Pacific Ethanol, Inc. (NASDAQ:PEIX)
Q4 2016 Results Earnings Conference Call
March 02, 2016 11:00 AM ET
Becky Herrick - IR, LHA
Neil Koehler - President and CEO
Bryon McGregor - CFO
Eric Stine - Craig-Hallum
Amit Dayal - Rodman & Renshaw
Good day, ladies and gentlemen. Welcome to Pacific Ethanol Incorporated’s Fourth Quarter and Year End 2016 Financial Results Conference Call. At this time, all participants’ lines are in a listen-only mode to reduce background noise; but later, we’ll be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today’s this conference call is being recorded.
I would now like to introduce your first speaker for today, Becky Herrick of LHA. You have the floor, ma’am.
Thank you, Andrew, and thank you all for joining us today for Pacific Ethanol’s fourth quarter and year end 2016 results conference call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO.
Pacific Ethanol issued a press release yesterday, providing details of the Company’s quarterly and 12-month results. The Company also prepared a presentation for today’s call that is available on the Company’s website at pacificethanol.com. If you have any questions, please call LHA at 415-433-3777.
A telephone replay of today’s call will be available through March 9th, the details of 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, March 2nd. And, therefore, you are advised that 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 constitute forward-looking statements and considerations that involve the number of risks and uncertainties. The actual future results of 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 and from time to time disclosed in Pacific Ethanol’s filings with the SEC. Except as required by applicable law, the Company assumes no obligation to update any forward-looking statements.
In management’s prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believe these measures will assist investors in assessing the Company’s performance for the periods being reported. The Company defines adjusted EBITDA as unaudited net income or loss attributed to Pacific Ethanol before interest expense, benefit for income taxes, asset impairment, purchase accounting adjustments, fair value adjustments and depreciation and amortization expense. To support the Company’s review of non-GAAP information later in this call, a reconciling table is included in yesterday’s press release.
Now, I will turn the call over to President and CEO, Neil Koehler. Please go ahead.
Thank you, Becky, and thank you all for joining us today.
We ended 2016 on a high note, as reflected in our financial performance. For the fourth quarter, we reported net sales of $441.7 million, a 17% increase over the fourth quarter last year. Total gallons sold were 240.9 million, up 13% from last year. We also reported significant year-over-year growth in gross margins, operating income, net income, and adjusted EBITDA. In addition, we successfully refinanced our $155 million term debt, significantly lowering our cost of capital and accomplishing a major milestone for the Company. Bryon will review this accomplishment more in a moment.
On an annual basis, compared to last year, net sales were $1.6 billion, up 36%. Gross profit increased to $51.8 million. Net income was a $148,000, up from a net loss of $20.1 million. And adjusted EBITDA increased to $58.9 million.
These results reflect the benefits of acquisition and the successful integration of our Midwest assets well as boosting production efficiencies, lowering our carbon store and further strengthening our balance sheet. They also reflect a generally positive market environment, while 2016 started off on a weak note and strengthened towards the back half of the year, particularly in the fourth quarter. In addition, U.S. ethanol demand remained strong throughout the year, exports grew to higher levels year-over-year, and overall supply and demand remained relatively well-balanced, providing a stronger operating foundation in 2016 versus the prior year.
Throughout 2016, we focused on implementing innovative initiatives designed to optimize our production, lower our carbon score, and generate near-term returns. We’re in the process of analyzing data from the commercial operation of our industrial scale membrane system at Madera plant. By separating water from ethanol in the plant’s dehydration setup, the membrane system is expected to increase operating efficiencies, lower production costs, and reduce the carbon intensity of ethanol produced at this facility. We’re in the late stages of interconnecting our cogeneration system with Pacific Gas & Electric, and will begin full operations this spring at the Stockton plant. The cogeneration system delivers steam and electricity into the Stockton plant while lower emissions and will reduce our annual energy costs by upto $4 million.
