Alto Ingredients - Q2 2023

Transcript

Operator (participant)

Good day, everyone. Welcome to the Alto Ingredients Second Quarter 2023 Financial Results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star and then one on a touchtone telephone. To withdraw your questions, you may press Star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Kirsten Chapman with LHA Investor Relations. Ma'am, please go ahead.

Kirsten Chapman (Principal)

Thanks, Jamie. Thank you all for joining us today for Alto Ingredients' 2Q 2023 results conference call. On the call today with me are President and CEO, Bryon McGregor, Director and Interim COO, Mike Kandris, and CFO, Rob Olander. Alto Ingredients issued a press release after the market closed today, providing details of the company's financial results. The company has also prepared a presentation for today's call that is available on the company's website at altoingredients.com. A telephone replay of today's call will be available through August 14th, the details of which are included in today's press release. A webcast replay will also be available at Alto Ingredients' website. Please note that the information on this call speaks of only as today, August 7th. You're advised that 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 states that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of risks and uncertainties. The actual future results of Alto Ingredients 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 Alto Ingredients' 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 believes these measures will assist investors in assessing the company's performance for the period being reported.

The company defines Adjusted EBITDA as unaudited net income or loss before interest expense, interest income, provision for income taxes, asset impairments, loss of extinguishment on debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense. To support the company's review of non-GAAP information, a reconciling table was included in today's press release. On today's call, Mike will start with an introduction, Bryon will provide a review of our strategic plan and activities, Rob will comment on our financial results, and then Bryon will wrap up and open the call for Q&A. It is now my pleasure to introduce Mike Kandris. Mike, please go ahead.

Mike Kandris (Director and Interim COO)

Thank you, Kirsten, and thank you everyone for joining us today. I'm pleased to announce, as issued in a press release this morning, that Bryon McGregor has been appointed President and CEO, and Rob Olander has been appointed CFO. I will continue on as a director and have agreed to support the company during the leadership transition for up to a year as the interim chief operating officer. We believe that succession planning is one of the most important things that we do, and we take it very seriously. To that end, Bryon and I have been working closely together for many years and even more so the last three years on our strategic plan to diversify revenue streams, optimize operations, and expand EBITDA. Bryon is recognized for his strong leadership, strategic vision, and outstanding management capabilities.

Prior to Alto, Bryon developed and managed capital financing for over 40 global industrial and infrastructure projects valued in excess of $12 billion. As a critical player at Alto for over 15 years, he gained a deep understanding of our markets and business needs. The board and I are confident he will lead the team to drive Alto Ingredients' sustainable profitability. Congratulations, Bryon. Rob Olander, our new CFO, is an expert in public accounting, company accounting, and process improvement. He has been a valuable player in developing and implementing our financial strategy. Rob will be a strong contributor as our new CFO. Congratulations, Rob. I will hand the call to our President and CEO, Bryon McGregor.

Bryon McGregor (President and CEO)

Thank you, Mike. I look forward to working with you as we complete our leadership transition, advance our transformative projects, and to your continued work as a member of the board. Turning to the quarter, I'm delighted to speak to everyone today and will keep my comments brief. Our key takeaway is that we are successfully executing our plan to transform Alto Ingredients and to achieve our long-term EBITDA targets. We're pleased by the market's continued improvements in Q2 2023, specifically the ethanol crush margins. Complemented by favorable economics from our specialty alcohol and essential ingredient products, we delivered a solid quarter, posting net income, positive Adjusted EBITDA, and positive operating cash flow. We continue to make significant capital expenditures to support our business transformation, diversify our revenue streams, and reduce exposure to commodity markets.

