Good day, ladies and gentlemen, and welcome to the Pacific Ethanol, Inc. First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Kirsten Chapman, from LHA Investor Relations. Ma'am, you may begin.

Thank you, Ashley and thank you all for joining us today for the Pacific Ethanol first quarter 2018 results conference call. On the call today are Neil Koehler, President and CEO; and Bryon McGregor, CFO. Neil will begin with a review of the business highlights; and Bryon will provide a summary of the financial and operating results; then Neil will return to discuss Pacific Ethanol's outlook and open the call for questions. Pacific Ethanol issued a press release yesterday providing details for the company's quarterly results. The company also prepared a presentation for today's call that is available 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 through May 16th, 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, May 9th and therefore you are advised that the 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 two 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, provision or benefit for income taxes, asset impairments, 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 was included in yesterday's press release. It's now my pleasure to introduce Neil. Please go ahead, Neil?

Thanks, Kirsten and thank you everyone for joining us today. For the first quarter, net sales were $400 million up 4% from last year's first quarter. Total gallon sold were $233 million. Production gallon sold were $141 million. Net loss available to common shareholders was $8.2 million and adjusted EBITDA was a positive $5.7 million improving $4.7 million and $7.6 million respectively in comparison to last year. Production margins in the ethanol industry during the first quarter improved slightly from the fourth quarter of 2017 but remained compressed as ethanol inventories reached at historic high in early March. Industry fundamentals have improved as inventory levels have declined by 9% since early March and are about 5% below inventory levels at this time last year. Gasoline demand is up around 3% year-over-year as we approach the high demand summer driving season and ethanol exports have been strong with a quarterly record of 522 million gallons exported in the first quarter. Ethanol production rates are running only 1% year-to-year, year-to-date over last year production margins while still quite volatile and improved thus far in the second quarter. Part of the industry's margin volatility arose from escalating trade positioning between China and the U.S. which resulted in additional tariffs placed on U.S. ethanol shift to China at the beginning of April halting for now new export business to China. China hand returned in the earlier part of the first quarter as a significant buyer of U.S. ethanol supporting its announced 10% blending requirements by 2020. Nonetheless, we remain optimistic that the improved ethanol supply and demand balances will result in continued margin improvements as we enter peak demand season. We believe that long term market fundamentals remain strong. The very compelling blending economics obtain value and carbon reducing benefits of ethanol will drive…

Thank you, Neil. For the first quarter of 2018 compared to the first quarter of 2017, net sales were $400 million up from $386 million due to an increase, 6.5 million gallons sold and partially offset by a $0.05 per gallon decline in our average sales price per gallon. Gallons sold for the quarter totaled $232.7 million, reflecting a 25.8-million-gallon increase in production gallons partially offset by a 19.3-million-gallon decline in third party gallons. The increase in production gallons sold is due primarily to the addition of ICP's production volumes and the reduction in third party gallons. This reduction resulted from our deliberate efforts to focus our third-party ethanol where we have a strong presence around our production assets. Gross profit for the quarter was $3.4 million, a $9.1 million improvement resulting from sales of higher margin products and better California carbon credit values. Despite this improvement, our operating margin was negatively impacted by $2.6 million and higher than expected repairs and maintenance expense at our peak in Illinois Mill facility. As previously noted, we have experienced larger than anticipated expenses in the second half of 2015 related initially to the repair and then to the replacement of the two package boilers that fell shortly prior to our acquisition of Aventine. The $2.6 million spend in Q1 were related to the installation and start-up of the two new boilers. The installation is now complete, and we are in the process of demobilizing the five rental distillers that provided steam on an interim basis. Q2 cost of goods sold will include the final cost associated with distillers and is expected to total approximately $2 million. With the boilers issues largely behind this, we look forward beginning to Q3 to the elimination of the net boiler expenses which totaled $11 million in 2017. SG&A expenses were $9.3 million compared to $5.5 million and included expenses related to the operation of ICP, but we're not present in last year's quarter. As a reminder, the prior year also included $3.6 million in one-time gains from legal matters. We continue to expect SG&A expenses of $34 million for the full year of 2018. As the first quarter, it usually contains expenses related to the 2017 year-end compliance and audit matters as well as higher federal taxes that are reflected to be lower from the remaining three quarters of 2018. Adjusted EBITDA was positive $5.7 million compared to negative $1.9 million in the year ago period. Turning to our balance sheet, cash and cash equivalents with $57.4 million at March 31, 2018 compared to $49.5 million as December 31, 2017. For the first quarter of 2018, our capital expenditures totaled $4.4 million, primary related to plans improvement initiatives in line with guidance. We continue to expect our 2018 capital expenditures will be a level with our 2017 expenditures. However, as noted in our previous call, we will just announce based on the industry economics and company performance. With that, I'll turn the call back to Neil.

