Aemetis, Inc

Welcome to AMETIS first quarter 2019 earnings review conference call. At this time, all participants are in a listen-only mode. A brief question-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of AMETIS. Mr. Waltz, you may begin.

Thank you, Rob. Welcome to the AMETIS first quarter 2019 earnings review conference call. We suggest visiting our website at ametis.com to review today's earnings press release, updated corporate presentation, filing with the Security and Exchange Commission, recent press releases, and previous earnings conference calls. This presentation is available for review or download on the ametis.com homepage. Before we begin our discussion today, I'd like to read the following disclaimer statement. During today's call, we'll be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities, and expectations with respect to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filing. Investors are cautioned that all forward-looking statements made on this call involve risk and uncertainty and that future events may differ materially from the statements made. For additional information, please refer to the company's Security and Exchange Commission filings, which are posted on our website and available from the company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended March 31, 2019, which is available on our website. adjusted EBITDA is defined as net income plus or net income or loss plus to the extent deducted in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, accretion expense, depreciation expense, and share based compensation expense. Now I'd like to review the financial results for the first quarter of 2019. Revenues during the first quarter of 2019 were $41.9 million, compared to $43 million for the first quarter of 2018. North America increased the volume of ethanol sold from 16.1 million gallons to 16.2 million gallons, which was offset by a softening price from $1.76 per gallon to $1.68 per gallon, while India's biodiesel price was $851 per metric ton compared to $839 per metric ton, with tons sold at 5,286 tons compared to 5,182 tons. Gross profit for the first quarter of 2019 decreased by $2.2 million to a $400,000 loss. compared to a gross profit of $1.9 million during the first quarter of 2018. Selling, general, and administrative expenses were $4.2 million during the first quarter of 2019 compared to $3.8 million in the first quarter of 2018, primarily driven by an increase in professional fees. Operating loss was $4.6 million for the first quarter of 2019 compared to an operating loss of $2 million for the same period in 2018. Interest expense, including accretion of Series A preferred units in the AMETIS Biogas LLC subsidiary, decreased to $6.2 million during the first quarter of 2019 compared to $9 million during the first quarter of 2018. Included in interest expense during the first quarter of 2018 was a one-time loan fee charge of $3.6 million. Net loss decreased to $10.7 million for the first quarter of 2019, compared to a net loss of $11.1 million for the first quarter of 2018. That completes our financial review. Now, I'd like to introduce the founder, chairman, and chief executive officer of Ametis, Eric McAfee, for a business update.

Eric. Thank you, Todd. For those of you who may be new to our company, let me take a moment to provide some brief background information. Amedis was founded in 2006, and we own and operate production facilities with more than 110 million gallons per year of renewable fuel capacity in the U.S. and India. Included in our production portfolio is a 60 million gallon per year capacity ethanol, distillers grain, and corn oil plant located in Keys, California near Modesto. We also built, own, and operate a 50 million gallon per year capacity distilled biodiesel and refined glycerin biorefinery on the east coast of India near the port city of Kakanada. Last year, we signed $30 million of non-dilutive equity funding and launched a renewable natural gas project to build biogas digesters at about a dozen local dairies, construct the pipeline connecting the digesters to our Keys ethanol plant, and install gas conditioning to produce carbon-negative renewable natural gas to displace diesel in trucks. We are also and the late stages of developing a $175 million advanced ethanol production facility to convert waste orchard wood and other waste biomass into 12 million gallons of cellulosic ethanol. Three of the four businesses are now fully funded with preliminary term sheets in place for funding of the cellulosic ethanol project. The combination of these growth and cost reduction initiatives are expected to increase our revenue monthly run rate to more than $350 million per year and in excess of $100 million per year of annualized positive cash flow within the next 24 months. This growth in revenues and cash flow reflects the upgrades of our existing plants and plant completion of new dairy renewable natural gas and cellulosic ethanol production facilities during 2019 and 2020. With the consistent support of California regulators and strong LCFS credit prices, Amedis made excellent progress on each of our four core businesses during the first quarter of 2019. Let's first review our biodiesel business in India. During the past few years, the tax regulatory and procurement structure for blending biofuels in India has been developed and we believe it is now being implemented to support the biodiesel industry. The total diesel market in India is approximately 25 billion gallons per year with 80% imported, of which less than 250 million gallons per year of biodiesel is currently blended. The 2018 National Biofuels Policy stated a plan to increase biodiesel blending to 5% of the diesel market, equal to more than 1.2 billion gallons per year of biodiesel. The OMCs in India supply about 70% of the fuel consumed in India, and the diesel fuel market has been growing at a rate of more than 5% per year. After two years of investment in construction, in early 2019, we completed the upgrade of our India plant, including this installation of a pretreatment unit to process lower cost and waste feedstock into oil. Expansion of boiler and other utility capacities, and implementation of environmental systems to enable full production of 50 million gallons per year of biodiesel and bio oil while