With the ultimate goal of expanding margins and increasing profitability, in late 2019, we began modifying our operations, focusing on low-cost, high-value initiatives. Our efforts were fruitful. In 2020, when demand for pharmaceutical-grade alcohol rose sharply, as a long-standing producer of high-quality alcohols, we were prepared to serve the market. We did so successfully, increasing our market share, as well as improving top and bottom-line financial results. Since then, we have continued making significant progress on our strategy, strengthening our balance sheet and liquidity, as well as accelerating investment in longer-term projects. Our near-term focus has been to increase production of high-quality products, including grain neutral spirits, corn oil, and high protein, as well as to execute strategies to improve plant efficiency and reliability by adding corn storage and other upgrades.

Now we are preparing to install a natural gas pipeline, convert our biogas waste to renewable natural gas, produce primary yeast, expand our cogeneration capabilities, and, most importantly, launch carbon capture and sequestration. Each of our projects has a different timeline. To be capitally efficient, we are being prudent with our financing. For our near-term endeavors, we are using our working capital resources, cash generated from operations, and excess availability under our credit facilities. For our longer-term projects, we continue to hold productive discussions with strategic partners, we will fulfill those capital needs as appropriate. Working diligently on our capital initiatives, we have made progress on each of them. It's important to note, however, that we will have more information we can share publicly as our Front-End Engineering Design or FEED studies are finalized, which we expect to complete in the next few quarters.

Now I'll provide updates on our capital projects. Regarding revenue-producing projects from near term to long term, first, in high-quality alcohol, we now produce the highest quality 192 proof and ultra-low moisture, 200 proof grain neutral spirits on the market. As planned, we are garnering qualifications, positioning us to sell additional high-value GNS to new and existing beverage customers for the annual contracting period for 2024. In addition, we will continue to supply GNS, especially our unique and highly differentiated ultra-low moisture product, on a spot sale basis for the remainder of 2023.

Regarding our expanded production of corn oil and high protein, we continue to align the system at Magic Valley and are working to obtain the dryer permits to achieve full capacity, which is integral to optimizing production of ethanol, corn oil, high protein, and other feed products on a low-cost basis. To provide the needed time to optimize production and properly place our expanded protein and corn oil offerings at appropriate market prices, we now expect to achieve full value for these products in the fourth quarter of 2023. Regarding an expansion into primary yeast production, design work is progressing well and on schedule. This said, inflationary pressures have impacted costs negatively, and we expect the cost of installation to be higher than originally anticipated. On the positive side, product prices for primary yeast have also risen.

Assuming the returns remain justified, we will continue to target commencing construction in early 2024. We will know more as FEED work progresses. Regarding carbon capture and sequestration, we have a unique and compelling opportunity. Our current Pekin campus operations yield approximately 700,000 metric tons of carbon a year, which we intend to monetize through carbon capture and sequestration. As frequently discussed, our campus is ideally located above the Mount Simon Sandstone Formation, one of the most significant carbon storage resources in the U.S., and is proximate to the Illinois Basin, one of the largest carbon sequestration locations. As stated before, with increased 45Q tax incentives under the Inflation Reduction Act, we believe we can generate over $30 million annually in EBITDA. This is based solely on a conservative assumption of annual carbon production sold at $85 per metric ton.

To be clear, this is after operating and sequestration costs and does not include any of the substantial economic benefits from 45Z or of the environmental attributes associated with low-carbon ethanol, including use in the production of ethanol to jet fuel, blue ethanol, synthetic natural gas, and sustainable aviation fuel or SAF. To further this initiative, we contracted the FEED study firm to determine capture, compression, and engineering design, and we have selected our development partner to provide turnkey transportation, sequestration, and monitoring services. Notably, the CCS project requires the upgrading of our natural gas pipeline and cogeneration projects, both of which have excellent project returns on a standalone basis. Our goal is to have CCS operational by the end of 2026. We believe this represents an aggressive but achievable schedule.

While we are finalizing arrangements to fund the installation costs associated with the capture and compression, the nature of these activities requires discretion, limiting what we can discuss publicly at this time. As such, we do not expect to reveal our strategic partners until mid-2024. Regarding cost-savings projects from near to long term, first, our new corn storage at the Pekin campus, as discussed on our last call, is fully operational and contributing to improved corn procurement costs, greater plant reliability, and reduced plant operating costs. Regarding a new natural gas pipeline, having completed the FEED study, we are finalizing easements and access, as well as targeting commencement of construction before year-end. Our goal is to improve procurement, pricing, and stability, which will lower our natural gas costs at the Pekin campus. It will also support our future energy needs for our capital projects.

