Alto Ingredients - Q2 2024

Transcript

Operator (participant)

Good afternoon, and welcome to the Alto Ingredients, Inc., Q2 2024 Financial Results Conference Call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your touchtone phone. To withdraw your question, please press Star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Kirsten Chapman with LHS Investor Relations, a division of Alliance Advisors. Please go ahead.

Kirsten Chapman (Head of Investor Relations)

Thank you, Kaylee, and thank you all for joining us today for the Alto Ingredients Q2 2024 Results Conference Call. On the call today are President and CEO, Bryon McGregor, 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 thirteenth, 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 only as of today, August sixth. You are advised that time-sensitive information may no longer be accurate at the time of any replay.

Please refer to the company's safe harbor on slide 2 of the presentation available online, which states that some of the comments in this presentation constitute forward-looking statements and considerations that involve 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 periods reported.

The company defines Adjusted EBITDA as unaudited, consolidated net income or loss before interest expense, interest income, provision for income taxes, asset impairments, loss and extinguishment of debt, unrealized derivative gains and losses, acquisition-related expense, and depreciation and amortization. To support the company's review of any non-GAAP information, a reconciling table was included in today's press release. On today's call, Bryon will provide a review of our strategic plan and activities, and Rob will comment on our financial results. Bryon will wrap up and open the call for Q&A. It's now my pleasure to introduce Bryon McGregor. Please go ahead, sir.

Bryon McGregor (CEO)

Thank you, Kirsten. We welcome our investors, valued customers, and other stakeholders joining us today. The Pekin Campus has been producing alcohol for over 150 years through many market cycles. We will continue to produce well into the future. Over the last few years, we've been leaning on our strong balance sheet by utilizing cash flow from operations and excess liquidity to fund capital upgrades and repair and maintenance, to strengthen our facilities and to improve our long-term profitability. While these additional expenses can impact our short-term results, our recent efforts are beginning to yield operational improvements, and we are confident we will reap long-term benefits. In Q2, our initiatives increased production in our Pekin campus, positioning us to benefit from improving ethanol margins. These efforts further demonstrate the advantages of our production facilities located there, including the ability to operate profitably on a consistent basis.

More specifically, in Q2, even with over $5 million related to spring outages, our Pekin Campus generated over $10 million of gross profit, up from over $4 million in Q1, reflecting these programs and higher crush margins in June. In Q2 2024, the average Chicago crush margin increased to 21 cents per gallon, compared to just above breakeven in Q1 2024. In July, the average Chicago crush margin rose further to 48 cents per gallon. These improvements align with the optimism we expressed on our Q1 call regarding strengthening crush margins, solid corn supplies, and growing export demand. Assuming margins remain strong, we expect to deliver solid financial results in Q3.

That said, our consolidated Q2 2024 net loss and adjusted EBITDA were negatively impacted by the cost of our biennial wet mill outage, preventative repairs and maintenance at all our facilities, lower feed and carbon prices, particularly with respect to our Columbia facility, and realized losses on hedging activities. Rob will discuss our financial results in greater detail in a moment. To generate more sustainable profitability in the long term, we've been actively expanding our revenue streams. I'll review our operations and strategic initiatives, beginning with carbon capture and storage, or CCS. We'll expect that the regulatory developments in carbon market fluctuations will affect this initiative on an ongoing basis. Most recently, Illinois signed into law the SAFE CCS Act on July eighteenth, establishing stringent safety, financial, and insurance requirements on carbon dioxide pipelines.

This act also imposes a moratorium on construction of new carbon pipelines until the Federal Pipeline and Hazardous Materials Safety Administration finalizes its new safety rules, or July 1, 2026, whichever occurs sooner. This timing aligns with our current proposed CCS project permitting and construction schedules. We believe the act will add clarity for the industry on CCS projects, although we do anticipate increased compliance and other requirements. The CCS market also remains dynamic. For instance, on the economic front, current prices in the Low Carbon Fuel Standard markets are at historic lows, and voluntary carbon markets are nascent. As such, it is difficult to project with certainty beyond the value of the 45Q tax credits that begin at $85 a metric ton, what the dollar values of the associated environmental attributes will be over the life of our proposed CCS project.