Thanks, Bryon. As I stated at the begging of the call we believe 2018 will be stronger than 2017. The fundamentals of long-term growth and demand for Ethanol supported by obtain value, and the carbon and cost to reducing benefits of Ethanol remain confirm. Our goal is to capitalize on the demand and positive momentum and our markets and we are keenly focused on extracting to maximizing value from all our assets to the combination of improved efficiencies and lower operating cost. With that Ashley, I would like to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Eric Stine from Craig Hallum. Your line is now open.

Hi, Neil. Hi, Bryon.

Good morning, Eric.

Good morning. So just wanted the start maybe I'll start with just a regulatory environment since it's pretty current from yesterday, but so a lot noise obviously on the E15 waiver or the RVP waiver, but also talks potentially expert volumes coming towards rind, just curious how you think this whole thing plays out and those two items I mean how do you view that, is that those two kind of wash or is that expert volume potentially be putting emplaces that is it that heart?

It's a bad palls and bad president, I will say that from my understanding that remain in yesterday, there was broad agreement consensus as there has been for some time now that we need to move forward on RVP parity for higher blends. As I stated in the prepared remarks, we do believe that that rule making will be initiated soon. There was no agreement on the attaching RINs to expert volumes and I can tell you that there is a broad consensus in the agriculture and biofuels community that that is nonsensical and terrible idea. It's - first of all not legal, the RFS is very explicit about supporting domestic demand for renewable fuels, not exports. Our exports are already the most competitively priced fuel component, not gain component in the market and attaching the RINs essentially as an indirect subsidy is something that does not need to be subsidized and we'll also result we believe in retaliatory trade action which were hurt, farmers and hurt the ethanol industry. It's also true that if you are attaching RINs to export volumes that's going to take away the incentive to increase the demand for the higher blends which the program is intended to do. So, we are optimistic that the RVP will move forward. We are also optimistic that the notion that we would attach RINs to export volumes is a non-starter.

Again, it seems pretty unlikely. Seems pretty unlikely. But thanks for your thoughts on that. Maybe just turning your corn focuses. I mean it seems like you've consistently done this where you've outperformed on your purchases potentially buying them forward. Curious on that how far out you're typically able to go or is it more of just a quarterly thing that you're able to put on?

We try when the pricing reaches a point that we find to be attractive, we will go out for some number of months at a time with forward basis purchases. And today is no exception, we have some pretty decent positions on in the Midwest. We've been a little more cautious out west. There have been some freight issues that have and high demand for exports that for grain, corn and soybeans, that has actually caused some spike in the freight costs and the basis for our West Coast plans. So, we have less coverage on there. I think our patience is paying off, we're starting to see the transportation ease and the basis of those premiums coming down. So probably a little closer to market than we typically will be at this time of year, but we do believe that with farmers coming out of the field after planning a great crop that we should see an opportunity to pick up some additional attractive reprice basis.

Okay. Got it. Maybe just last one from me on distillers' grains obviously first quarter pricing picked up nicely. Just thoughts on maybe the trends there. And just can you remind me how your structure there if I remember correctly you've got a decent amount under fixed contracts. So maybe you're not fully seeing the impact and potentially you will down the road?

Yeah, that's a fair assessment. We do sell forward distillers' grains and that market as you mentioned has been coming up very nicely. And the spot values are at higher levels and the increments that we have contracted. But we still also have quite a bit that's open. So, there are combination of having some fixed positions, but we - across the whole portfolio have more open than is contracted. So, we are benefitting from that. Proteins are very strong, very tight, soybean mill has been very expensive, distillers grain essentially ride along with the other proteins. And a year ago we were selling distillers grains at a discount to corn, we're now selling distillers grains at a nice premium to corn. Our coal product returns as you can see from our published results has improved over the quarter. It's also particularly beneficial at our wet mill where we have a higher coal product return to begin with and a higher focus on high protein sales. We're seen some added benefit there as well.

Okay. Thanks a lot.

Thank you.

Our next question comes from Carter Driscoll of B. Riley. Your line is open.

