe is well positioned among the second generation biofuel companies as we look for ways to enhance values to our platform and our shareholders.

With that Doug is going to talk a little more about yields going from corn and our and our production plant.

Doug Anderson

Thanks Scott. We saw a significant improvement in the distillers during the quarter, similar incremental contribution to what corn oil represents. Specific details about our improvements included we realized more consistent ethanol yields at both plants with a 1% improvement over the first quarter and by granting finer and continuing to work on improving our process consistency.

Corn oil optimization activity has gone very well overall for the company. During the second quarter we were able to consistently exceed our stretch goal of 0.65 pounds per bushel through continuing process improvements, the addition of chemical additives and also the continued development of operational expertise with our unique design. Overall in the quarter, we produced at about 30% less ethanol than the same period of 2011 when we ran nameplate capacity.

As Scott has already mentioned, a key tenet of our plan remains running smart as opposed to running solely to maximize capacity utilization while we continue to focus and continued efficiency improvement and cost control and with that I will turn it back to Scott.

Scott Pearce

So I will talk briefly about the key area of the industry that impact us gasoline ethanol complex, corn supply to stores and then talking just about the ongoing discussions around the mandate and the RFS and our perspective on that. If you look at EIA's most recently monthly recap US ethanol production is down by 6.9% from the records are set at the end of last year. That would show us at an annual run rate of 13.7 billion gallons and they would be virtually unchanged from the year prior however the bigger news is since that time weekly data suggest the we are actually running closer to somewhere around 12.2 billion to 12.5 billion gallons and this is in contrast to an implied demand at May that was 13.4 billion gallons which was up year-over-year.

We do think 10% blending continues to be the de-facto standard and that domestic demand will track gasoline demand going forward. We look to the same numbers and weekly data and do note that unlike in May we are producing at less than what the implied demand is currently. Our view is that we will see some impact on 15% ethanol blends but there will be pretty minimal and we are really only to start pick up. As we talked about in past calls Ethanol inventories played big role and we touched on this at the beginning of the call in ethanol prices. At the end of May, EIA reported ethanol inventory above 900 million gallons at 9.18 which was down from 9.40 million gallon at the end of April and all over again if you look at the weekly data inventory levels have continued to trend down since that time with reduced production in relatively higher seasonal demand.

And in the last week the report showed the drop down below 800 from the first half. Exports have taken up some of the excess ethanol production although net exports are lower than what we saw in 2011 both looking at the May day as well as what we know since that time. We've touched on this a little bit in terms of our results but co-products and this is probably the stronger carrier, not surprisingly with high corn prices and the relative value we are realizing as well as corn oil values at similar levels is helping against these low cost margins.

As far as the 2012 crop, I touched on the conditions around our plan earlier but this has remained in pretty good shape and we are looking at the new crops and this is consistent with the USDA's state level crop reports. Wood River benefits from extensive irrigation while Fairmont has not seen more severe drought conditions that are common in corn well states towards south and east. We believe this drought will lead to greater variability in local supplies and some ethanol clients that have had historically good corn supply maybe short particularly in the regions impacted by the drought.

We anticipate that this could create improved opportunities for margins for those with relatively strong corn supply. So in essence the local corn supply demand is going to play a big factor and profitability as we look at this coming production against the crop year.

So those are our comments in terms of different areas of the industry with respect to the growing course of calls for some change or action by the government whether it's USDA or more broadly appeal or somehow alter the mandated RFS we agree with leaders in the industry who suggested that this is a complicated situation with a drought and historically high point price there certainly reason to have a discussion around what are the impacts and what are the different choices. Having said that, the market we believe the market is working. Ethanol production is down and the markets continuing to indicate that that’s should be the case while demand for our coal products which is a substitute for corn remains strong.

Taking a broader view, the US and the world needing environmental and cleaner solution that ethanol provides as well as an octane value that delivers something provide that competitive price. We believe that this is a key factor that has been overlook as people talk about reducing or cutting back the RFS some type of silver bullets for increasing corn supply.

In the end, we remain of the view that the US and the world need a long-term solution to diversify ways and fossil fuels and as to the solution first generation corn and sugar, second generation biofuels will continue to play an increasing roles.

There are no easy answers and we do not see good reason for 50 year event to justify abandoning sensible long-term policy and the associated investment that has established US as a leader in developing sustainable and market competitive biofuel and bio based chemical solutions.

With all that said, in spite the current challenges, we remain focused on controlling the things we can and being able to realize the long-term prospects for the industry and biofuel in particular. We continue to benefit from the improvements we made over the past year to our platform and with ongoing refinements are confident that our unmoved focus on cost and running efficiently has produced better results than otherwise would be the case and positioned our plants well within the industry. And we anticipate further improvement in the domestic supply demand as more production comes off line and our optimistic specifically about the cost conditions around our facilities.