At our Madera plant, we’re continuing work toward installing a 5-megawatt solar power system with the goal of beginning full scale operations in early 2018. The solar system is expected to lower our utility costs by approximately $1 million annually and lower our carbon score. We also began generating high-value D3 RINs from the production of cellulosic ethanol at our Stockton plant. In the third quarter, we received the first approved registration from the EPA to produce cellulosic ethanol from corn fiber utilizing Edeniq’s Pathway and Cellunator technologies. We’re now on track to produce over 1 million gallons of cellulosic ethanol annually at Stockton. We continue to focus on fine tuning this technology to maximize yields and production efficiencies.
Based on the success of this initiative, we announced in February, we are introducing cellulosic ethanol production to our Madera plant. Again, utilizing Edeniq’s Pathway and Cellunator technologies, we expect to produce up to 1 million gallons of cellulosic ethanol annually. Once commercial scale production has reached, we expect the technology will increase earnings by over $2 million per year. We are now working with EPA to qualify this production for D3 RINs and we expect that approval to be received near the time we begin commercial operations in the second half of the year. We are also working with the California Air Resources Board to qualify our cellulosic production at both our Stockton and Madera facilities for additional carbon credit under the California Low-Carbon Fuel Standard.
As I mentioned earlier, late in the fourth quarter, we entered into a series of agreements to refinance our term debt and improve our liquidity. As part of that effort, we expanded our relationship with the Aurora Co-op; specifically, we agreed to contribute our Aurora plant assets into a newly created company, Pacific Aurora. And the Aurora Co-op simultaneously contributed to Aurora West Grain Elevator with 3.5 million bushels of grain storage capacity, loop track, related land and other assets. The Aurora Co-op also paid us $30 million in cash, and now owns 26% of the new entity.
Pacific Aurora a fully consolidated subsidiary of Pacific Ethanol. The transaction was immediately accretive to shareholders. And we expect the arrangement to reduce operating costs by over $5 million annually. In addition this expanded relationship fully integrates the property into one highly functional and well performing facility, enabling us to optimize grain procurement, more efficiently manage grain transfers, offer storage, drying and merchandizing to local farmers, and provides us with additional growth opportunities.
We’re encouraged by the trends in the ethanol industry and as the fundamentals support continued long-term demand. Ethanol is a low-carbon, high- octane transportation fuel and is an integral component of gasoline for all refiners. So, far in the first quarter, a period known for seasonally low demand, we’ve seen better market conditions than we have the last two years of this time, although margins have been compressed.
Corn prices continue to be favorable in light of the record corn harvest, while ethanol prices remain firm and gasoline prices are on the rebound, all of which creates a positive backdrop for improved margins. Exports are expected to continue growing year-over-year in 2017, as ethanol is increasingly blended internationally to meet octane requirements and reduce immersions.
Overall, with the backdrop of strong ethanol demand and a record corn crop, we see a supportive environment for ethanol into 2017.
On the regulatory front, we also see continued support for the ethanol industry. Thus far, we believe all indications are that the new administration will be supportive of policies such as renewable fuel standard, which prioritize domestic energy resources. 2016 was a year of growth for E15 sales and infrastructure development. At the end of 2016, there were over 600 stations and as expected to double by the end of 2017, offering E15 for sale. We’re seeing increased momentum in the adoption of E15 infrastructure as the 15% ethanol blend becomes increasing reality in the U.S.
I’d like now to turn the call over to Bryon for a review of the financials. Bryon?
Thank you, Neil.