Good morning Neal, good morning Brian. So just to follow up. There is just a lot of noise yesterday coming out of the news, the media even some contradictory comments coming out of various congressional parties in the White House. I mean Chris, tweeting a win-win and Trump very kind of saying I mean last meeting on RFS. What is your take I mean I still feel like there is a lot of misinformation out in the marketplace today? Obviously the RFS's established law. So, there is the legal precedent there, obviously attaching - export market would thrower and disarrayed and probably cause RIN prices to plummet and really throw I would argue the export markets into I guess you said potentially not make at the low cost so far that we are today. Kind of just give me your thoughts about how you think this plays out and under what timeframe or how it will get resolved to the point that you can move more towards disparity as even talking about is the natural evolution in this marketplace.

We have a President who has been consistently supportive of ethanol from before he was President, very strongly so during the campaign and has been consistently in support since then. There is an EPA that has not necessarily seen in that way and has been talking about things last summer, Secretary Pruhl [ph] was talking about attaching RINs to export volumes, there has been way too many small refinery financial exemptions granted for companies that are under no financial hardship that's a problem that has not helped demand, it has not helped the clarity around moving in this program forward and increasing the demand for renewable fuels. These meetings do get frustrating because the politics are at a fairly high pitch and we do see a varying opinion. What is clear to us is as I was mentioning to Eric, was that there is broad consensus to move forward RVP parity and there is no support on the agricultural and biofuel side for attaching RINs to export volumes, no one was there an agreement from what we understand, I was not at the meeting but from the reports that we have gathered there was no agreement on that point. So that is just such a bad idea, we can't imagine that that would move forward. The way this plays out is that with the rule making, there is issues in Congress and attempts to longer term look at how the RFS might be repositioned but as you said its existing law that is not changing anytime soon. And the focus now is at the EPA and what they can do through their statutory authority on regulation and they have the regulatory authority to give RVP parity a higher blend. They also believe they have the regulatory authority do other things like attaching RINs to export volumes but that would have to go through a rule making process as well. So, our hope and expectation are that there will be an RVP rule making that will move and it will not be moving with export RINs attached and, in our opinion, it might include some transparency on the RIN market. We have seen that market come off substantially to where RINs are trading about $0.30 and per RIN yesterday three years low. So, don't really see that as the problem and as we have said before in this industry very consistently said is that the way to deal with RIN prices is to blend more ethanol, because we sell ethanol today at close to $0.60 discount to wholesale gasoline, and you got a free RIN attach to that screaming deal. So, let's just get on with the blending to more ethanol and the economy and the agricultural economy and the consumer and the environment will be better for it.

Okay. Again, not believer of this point. But the exemptions for the smaller finders, again needs to be also increasingly political in particular if it done shifts back cost compliance to the larger refiners which are increasingly getting noisy about it, is there a potential resolution whether the refinery comes in the form of either a legal challenge or maybe just Trump starting to stem the issue recognizing to potentially have some negative impact on just the whole structure of the delivery and booking of RINs, because hearing words there are some of the bigger players are getting concern that what they have in the balance sheet for that RIN compliance is starting to be devalued. Just trying to get your sense of how this issue gets resolved?

Yes, it gets resolved by the Secretary Pruhl [ph], the EPA not handing out small refinery exemptions like candy in a candy jar. For companies that don't warranted. So, we have seen and again there is - this is not public information, but what we can piece together it looks like it could be as much as 1.6 billion gallons of obligation that have been exempted, doesn't necessarily mean that those gallons aren't being blended, but if you piece the numbers together from the EPA data, it does appear that kind of demand it has been lost relative to the RVOs [ph] and that is demand that needs to come back to the ethanol industry and the agriculture economy and need to start by not exempting these refiners that don't warrant them. There are legal challenges that have already been brought by bio, I think it's quite possible there could be other legal actions brought as well. The Trump administration and it was a topic of conversation from what we understand the meeting yesterday is very well aware of this issue and how harmful it is to the agricultural economy.

I appreciate all that color, Neil. Shifting over you talked about the expectations of what is the EPAs issue with deploying at Madera and the other facility for cellulosic?

It's hard to understand because a lot of the action out of the EPA has been a little hard to understand under-secretary approval, but it appears that there is not a warm embrace of advanced biofuels and so some concerns have been raised as the pathway applications we find that to be curious when our Stockton pathway application was approved, and our Madera and Magic Valley are identical with the same identic technology and protocols and approach. So, we believe is the shift of delay tactic to hold back the advancement of the advanced biofuels. We're not alone there any number of corn fiber applications that have been held up in back any applications that are in the EPA today are on hold again the White House has then made, very aware of this, there's been coalition letters and letters from buy parties and folks in Congress complaining about this and we are getting indications that the backlog jam will be broken as well and this pathway applications will be moving forward in the near future.