The gas pipeline will create a new revenue stream, lower our operating costs, and reduce environmental footprint by converting our biogas waste into renewable natural gas. Regarding expanding our cogeneration capabilities at the Pekin campus, we have completed the feed study, furthered our design and prep work, and initiated financing discussions. We expect these capabilities to also address energy needs for both our current operations as well as our capital projects. Before I turn the call over to Rob for our financial remarks, I'd like to reiterate that our business is focused on renewable products, which underscores our daily commitment to sustainability. Part of that pursuit, during Q2, we achieved EcoVadis Silver Medal status at both ICP and Pekin, indicating sustainability ratings in the 80th percentile amongst our peers.

We're proud of our team's efforts and continue to build and bolster procedures and implement programs focused on our sustainability, health, and safety. We plan to include greater details on this in our 2024 proxy statement. Now I'll turn the call over to Rob, our new CFO.

Rob Olander (CFO)

Thanks, Bryon. Our gross profit increased significantly from Q1, 2023, and our production capacity utilization increased to 81% from 70% in Q1, 2023. Looking ahead, we expect production capacity to increase further for two reasons. First, when Magic Valley systems are aligned, we expect to achieve optimal capacity at that facility. Second, Washington State recently approved a new Clean Fuel Standard that justifies the economics of shipping our Columbia ethanol production north, basically opening a new low-carbon fuel market for the plant. For Q2, 2023, we improved Adjusted EBITDA to $16 million. Looking ahead, July's crush margins were strong. We locked in some positive spreads for Q3. Taking this into consideration, as well as current positive crush margins and a positive forward curve, we expect to generate positive Adjusted EBITDA for Q3, 2023.

During Q2 2023, we spent $8 million in CapEx, bringing investment year to date to $18 million. We also purchased 400,000 shares of our common stock for $1 million. Since beginning the share repurchase campaign last September, we have bought back 1.6 million shares for a total of $4 million at an average overall price of approximately $2.50 per share. Given Alto's significantly undervalued market price, we believe these repurchases are a beneficial return on investment and an effective use of capital resources. As of June 30, 2023, our cash balance was $23 million, and our total loan borrowing availability was up to $114 million to support business operations and growth initiatives.

Borrowing availability includes $49 million under our operating line of credit, $40 million under our term loan facility, and an option to request up to an additional $25 million on that facility. With that, I'll turn the call back to Bryon.

Bryon McGregor (President and CEO)

Thanks, Rob. Before I open the call to questions for our covering sell side analysts, I'd like to reiterate, as shareholders ourselves, our team is dedicated to driving sustainable long-term value for all stakeholders, including customers, employees, and investors. As part of that mission, management, together with our board, continually pursue legitimate opportunities to maximize the value of our assets through capital investment and partnerships with strategic third-party industrial enterprises that share our vision. We believe this approach provides the best option to liberate the inherent value of the company. Where appropriate, and as previously demonstrated, we've also chosen to sell non-core facilities, including Aurora, Madera, and Stockton, and invest those proceeds in more productive and profitable alternatives. Our team is experienced and committed to leveraging our assets to deliver more diversified, higher value, and sustainable revenue streams from our specialty alcohol and essential ingredients.

Our strategic plan is coming to fruition, as evidenced by our new high-quality products and benefits from our cost improvements. The aggregate sum of our of our parts carries far greater intrinsic value than the individual pieces and will be an even higher value when carbon capture and sequestration is deployed. As such, we continue to be excited about our capital projects, which we expect to increase our annual EBITDA incrementally by over $65 million by the end of 2025, with the completion of our near-term projects, and by approximately $125 million by the end of 2026, when our CCS, cogeneration, and other long-term initiatives are fully realized. I'd like to open this call for questions. Operator?