simultaneously operating the biodiesel pretreatment and glycerin refining units. The plant is now fully operating the new feedstock pretreatment unit, the new boiler unit and other upgrades that now enable plant operations at full plant capacity. On May 6th of this year, We announced that our Universal Biofuels India subsidiary was awarded a $23 million biodiesel supply contract with the three India government-owned oil marketing companies in a public tender process. Biodiesel shipments to the oil marketing companies are scheduled to begin this month. During the 2018 construction period, the India biodiesel plant increased revenues 60% to $21.5 million. including shipping about 6 million gallons of biodiesel. However, this increased sales revenue represents less than 15% of the 50 million gallons of biodiesel production capacity that is now in place. We are making excellent headway in ramping up production and revenues by adding new customers in truck fleet, retail stations, and government sectors. We began retail station sales of biodiesel in India under the Universal Biofuels brand for the first time in Q1 2019. Prior to late 2018, the sale of biodiesel at retail stations was not legal, but an India Supreme Court decision opened the retail channel and we developed a branded franchising model for retail distribution. We are very pleased that we achieved the upgrades at the India plant without incurring any third-party long-term debt. at the India subsidiary or any ownership dilution to our shareholders. AMETIS owns virtually 100% of the India subsidiary and as a result, as cash is created from earnings generated in India, the funds can be used to repay AMETIS senior debt and provide development funding for our other projects. At about $3 of revenues per gallon of biodiesel, the upgraded India plant can generate more than $150 million of annual revenues at full capacity. Once the existing capacity becomes fully committed to the expanding biodiesel markets the India plant has a footprint to expand its capacity to 100 million gallons per year to meet increasing biodiesel demand in India. In addition to the significant progress in India Our three businesses in the U.S. have achieved major milestones toward sustained profitability. Let's review our California traditional ethanol business. Similar to our strategy in India, where we added a technology to allow the use of a lower cost waste feedstock to produce biodiesel, we have been upgrading our Keys California ethanol plant to lower input costs, reduce the carbon intensity of our biofuel, and significantly increase the value of the ethanol we supply to customers including Chevron, Valero, Shell, Flyers and other gasoline suppliers in the 1.5 billion gallon California ethanol market. Our Keys plant upgrades include a $5 million membrane dehydration system fully financed by Mitsubishi Chemical as a strategic implementation of the technology for the first time at a corn ethanol plant. The Mitsubishi unit is scheduled for completion in Q4 2019 and will reduce natural gas usage and decrease the carbon intensity of our ethanol, generating an estimated $3 million per year of increased cash flow. After three years of project development, this month construction began on a project by Lindy Gas to build a CO2 liquefaction plant on five acres owned by Amedis adjacent to the Keys plant. The CO2 plant will convert the 175,000 tons per year of renewable CO2 produced by our ethanol plant into liquid CO2 for sale to local food processors, beverage producers, and other users. The CO2 plant is scheduled for completion by the end of 2019 and is expected to generate a carbon reuse tax credit of $35 per ton for more than 100,000 tons of CO2 per year. in addition to more than $1 million per year of increased cash flow from CO2 sales and related land lease. Additional projects at the Keys plant are targeted to further reduce natural gas usage and costs, thereby increasing the number of low carbon fuel standard credits generated by each gallon of ethanol we produce. Next, let's discuss our advanced low carbon renewable fuel strategy for a moment. With the extension of low carbon fuel standard in California to year 2030, and the resulting increase in price of California low carbon fuel standard credits from $62 in mid-2017 to more than $190 per credit this year. We have targeted our biofuels expansion projects to the production of valuable below zero carbon renewable fuels through the use of patented and proprietary technologies that convert waste wood and other cellulosic feedstocks into biofuels. The criteria we used to identify the most profitable opportunities in the renewable fuel industry was a combination of maximizing the California LCFS credit value and the federal renewable fuel standard value. The price of federal renewable identification numbers for biodiesel and other products change according to supply and demand, with one exception. Congress decided more than 10 years ago The D3 RINs would be set by law in order to attract funding from investors to build production capacity of cellulosic biofuels and renewable natural gas. The D3 RIN is priced to provide investors with about $3.50 per gallon of value plus the California low carbon fuel standard value if the biofuel is sold in California. However, D3 RINs are only generated by cellulosic ethanol and Renewable Natural Gas. And the highest amount of LCFS value is generated from dairy biogas and orchard wood that would otherwise be burned, such as waste almond orchard wood. So the EMETIS advanced biofuels businesses are California Dairy Renewable Natural Gas production and pipelines and converting California waste orchard wood from about 1.5 million acres of almonds and walnuts into cellulosic ethanol. with about 1,200 dairies and more than 1.6 million tons per year of waste orchard wood within 150 miles of the Amedis plant in California. Amedis can grow to more than $1 billion of annual revenues and $500 million of annual cash flow by converting waste dairy biogas and waste orchard wood in the Central Valley of California into valuable low-carbon renewable fuels. Since we are utilizing local feedstocks, all of our renewable fuels customers are located within 50 to 100 miles of our biofuels and biogas production locations. Let's briefly review our Imetis Biogas dairy digester and pipeline