Now I would like to turn to turn it over to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And we do have a question from Mr. [George Farber]. Please go ahead.

Unidentified Analyst

I just have really one question, can you please tell me what the historical book value of the company is right now and how many shares are outstanding?

Kelly Maguire

Yes, George this is Kelly. With the reverse stock split that went into effect in June, at the end of June the company had outstanding 5.4 million shares of common stock and a book value or an equity value of $75 million, so that would be a book value of $14 per share.

Unidentified Analyst

$14 a share and then what would be the replacement course for the plant and equipment that you have setup approximately?

Scott Pearce

Replacement values are pretty hard to predict, but approximate, I would say would be 10% to 20% more than that Kelly what do you think.

Kelly Maguire

I would say that’s probably good estimate.

Unidentified Analyst

So somewhere between $16 and $18?

Kelly Maguire

Correct.

Unidentified Analyst

Yes thank you very much. Keep up the good work gentlemen I realize it’s not your fault and that you are doing the best you can and as a shareholder, I am not happy, but I am not disappointed with your actions and efforts and what can I say.

Unidentified Speaker

Yeah, we are not happy either George; but thank you; and we are going to continue to press on.

Operator

And we do have a question from Mr. [Eddie Williams]. Please go ahead.

Unidentified Analyst

The supply of corn around the plant; what’s the relationship between the suppliers and the plant operation, i.e. what that corn necessarily come to you or will it go to the market?

Scott Pearce

We regularly maintain and work hard on the relationships with the farmers around the plants and I think the best way to answer that is we definitely have to on an ongoing basis work in a market environment. That being said, we regularly secure and advance as much corn as we can; when we believe that the values are sensible and at this point have already secured, the exact numbers to probably around 30% of our corn for the fall and ultimately have the benefit of storage during the time of August. So it’s iterative process but one that we have already begun to stay ahead of.

Unidentified Analyst

The other question is, looking at the total mix of revenue; have you foresee the margins in this upcoming season for I would say with the inventory coming down, how you foresee the business in the next two quarters?

Scott Pearce

We don’t give guidance; if you look at the forward curve that’s the best indication that you can and I’ll leave it to that to indicate what maybe the markets; my only comment against the forward curve would be that right now, I don’t believe that it is providing a lot of anticipation of what is going to happen given the high level of uncertainty in terms of the current production.

Unidentified Analyst

And I don't know if I missed it, but you had mentioned that there was a study going on with isobutanol, can you comment on that?

Scott Pearce

A study?

Unidentified Analyst

An ongoing evaluation with Gevo.

Scott Pearce

Correct. Yes, I just mentioned, we had a press release at the end of June formally announcing the collaboration with them to continue to evaluate the prospect of retrofitting one of our facilities, and I don't have a whole lot more to share on that other than what was contained in that release and just that we believe as I said they are one of the second generation technology just well positioned and we like the option of working with them and therefore have chosen to spend some of our resources on continuing to move the path forward on the ability for us to complete that retrofit.

Unidentified Analyst

And any guideline as to, is this near-term, is there something that will be 2014 in terms of being accomplished or what's the run rate for such an activity?

Scott Pearce

That's the right way to think about it and I don't want to speak to specific 2014 sooner or later, but it is a longer-term prospects specifically because today Gevo is starting up its first full scale facility and that is one key piece of what we would ultimately be monitoring. And then the second is to be able to have some measurable approval from the government for most likely for an advanced biofuel requirement and that is a process that is underway but we’ll take into 2013 for sure. So no investment or formal discussion would be made before then.

Unidentified Analyst

And the last area there; you had mentioned there were additional 50 cars, railcars put into the mix for as a service. What does that in total and what kind of net bottomline outcome for that particular effort?

Kelly Maguire

Yeah, we did subleased out 50 extra tanker cars at a significant premium to what we were currently being charged as far as our lease cost is concerned. And most of these cars, the cars that we leased out are going into the oil fields.

Unidentified Analyst

So that’s total of what 100, how much?

Kelly Maguire

We have done a total of a 100.

Operator

(Operator Instructions) And we do have a question from Mr. [Kevin Chebar]. Please go ahead.

Unidentified Analyst

My question is based on the current spreads and your margins and your current available credit. How much time run rate do you have before you need to find some new debt or will take some other measures?

Scott Pearce

Well, I think that broadly you are asking the question about our liquidity and with the current spreads and only thing I can really say Kevin is that we have a fair amount of flexibility within our capital structure and we are doing all we can to manage the business to maximize liquidity while exploring certain alternatives that may be able to improve our position. And with that ongoing there is really nothing I can say about the timeframe and moreover to my earlier point to the question that Eddie raised, it is the current forward strip indicative of what the margins that are to be realized on, we don’t know, but we are doing things now to try to proactively address that.

Operator

(Operator Instructions) There are no further questions at this time. This concludes today’s conference call. Thank you all for your attention. All participants may now disconnect.

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