Given our plans to take a capital-light approach to this project, we need to align Alto and its various partners' resources to best bear the various risks while retaining the appropriate financial benefits. Given these evolving dynamics, it's important that we bring the right partners to the table. We believe we're doing so effectively as we continue to work collaboratively with Vault and other parties. Moving to operations, as previously discussed, we conducted our biannual wet mill repairs and maintenance outage at Pekin Campus in April. This scheduled outage was completed on time, within budget, and is now demonstrating improvements over prior operational performance. For example, we increased production at the wet mill, improving capacity utilization while reducing our fixed cost per unit. The Pekin Campus is now fully operational and taking advantage of the summer driving season economics.

We remain on track to achieve 90 million gallons or more of Specialty Alcohol sales in 2024. We are encouraged by the demand from existing and new customers. We're capitalizing on our proximity to the river, which gives us access to the Gulf and the ability to export product. We're building a second loading dock at our Pekin Campus that will increase barge volume, reduce our overall transportation costs, and provide critical redundancy. We expect the cost of the second dock to be less than $3 million. Now let's pivot to review our Western plants. We built these facilities at a time when destination plants delivered a solid and differentiated value proposition. As competition and corn basis increased and carbon values declined, we began investing in these plants to broaden our revenue streams and improve profitability.

Ultimately, our goal is to optimize their value, which could include operating them long term as part of our portfolio of production assets, or evaluating, evaluating the sale of one or both plants. At Magic Valley, we continue to work with our high-protein system vendor, Harvesting Technology, to produce increased levels of corn oil and higher protein feed products that garner higher prices. In January of this year, we hot idled the plant due to negative regional crush margins and to address the excess water and mass balance challenges that inhibited our ability to operate the plant at capacity and to achieve the target results from our corn oil and high protein system. We made significant modifications that included the installation of additional equipment and adjustments to the design process flows.

Also in Q2, to optimize plant efficiency upon restart, we accelerated routine maintenance activities, including tuning other major plant equipment and operating systems, performing routine cleanings, and flushing prior process residuals. We resumed operations in early July and are encouraged by the initial results. We expect to increase production rates in the coming weeks as we complete the system upgrades. We intend to do so carefully to ensure the process remains balanced and our products meet quality expectations. We anticipate having a clearer picture with respect to the effectiveness of the system modifications and the general performance of the plant later this summer. In Q2, we significantly improved the production rates at our Columbia plant by addressing centrifuge limitations we experienced in Q1. As a result, we increased capacity utilization rates in Q2 and anticipate further improvements as the summer driving season continues.

We're currently working on other ways to improve the facility's profitability and hope to share more information with you over the coming quarters. Before I turn the call to Rob, I'd like to note that customers have indicated their support of our efforts to continue to improve our sustainability and lower our carbon footprint. In July, our ICP and Pekin plants received the 2024 Bronze Medal Sustainability Rating from EcoVadis, which honors the top 35% of companies assessed. EcoVadis is a globally recognized business sustainability rating service that sets corporate sustainability standards. Now I'll turn the call to Rob.

Rob Olander (CFO)

Thanks, Bryon. I'll review the financial results for the Q2 of 2024 compared to the Q2 of 2023. During Q2 2024, we sold 95.1 million gallons, relatively consistent with 94.4 million gallons sold during Q2 of 2023. However, due to lower market prices in 2024, Q2 2024 net sales were $236 million, compared to $317 million in Q2 2023. Although ethanol prices decreased, crush margins remained consistent. Therefore, lower ethanol prices did not materially impact gross profit. In fact, during Q2 2024, our Pekin campus contributed over $10 million to gross profit, even after considering its outage costs, lost production margins, and derivative losses.

Total gross profit for the quarter was $7.6 million, down $9.6 million from Q2 2023, yet up over $10 million from Q1 2024. Various factors impacted our gross profit and bottom-line results. While our Essential Ingredients return improved 46% in Q2 2024 compared to 38% a year ago, revenues decreased in Q2 2024 compared to Q2 2023. This is largely the result of a compression on protein prices due to an increase in soybean meal supply, a consequence of production growth and soy crush, driven by the demand for renewable diesel. Next, renewable fuel revenue and bottom-line results at our Columbia plant were negatively impacted by historic low carbon market pricing.