Our consolidated financial results for the fourth quarter 2016 compared to the fourth quarter of 2015 were as follows. Net sales were $441.7 million compared to $376.8 million. This 17% growth rate reflects a year-over-year increase in production and third-party gallons sold as well as a higher average sells prices per gallon for ethanol. Cost of goods sold was $415 million compared to $367.2 million. Gross profit was $26.7 million compared to $9.5 million. SG&A expenses were $7.9 million and reflect an unamortized refinancing cost and typical yearend adjustments; this compares to $7.1. Income from operations was $18.8 million compared to $500,000. Interest expense was $5.8 million compared to $5.4 million. Net income available to common stockholders was $12.6 million or $0.30 per share compared to a loss of $1.1 million or $0.03 per share. Adjusted EBITDA was $27.4 million compared to $11 million.
For the full year 2016 compared to 2015, net sales were $1.6 billion compared to $1.2 billion. Gross profit was $51.8 million compared to $7.4 million. SG&A was $28.3 million compared to $23.4 million. We expect SG&A in 2017 to be comparable to that of 2016. Operating income was $23.5 million compared to an operating loss of $18 million. Net income available to common stockholders was $148,000 or breakeven on a per share basis compared to a net loss of $20.1 million or $0.60 per share. And adjusted EBITDA was $58.9 million compared to $16.1 million.
Now, turning to our balance sheet. Cash and cash equivalents was $68.6 million at December 31, 2016 compared to $52.7 million at December 31, 2015. Working capital was $156 million at year-end compared to $125 million for the year prior. Our fourth quarter capital expenditures totaled $5.1 million, bringing our total CapEx for 2016 to just over $18 million. Our initial budget for capital projects in 2017 currently totals $45 million. This represents $15 million in previously announced projects, including completion of our Stockton cogeneration and the Madera site [ph] solar projects. The remaining $30 million represents projects that increase yield, capacity or revenues, improve operations, extend reliability, reduce costs or lower our carbon score. We will fund these projects through a combination of cash, cash flow or where appropriate, lower cost financing such as our PACE financing for our solar project.
Consistent with our practice, we will adjust our capital budget based on prudent resource management, market conditions and evaluate and prioritize each new investment to optimize shareholder return.
In December, we announced a refinancing of our $155 million principal term debt through a series of transactions. In doing so, we reduced interest cost by more than $8 million annually; we lower our total debt outstanding by more than $12 million; and we increased cash, working capital and liquidity resources by approximately $55 million. This represents a major achievement for the Company as we significantly strengthen our balance sheet and establish more flexible financial structure upon which to continue to grow our business.
With that, I’ll turn the call back to Neil.
We are proud of our accomplishments in 2016. We successfully integrated our Midwest assets, made enhancements at all of our plant assets and strengthened our balance sheet. In 2017, we remain committed to evaluating and investing in plant improvements to enhance efficiencies, implementing solutions to improve our carbon score, and increase profitability, continuing to strengthen our balance sheet to maintain strong cash flows and liquidity, and leveraging our diverse based of production and marking assets to expand our share of the renewable fuel and co-product markets.
We are encouraged by the continued global demand for ethanol, particularly the growing demand for the low-carbon fuel we produce. With our successful strategy and strong balance sheet, we anticipate 2017 will be a year of solid financial performance for Pacific Ethanol.
And with that, I’d like to turn the call, operator, over to questions.
[Operator Instructions] We’ll be taking our first question from the line of Eric Stine from Craig-Hallum. Your line is open.
Hi Neil, hi Bryon. Congrats on the quarter. Maybe we could just start on the regulatory front. I mean, there has obviously been a lot of noise there and seems to be positive, but just thoughts on, number one, I guess the 2017 RVO, thoughts on does that in fact get entered into the public record here at the end of March. And then, just point of obligation, I believe that’s something that you’re pretty agnostic to, but maybe if that were to change, how do you see that impacting the industry?
Sure, Eric. On the first point, the 2017 RVO, we will expect it to be fully implemented at the end of that freeze period that all regulations EPA went through, I believe it’s March 21st. So, no indication other than that will be full implementation of the 2017 RVOs. I think what will be interesting is that we stay on schedule with the EPA and we get to the spring, early summer and see what the 2018 RVOs will be. But we expect to see continued and full implementation of the RFS and increasing amounts of renewable fuels into the mix.