Okay, maybe a question for you Bryon. So, if I understood correctly you're going to switch out, you're going to finally fully decommission the problematic boilers this quarter, the head to COGS this quarter but it should be fully operating with the new replacement is there any starting in 3Q is there any recourse you have that has not been already pursued with maybe economically for BOEM that - equipment ways that causes ongoing problem?

Yeah, so there is actually a lawsuit that's going on we're in deposition phase and these things take time. But we feel like we have a very strong case and we'll need to pursue that. And it's a bit disappointment with a bit of discoveries [indiscernible] so we first prepared them and discovery that indeed it was a manufacturing defect. So ultimately had a replacement - danger in the site so definitely not something that we expected to do but we look forward to having this behind us and being able to -…

Is there specific insurance claim outside of the lawsuit?

There is, yeah there is, and every dollar that we received initially against the initial event there was only one boiler the exploded the other one was we brought down just for security purposes and when we opened it up we were seeing the same decay and deterioration so that does not result in an event. It would be insurable so the one that we blow discovered and we're in the process of analyzing the safety discussions with our insured on that. But then having repair them and then discover at the same event that is not an [indiscernible] either. So really have to look more to the OEM to get this thing result appropriately.

Got it, okay. Neil, so obviously the trade or what's going on back and forth with China. It looks as a very promising market in the short-term. How do you see this playing out and let me just characterize some of the opportunities in other export markets to obviously hit a record last year looked very promising start? You're positioning from there, your expectations of being able to incrementally ramp exports and then just have one last follow up.

Yeah, exports are key. I mean it's always the incremental barrel in a commodity market that really drives your defined demand balances and margin environment. And in today's market where we have a relatively flat although slightly increasing with gasoline demand. Domestic market growth has been in the exports. And so, while China with only represented about 10% of total exports in Q1 coming from virtually nothing last year, so that was very promising and looking like they were going to continue to grow. With those gallons coming out of the market that relatively modest increment has had an impact in the short-term. There are other countries that are stepping up both new countries taking ethanol and existing countries workhorses like Brazil who are taking record quantities and Canada increases and South Korea, India. So, we're seeing the growth, I stated last quarter that we anticipated to see 1.6 billion to 1.8 billion gallons of export this year. Still think that's the right range if China comes back, it could be closer to the higher end of that, but I would say the current expectation that it's probably on the lower end of that. They had a 30% tariff last year, which really did eliminate most of that business with China but given the very compelling price spread with gasoline and ethanol we were able to clear the market even with that tariff but adding the additional 15% to take it to 45% in today's market is preventing any additional trade plus the uncertainly as to how long it's going to be on. I do think that China with their very ambitious program to run 10% ethanol by 2020 that is the equivalent by them given the very dramatic increase in gasoline demand that will be the equivalent of about 4 billion gallons of ethanol they have domestic capacity produce the billion. So, they're going to need at some point if they're going to stay on that program, they will continue to need as a build their own production sheet which obviously a lot of - is their objective. They do have their own corn supplies but that we think that in the interim there is a great opportunity. As we move to higher blends in the U.S. to continue to support China with exports. When that starts is that later this year is to next, we think it's a matter of not if but when.

Okay. Maybe just last one for me. Any update on your - are you seeing any changes to potential rollout or expansion, I should say of E15 at the retail level and or you are seeing any movement on the front to maybe have some incentive of ethanol in our federal or state level to do so or as the whole kind of RV parity. I would say dispute but just the [indiscernible] that have gone over the last couple of weeks is put [indiscernible] with all. Maybe just trying to get a sense of what the retail environment is relative to kind of last quarter's expectations or any material changes?

E15 is happening albeit slower than we all would like to see. But there are close to 1500 stations today or 1400 some numbers such as that growing too close to 2000 stations by the end of the year we believe there is incrementally 50 million to 75 million gallons of ethanol that are being blended in E15 and E85 today so on a domestic market of 14.3 billion gallons that's not much. But we think that that doubles on a run-rate by the end of this year. but it's like I said before it will be lot like E10 because there is no, the incentive is there the price spread the $0.65 a gallon was cheaper than wholesale gasoline today and gasoline is going up oil is going up, even more important to be blending more domestic ethanol given what's going on with there on and internationally to secure our own energy security. We will see grow when you have E15 on at the retail level, it's currently selling for close to a dime cheaper than the E10 and consumers are picking up on that where E15 is been distributed, we're seeing very good volumes at those stores. And even those that didn't necessarily want to blend E15 are starting to blend it, Minneapolis is a kind of the Ground Zero right now for E15 with the very large penetration. And we're seeing it grow. So, it is something that we believe will accelerate. And given both the octane needs, carbon reduction and cost benefits for the fuel, it is our - from the ways with the market. Overtime the entire market we migrate towards the higher blends.