Additionally, as Bryon outlined on our last call, in Q2, we completed repairs and maintenance initiatives, including our Pekin and wet mill outage, to improve our operational performance heading into Q3. It's important to note that costs associated with wet mill outages are more substantial than those for dry grind facilities due to the nature and extent of the maintenance activities, the extended downtime required, and the opportunity costs. The biennial outage cost $3.6 million, and the planned ICP outage cost $1.8 million in Q2 2024. This does not include lost revenue associated with approximately 3.5 million fewer production gallons.

During Q2, on a consolidated basis, we recorded $11.3 million in repairs and maintenance expense, including a portion of the outage costs, and we remain on track for our 2024 estimate of $34 million in total repairs and maintenance expense for all plants. Finally, realized derivative losses for Q2 2024 were $2.9 million, compared to $5.5 million in realized derivative gains for the same quarter in 2023. As covered previously, we employ a variety of risk management strategies to mitigate the price volatility of different commodities throughout the year as a normal course of business. Our consolidated net loss for Q2 2024 was $3.1 million, compared to net income of $7.6 million in Q2 of 2023.

Adjusted EBITDA for Q2 2024 was -$5.9 million, including $3.6 million in costs related to our wet mill outage and the $2.9 million in realized losses on derivatives. This compares to positive adjusted EBITDA of $14 million, including $5.5 million in realized derivative gains in Q2 2023. As of June 30, our cash balance was $27 million, and our total loan borrowing availability was $95 million, including $30 million under our operating line of credit and $65 million, subject to certain conditions, under our term loan facility. In Q2 2024, we used $13.7 million in our operating activities, bringing the year-to-date total to a net use of $12.3 million.

We invested $4.7 million in CapEx, bringing the year-to-date total to $9.3 million, in line with our $25 million-dollar plan for 2024. As Bryon noted, we are pleased with the margins in July, and if they remain strong and we continue to meet our production targets, we expect to deliver positive Adjusted EBITDA for Q3. With that, I'll turn the call back to Bryon.

Bryon McGregor (CEO)

Thank you, Rob. We've been executing our plan to improve our profitability and leverage our strength and opportunities. The major planned outages we completed in the Q2 position us to benefit from positive crush margins in the H2 of 2024. We're excited to see our initiatives come to fruition, bolstering our ability to continue to serve our customers for many years to come. Operator, we're ready to begin Q&A.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Your first question comes from Sameer Joshi with H.C. Wainwright.

Sameer Joshi (Analyst)

Hey, hey, good afternoon, guys. Thanks for taking my questions.

Bryon McGregor (CEO)

Hey, Sameer.

Sameer Joshi (Analyst)

Let me start with the last point you discussed about the CapEx of $25 million on target or in line with the guidance. So far, you have spent $9.3 million. What is the rest of the CapEx slated for this H2?

Rob Olander (CFO)

We got a variety of different CapEx projects that we've reviewed and approved, that we have planned for later this year. I will note that we've spent less year to date, but there is also more spend slated in the H2 of 2024.

Sameer Joshi (Analyst)

Any particular areas you are focused on for that?

Rob Olander (CFO)

A lot of the areas involves, you know, the things that we talked about before, increasing plant efficiencies, upgrading various systems, things like that.

Bryon McGregor (CEO)

Would also include the $3 million from the new pipeline-

Rob Olander (CFO)

Right.

Bryon McGregor (CEO)

- or the new, load out or loading facility.

Rob Olander (CFO)

Right. The new alcohol dock. Yep.

Sameer Joshi (Analyst)

Got it. And then these various upgrades that are being done, and you talked about increasing capacity utilization at each of—as a result of each of these maintenance and upgrades. Is there a quantifying—like, can you quantify it? Like, what levels were you achieving before, and what are the expected levels for, say, 3Q and 4Q of utilization at these plants?

Bryon McGregor (CEO)

Sameer, it depends on what we're talking about, and that's why we didn't provide specific details in the prepared remarks. But what we're overall seeing is somewhere between 10% and 15% improvements from production prior to the event. And it just, again, it depends. As an example, we've seen about a 10% improvement in ethanol production. Overall, that would include both specialty and beverage. I'm sorry, specialty and fuel. But it would also, and, you know, we've seen up to 15% improvements in essential ingredients. A lot of our, you know, quality essential products that come out, including yeast, that come out of the wet mill. So overall, very pleased.

You know, we hope to see continued improvement in that over the you know, as we continue to further line out the operations.