As it relates to the point of obligation, all of the trade associations for ethanol, agnostic to some degree for non-obligated party. But since we care so much about the RFS and its integrity, we have all opposed moving the point of obligation for fear that it would be disruptive to the underlying integrity of that policy. That being said and what you’ve seen in the news is that there was an effort on the part of the administration to see some value in moving the RVO to reach out to the ethanol industry and say if we were to move the RVO and to include some opportunities to further increase the market penetration of E15 is that’s something that could work. And while we remain opposed moving the point of obligation, certainly if there’s RVP parity for E15, that would be very significant.
So, there is a scenario where the point of obligation could be moved because if the administration decides they want to move it, they have that discretionary ability. And it’s encouraging to us that in that discussion, it is being portrayed in a way that would include additional help for increasing the market access for higher level ethanol blends. So, if you look at the markets, when that news came out, and again it’s still all conjecture and how knows where it heads, but corn markets were up, RIN prices were down and ethanol equities were up. So, clearly the markets thought it was positive news in terms of increasing the market share for ethanol.
And then, I’m going to segue to E15. You mentioned the Reid vapor pressure looking for a waiver there. Is there -- do you see a path forward there, outside of potentially as part of this point of obligation negotiation? And then, as part of that, I mean, what kind of incremental volumes are you looking for, for the industry due to E15?
If there were an executive order to move the point of obligation and directed the EPA to extend the RVP allowance to E15 in the summer months outside of our key areas, [ph] that would be the quickest way to get that and there’s no question that that would be a real boost to the marketing E15. The other way to accomplish that would be through congress. It was the Clean Air Act that extended the RVP allowance to E10, and that was a congressional act. So, there has been discussions and bills that are being introduced to do that. Congressionally that’s less certain, and certainly a longer process. So, administratively, would be the quickies way to do that and that still might happen. But, as you point out, there are other avenues. So, on the E15, I mentioned, there is over 600 stations; we expect that to double. The volumes are good. It prices right, people love the product. And we expect in 2017 to see in an around a 100 million gallons of incremental demand by way of E15. Some say it could be less; some say it could be more, but we’re encouraged. When it’s on the street, it prices well and performs exceptionally well. And it’s -- you see some very nice volumes at the stations that are selling it. And we also expect to see further announcements in 2017 of new large retail chains introducing E15 to the mix.
Right. Okay. Thanks for that. Maybe just on the export side, would China effectively close? And you and others clearly looking for growth. So, maybe just some of the important markets that are going to make up the export piece of the equation, I mean Brazil the obvious one, but some of the other ones that are going to help the cost?
Well, certainly, the two largest are Brazil and Canada, and we anticipate to see very strong exports to both those countries at or above current levels, definitely see some growth in Canada. Canada actually looking at expanding their renewal fuel standard and potentially implementing a low carbon fuel standard; they are less than 10% ethanol in the overall mix. And we think that that will move rapidly towards that. So, we do see continued growth in Canada. I think you will see year-over-year growth in India, certainly in the Middle East right now with the very attractive pricing of ethanol and octane enhancer, we’re seeing some additional exports into the Persian Gulf for blending with gasoline.
So, all-in-all, we and others expect that exports will be incrementally larger in 2017 than 2016. At our Ethanol Conference last week in San Diego informa was a third-party consultant on ag and energy issues, projected that the exports in 2017 will be 1.2 billion gallons, and that compares to just a bit over 1 billion gallons in 2016.
Got it. Okay. Maybe just one last one for me, just on basis. I mean, that was a good number for you in the fourth quarter; it looks to me like you potentially locked some of that in. So, I mean, have you been able to lock that in to some extent going forward, and how should we think about that trending going forward?