Operator (participant)

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and one on your touchtone telephones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Eric Stine from Craig-Hallum. Please go ahead with your question.

Eric Stine (Senior Research Analyst)

Hi, everyone.

Bryon McGregor (President and CEO)

Hi, Eric.

Eric Stine (Senior Research Analyst)

Hey, you know, you just came off $16 million in the Adjusted EBITDA for Q2, and I know you're guiding to positive, but I mean, as it stands here today, just directionally, it would seem to me that, that you are expecting sequentially it to be directionally higher. I know that ethanol markets can change very quickly, but, given a positive crush in July, given some of the operational things that you've got coming on, is that a, is that a fair way to think about it, or are there other factors that should, should drive our, our thoughts?

Bryon McGregor (President and CEO)

It's a great question, Eric. I think, well, you know, from your mouth to God's ears, but I think that what I'd say as well is, is we're also coming into a harvest, that with corn prices, you know, rising, basis rising, and there's still questions as to when the harvest will occur. That being said, we're seeing positives, as Rob said, positive crush margins through, through the quarter and through actually right now, through year-end. We would think it would be a disservice to comment on the fourth quarter, to be sure. Again, we've been able to lock in some spreads. We're feeling good about the quarter and expect positive EBITDA margins for Q3.

Eric Stine (Senior Research Analyst)

Okay. I'll just leave it there. Maybe, maybe just on carbon capture. The $30 million, and I know that's definitely a longer-term plan, but, you know, just to be clear, that's $30 million if, if you're kind of going at it solo or if you get a high percentage of the economics. I mean, just so maybe confirm that first. Then some of the early work you're doing, I mean, should we take that as you're leaning towards more of a partnered approach, or is it still something where you've kinda got all options on the table?

Bryon McGregor (President and CEO)

Well, we're certainly going down paths. We have not made a final selection, but the intent is to clearly bring to bear for the benefit of the company and the shareholders to optimize the value that's returned for, you know, to the company, particularly since we're the one that's generating the CO2, right? The $30 million that we talk about, and as I mentioned in our prepared remarks, is that that's really just the economics around the 45Q. It doesn't include 45Z and the benefits that are associated with that, nor the environmental attributes that are also are all available today. Part of that reason is that we think it would be premature to be sharing some of that information because those numbers are all over the place.

They're certainly, you know, contributory and beneficial to the bottom line, right, as you drop those in. Whether we are taking that all in by ourselves and going it alone, or whether we're sharing that, we'll make sure that we optimize that, you know, so that we can make sure that we get execution and get the best execution available.

Eric Stine (Senior Research Analyst)

Okay, got it. Maybe last one for me, just on, on high protein. I know, you know, early on, and you did a lot of due diligence about it, but CoPromax, it was a newer technology. You know, just curious if you could talk about how that's played out. Again, I know it's still early at Magic Valley, but how that's played out, you know, versus your maybe your original expectations.

Bryon McGregor (President and CEO)

We had hoped to be able to accelerate through that, through the, if you will, the startup. Clearly, the implementation of the, of the CoPromax technology, is significant in, in regards to the profile of the facility. As you would have with any project where you were, you know, moving and changing a lot of parts, that you need time to be able to line out all of those, all of the different assets and, and the operations of that facility. We've seen good results, individually in all these and, you know, both in corn oil and in protein, on par with what, you know, you're hearing in the, in, in the open market.

The real challenge is being able to do it on an ongoing, sustainable basis and be able to do it at, at capacity for all, you know, for the full operation of the facility. We're working hard at that. We're making good progress, but it's taken longer than we expected. But we remain optimistic, and we expect to be able to do that, have that, you know, in full, at full capacity by on or before year-end or into Q4.

Eric Stine (Senior Research Analyst)

Okay, thanks.

Operator (participant)

Our next question comes from Sameer Joshi from H.C. Wainwright. Please go ahead with your question.