project. Methane, commonly known as natural gas, is a potent greenhouse gas. that is up to 34 times more powerful than carbon dioxide at capturing Earth's heat. About 25% of California's methane emissions are from the waste ponds on dairy farms. To reduce damaging methane emissions, in late 2016, California passed a law known as Senate Bill 1383 that mandates the capture of biogas from dairies in order to reduce methane emissions. Along with the mandate, California has funded about $75 million of annual matching grants to dairies to build biogas digesters and related systems. Biomethane sourced from dairies can be used to replace gasoline or diesel fuel in trucks and buses to significantly reduce carbon emissions and air pollution. After more than a year of project development and financing work, we recently announced a fully financed $30 million project and an award from the California Department of Food and Agriculture of two matching grants for a total of $3 million to build a dairy biogas project. We have filed for additional matching grants to fund approximately 50% of project dairy costs to capture biogas from these dairies in on-site digesters, deliver the biogas to our ethanol plant via a new pipeline, then either use the biogas in our existing boilers or convert the biogas into biomethane. Biomethane is commonly known as renewable natural gas, or RNG. The biomethane can either be sold directly to trucks at the Keys plant or injected into the utility natural gas pipeline for delivery anywhere in California to be used in trucks to displace petroleum diesel. On a scale of the carbon intensity of different fuels, the carbon intensity of biomethane captured from dairies is approximately negative 275. Since the carbon intensity of gasoline and conventional diesel is about a positive 100, biomethane is about 375 carbon intensity points lower than gasoline as a transportation fuel. We believe that capturing biogas from dairies and converting it into renewable natural gas to generate negative carbon intensity biofuels is an excellent way to reduce climate change and create value for dairies and lower costs for diesel truck fleets. based on our existing animal feed supply relationships with about 100 dairies and the ability to use biogas in our plant until utility pipeline approvals are obtained and pipeline injection is completed. We believe that Amedis is uniquely positioned as one of only three ethanol companies in California. To allow a rapid deployment of the project, Amedis recently announced a $30 million preferred equity financing by the new Amedis Biogas subsidiary. with investments from a portfolio company of our senior lender, Third Eye Capital. We are very pleased that the funding was accomplished with no dilution to the shareholders of the Amedis parent company and the equity is structured to automatically repurchase the preferred stock from biomethane operational cash flow. Prior to the full redemption of the preferred stock, Amedis receives 25% of free cash flow with the remaining 75% of free cash flow used to redeem preferred stock. After redemption of the preferred stock, AMETIS will receive 100% of ownership of the dairy biogas project assets and ongoing cash flow. Construction of the first two dairy digesters and related pipeline system is expected to be completed this year, followed by the completion of the remaining digesters and systems in the first phase within the next year thereafter. We expect the AMETIS biogas business to scale up to generating more than $2 per share of recurring annual positive cash flow after completing the expanded planned project of three dozen dairies and redeeming the preferred stock. Let's finish with an update on our below zero carbon cellulosic ethanol project in Riverbank, California. We were pleased to announce this past summer that the Adventus Advanced Biorefinery under development in Riverbank, California near Modesto was named as the number one waste to value project in the world by Biofuels Digest, the world's largest daily biofuels publisher. The IMETIS project earned its number one ranking as a result of our fixed-price, low-cost almond and walnut wood waste contract for 20 years, with a cost of only about $20 per ton for the first half of the contract period. Our planned production of high-value cellulosic ethanol worth more than $5 per gallon, including valuable fish meal and other byproducts, and our use of the patented Lanzitech gas microbe ethanol production technology. The Lanzitech technology is now in full commercial operation at a plant that opened last year in northern China that converts waste gases from a steel plant to produce ethanol. This year, we announced three significant financings related to the Riverbank project. A $5 million California Energy Commission grant to fund engineering and equipment, a $12.5 million tax waiver that offsets equity funding required for the project and the signing of a $125 million U.S. Department of Agriculture conditional commitment letter for a 20-year debt financing under the 9003 biorefinery program. Now that the USDA loan guarantee has been signed, we are focused on completing engineering of the plant required for the negotiation of the EPC contract that will include a bonded maximum construction cost as required by the USDA conditional commitment letter. The Riverbank cellulosic ethanol plant is expected to generate more than $80 million of revenue and more than $50 million per year of positive cash flow by producing cellulosic ethanol from low-cost waste orchard, vineyard, forest, and construction demolition wood as feedstock. The financial closing to begin construction of the Riverbank plant is expected in late Q3 or early Q4 2019. In summary, we believe that the strong growth occurring at our India plant, which has no long-term debt, the increased profit margins from plant upgrades related to the Keys biorefinery, the funded Amedis Biogas Dairy Digester and Pipeline project, as well as our deployment of the patented LansTech cellulosic ethanol technology at the Riverbank plant under development has positioned AMETIS to rapidly produce expanding positive cash flow from the production of low-carbon, clean-burning, high-performance renewable fuels from abundant, low-cost waste biomass feedstocks. Now let's take a few questions from our call participants.