We’re always looking for opportunities to do that, and it’s safe to say that we always have something in the portfolio on forward basis. And we pick our spots, and they’re pretty easier take when the farmer wants to sell and the marketers want to move their products, we’re able to improve upon our basis. So we do have some quarter basis out. It’s been good because with some of the weather and logistics issues that the railroads have been extended, we’ve had -- we’ve seen through transportation surcharges very high basis to the West Coast…
And we’ve pretty much avoided that. We’re seeing very good basis in the country. So, in Nebraska which not only feeds our Aurora plant but becomes the basis that establishes the pricing out to our western plants, we’re seeing in that 20 to 30 under the board, closer to even in Illinois and more on the eastern corn basis. So, it’s good. And obviously with record crop in the last four years being four record crops and carry outs projected to reach as high as 2.3, 2.4 billion bushels, the highest in almost 30 years, very positive in terms of corn supply and projected pricing and basis.
[Operator Instructions] We will be taking our next question from the line of Amit Dayal from Rodman & Renshaw. Your line is open.
In regards to CapEx increase we are going to see in 2017 that Bryon discussed, can you share how much of benefit on the margin side you might see or what time period?
I think the question is in regards to CapEx budget, what sort of returns, and margins obviously depends on the projects. We have focused on projects that they have really one to at most three-year return. And depending on the project, can be a quarter of a cent, can be half a cent and can be in aggregate a penny. So, it all directionally is improving margins and improving the bottom-lines and all the projects that we’ve identify in 2017, all have a very good return profiles.
Amit, I might also add to that just, the 45 million represents projects that we see on the horizon within 2017 that makes sense. We haven’t formally approved all of those, except for the ones that we already announced. And so we will give you greater clarity on those as those get announced, at least the major ones, and we will give you more color around those as we move forward.
Understood, and just at a higher level, follow-up maybe to that. Should we be looking at revenue growth as perhaps strategic priority or are we going to continue focusing on these operational efficiency types of initiatives for the next one or two years?
I think it’s both. I mean, this is an industry that continues to grow. So, we continue see E15 accelerate in the marketplace, see that growing demand for octane as we move to higher efficient engines, which are going to require higher blends as well. At some point, we’re going to incrementally need some more production. We’re pretty balanced on supply and demand, and clearly don’t have the ethanol in the system to supply a large E15 market. So, we’re looking at incremental expansion; we continue to be open to acquisitions. You have six companies that control about 50% of the production, that’s come a long way in terms of rationalize and consolidating the industry, but we think there is more of that ahead. So, it’s definitely dependent upon those market conditions and how the growth and the demand for the product is playing out. We will continue to focus not only on the operating efficiencies and lowering our cost and lowering our carbon, and having those premium values, but looking at incremental expansion as well.
Understood, and may be just one last one for me. The Stockton and Madera cellulosic efforts, can these be scaled beyond the 1 million gallon or are you just going to be, over the next few years, just focusing on optimizing at that level and then maybe looking to scale it?
We’re always looking for opportunities. We talk to a lot of the technology providers with the technology that we implemented, which was relatively low entry point in terms of capital and could move quickly and deliver meaningful returns. There is an opportunity to tweak around the edges and potentially get beyond that roughly 2% uptake that we’re getting in cellulosic ethanol. That being said, there is closer to 8% or 9% of fiber in the product. So, we are looking at other opportunities and technologies to extract more of that fiber and convert more of its cellulose ethanol. That again depends upon the efficacy of the technology, the capital costs and the continued incentives through the renewable fuel standard and low carbon fuel standards to see what kind of premiums we can get for that product.
Understood. Thank you. I’ll take my other questions offline. Thank you so much.
[Operator Instructions] It looks like that we have no other questioners in the queue at this time. So, I would like to turn the call back over to Neil Koehler for closing remarks.
Thanks, operator. And thank you all for joining us today. I look forward to talking to you after the next quarter. Have a great day. I appreciate your support.
Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program. And you may now disconnect at this time. Everyone have a great day.
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