Sameer Joshi (Senior Equity Research Analyst)

Thanks for taking my questions. Bryon McGregor, congratulations, and Rob Olander, too, and Mike Kandris, nice to see you moving towards retirement and trying to enjoy life. My first question is just following up on the CCS primaries and nat gas FEED studies. Do you have any estimate on this Front-End Engineering for each of these? Is it going to be completed within the next few months, or how, how is it progressing?

Bryon McGregor (President and CEO)

Yeah, First off, thanks, Sameer. Appreciate your comments. We expect to have the FEED study done on the cogeneration, and now it's just about lining that out and getting bids for equipment and materials. With regards to natural gas pipeline, we also have that FEED study done. We've actually obtained, as we mentioned in the prepared remarks, we've obtained all of our easements. At this point, it's just finishing up again on some of the bid work, and then we would expect to be able to start that facility before the end of the year.

Those are, of course, important and integral to making the kinds of improvements that we would like to make at the facility so that we're building, you know, carbon sequestration on a good, firm foundation.

Sameer Joshi (Senior Equity Research Analyst)

Got it.

Bryon McGregor (President and CEO)

Those we need to continue to progress, and then we're working concurrently on the carbon sequestration and making good progress there as well.

Sameer Joshi (Senior Equity Research Analyst)

Got it. Thanks for that color. On the specialty alcohols, ongoing sales, how is the certification process going for the customers for the next buying cycle? Do you have any insight on that?

Bryon McGregor (President and CEO)

I think it's going actually pretty well. We're actually seeing some early interest in not only that product, but also just in the fourth-- what would be the otherwise the fourth quarter exercise. I think that's partially because we've seen corn prices come off materially from where they were earlier in the, in Q2. That's all positive, and we're getting good feedback. Again, we're really excited about the product. I would say, though, that it's a, you know, especially in the general specialty market, it's a crowded space, and so we look forward to sharing with you more information as we move along here.

Sameer Joshi (Senior Equity Research Analyst)

Understood. On, on the ethanol sales, we understand, the crush spreads, are, are beneficial and expected, at least in the near term. Is there any, positive benefit from the E15, requirement? Have you already seen any increased demand, as a result of that?

Bryon McGregor (President and CEO)

I think it's hard to measure, but yes, I think that it's been contributory to the solid margins this year. We've seen gas demand up slightly, but I think it's still down from 2019 a bit. Yeah, I think that it's all, you know, integral. I think that we've also seen generally some discipline in the market space with regards to just production values and, and production volumes, and that's also been helpful and contributory to that.

Sameer Joshi (Senior Equity Research Analyst)

Okay. Just last one. I know you have access to borrowing capacity of $110 million-$115 million. Do we know what is the cost of this capital? Is it tied to LIBOR or any other such parameter?

Bryon McGregor (President and CEO)

It consists of. Yeah, I think we do. I mean, you'd have to figure out, or we'd have to do the math, but I think as Rob laid out, you've got three sources: ongoing cash from operations and retained cash and earnings. Then on top of that, we have our borrowing base under our line of credit, which is really inexpensive. I don't know what's, Rob, something 5.5%-6%?

Eric Stine (Senior Research Analyst)

Yeah.

Bryon McGregor (President and CEO)

Right. It's like, it's for us, whatever the small spread is, that's all public. Then on top of that, then we have the fixed rate at 10% from the Orion term loan.

Sameer Joshi (Senior Equity Research Analyst)

Got it. Thanks for that. Congrats on the progress, and good luck to all, all of you. Thanks.

Eric Stine (Senior Research Analyst)

Thank you.

Bryon McGregor (President and CEO)

Thank you.

Operator (participant)

Ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor over to management for any closing remarks.

Bryon McGregor (President and CEO)

Thank you, Jamie. Thank you all again for joining us today. We'll be in New York City at the H.C. Wainwright Conference on September eleventh and twelfth. Have a great day.

Operator (participant)

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.