Appreciate to answering of my questions. I'll get back in the queue gentleman.

Our next question comes from Sameer Joshi of H.C. Wainwright. Your line is open.

Good morning, Neil and good morning Bryon.

Good morning.

Most of my questions have been answered but just a few clarifications. The D3 RIN for Stockton, that remains in place, right there is no issue on that through Madera and Magic Valley issues?

That is correct.

Okay. And sticking with Stockton, you mentioned that the cogen unit is working intermittently and do you expected to start by in the second half. Are there any plans for the second unit under progress or are those on hold at the moment?

We've never initiated any additional plans until we have this fully operational and could verify the performance, in terms of energy savings and also to confirm what carbon benefits over as well. It is something that we believe we'll have good applications at other plans, Madera in California with where we have these very high electricity rates would be the next opportunity. But for now, we're focused on getting these two units up and running and performing that expected levels in Stockton.

And then another clarification on the boiler issue. You mentioned there will be 2 million hit in COGS in Q2. How does it relate to the $4.4 million CapEx like is it - can you just clarify those things for me?

Because they are showing up as cost of goods sold $50 million versus CapEx shows up there is where we capitalized within the amortized that we are which is [indiscernible] but because we already have two boilers originally in our capital structure, we didn't right those office since that we're now expensing the purchase significant installation of the new unit. That's cost of goods sold.

Okay, understood. And then just one last clarification on the interest payments, I see your interest expense is around $4.4 million, $4.5 million this quarter which is higher than sequentially than the previous quarters whereas that they do not go up that much revenue. Just give some clarity on that?

This is chain, is it [indiscernible] LIBOR rates, and then - I'm sorry.

No, I can realize LIBOR is depend on the LIBRO yes.

Yes, it's primary LIBOR and then we cancel our specific order facility just didn't need the facility. And as a result, any charge that we have for the initiation of that as far as things reasonable like we're taking in as expense on that on the quarter.

Okay. And one last one from me, on the OpEx front, the $4.5 million savings from the integration of ICP, have then those already been realized or when do you expect that those complete realization of those things?

Yes, we're pretty close to that I would say that for modeling purpose as usual and other [indiscernible] and seen the benefits of those in the second half of the year.

Understood, thanks. I'll take the questions offline.

Thanks, Sameer.

Our next question comes from Anna [ph] of ROTH Capital. Your line is open.

Hi, good morning and thanks for taking my questions. So just following up on the boiler or plate, it is a multiple question. So just to understand that all the measure expenses related to this as complete with Q2 and we can assume that there are no expenses going into Q3 and onwards?

That's correct.

All right. And can you talk a bit more about if there is any further catch up maintenance and tradition expenses related to Aventine or ICP plans, and just trying to understand how you should look at the financial impact cost wise going forward on these?

I guess it's a - we don't have any - there is just normal maintenance on these facilities now going forward for the most part these are our the ICP facility and if we can wet mill the [indiscernible] are older facilities so they do carry a slightly higher cost to goods sold and higher repair maintenance requirement than do newer facilities that being said we believe we have addressed the more significant - that needed to be repair and replace from this - acquisitions and so that we're more into the maintenance mode.

So, they reflected in our budget which Brian in his remarks reaffirmed that our capital budget for 2018, covering all that.

All right. Thanks for the color. And just in - industry, so it continues to be fragmented and from recent announcements from it doesn't look like consolidation is taking place anytime soon, so what are your thoughts on the industry dynamics and how that's going to impact the demand supply as going forward?

Well, from supply demand again we feel that there are arbitrary restrictions on introducing - blends we remove those. Ethanol is such a compelling product to brand that we see an increase and domestic demand in what is 40% of the world's gasoline market here in the United States. You are right about fragmentation, you're right that consolidation is not happening at the moment, we have seen quite a bit of consolidation over the last five plus years, but it is sold out over the last couple. We do believe that ultimately, we have an industry with six players controlling roughly 50% of production and it would be helpful for six players to control. Growth is 60% or 70% and think ultimately that is where we trend and but in the mean time we do continue to have a fairly fragmented market that often doesn't act as irrationally as you would hope.

Great, thanks for the color, I'll hop back in the queue.

And I am not showing any further questions in queue at this time, I would like to turn the call back to Neil Koehler for any closing remarks.

Thanks, Ashley and thank you all for joining us today. We appreciate your continued support in Pacific Ethanol and look forward to speaking with you all soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.