Sameer Joshi (Analyst)

Great. Thanks for that color. And then just one clarification, maybe, the OpEx was up slightly. I know that these other costs are not run through the OpEx line, but was there a reason for this slight bump in the OpEx? SG&A.

Rob Olander (CFO)

We're here. Sorry. There's a lot going into the other OpEx category. One thing to note is, you know, until we've officially approved the path forward related to our carbon capture and storage project, some of the upfront costs run through that line item.

Sameer Joshi (Analyst)

Some upfront costs. Oh, got it. Okay, thanks.

Bryon McGregor (CEO)

That, that activity clearly picked up. Sameer, sorry, that activity is clearly picked up year over year, and so that would account for the material portion of it.

Sameer Joshi (Analyst)

Thanks. Thanks. I'll take my other questions offline. Thanks.

Bryon McGregor (CEO)

Thanks, Sameer.

Rob Olander (CFO)

Thank you.

Operator (participant)

Your next question comes from Eric Stine with Craig-Hallum Capital Group.

Eric Stine (Analyst)

Hi, Bryon. Hi, Rob.

Bryon McGregor (CEO)

Hey, Eric.

Eric Stine (Analyst)

Hey, so just on carbon capture. So I can appreciate, you know, the timeline in July 1, 2026 and how that matches up, but I also know, you know, there are a number of steps that were targeted in the interim. So just curious how you think about that, how your partners are thinking about that, the various steps, whether it's the Class VI Permit, negotiating with those financing partners and thinking about an investment in your region versus maybe some other region where you're, they're not running into the same issues. So just some thoughts on that would be great.

Bryon McGregor (CEO)

Sure. So, as I mentioned in our prepared remarks, we think that we picked the right partners. We're working, you know, diligently ahead. They've been very collaborative and cooperative, clearly having to address issues as they arise. As an example, the SAFE CCS Act that recently was enacted in Illinois and pivoting and addressing those issues. And not to fully reiterate what was in the prepared remarks, but maybe from an additional color, is that there are in the capital light approach, there are risks that a- and adjustments that you need to make that you would otherwise wouldn't need to make if you were just doing it all on balance sheet, right?

I think that we have those parties that are there and best suited to be able to handle those risks, but it's also doing it in a way and in an organized way so that you're not assuming risks that you otherwise don't need to take beforehand. So as an example, if you think about the Class VI Permit, that's a two-year program, right, at a minimum from EPA. And you have to make decisions as to when you want to start to do your, you know, purchasing for compression. Do you assume that, you know, do you start right out of the box and start ordering that before you have your Class VI Permit?

Or do you wait until you, you've got your Class VI Permit, you know, approved and submitted and awaiting final approval, and some of those other processes need to be in place? So those are all the things that are going into consideration. You know, there are a number of parties out there that are willing to sell, as an example, their carbon credits or the environmental attributes well in advance to finance their, their terms. You know, is that the appropriate approach, and are you giving up too much, or do you try and retain those values and, and wait for those to come in the future? So those are all things that, or a few things that come into, you know, come into the calculus when you're working through this process. So I don't know if that's helpful, Eric, but it's-

Eric Stine (Analyst)

No, it is.It is.

So, but-

Bryon McGregor (CEO)

Trying to find balance and risk in return.

Eric Stine (Analyst)

Sure. I mean, but net effect, you do feel, whether it's with Vault or with some of the, you know, financial partners that you are in negotiations with, that those are the right parties that are willing to deal with that, with the needed flexibility, just given the situation?

Bryon McGregor (CEO)

Correct.

Eric Stine (Analyst)

Okay. All right, appreciate that. And then maybe, just turning to Magic Valley, so good to hear that you've got the restart and it's been going for, what, a month or so. Just curious, like, it sounds like you're taking the right approach to be measured in it, but what do you need to see, where you're convinced that you're on the right track, and does this push out a little bit, the decision in terms of maybe rolling this technology out to other plants?

Bryon McGregor (CEO)

So we are pleased with what we've seen so far, that the steps that we took to expand and add additional equipment, to be able to give additional leniency into the process so that you don't have to have everything out aligned fully all of the time, was important, and we're seeing the value of that today, probably running at around 70% of capacity today. So to achieve, what we would define as success is being able to achieve maximum capacity than we saw before we implemented the project, and being able to achieve the goals and the targets that we had established with harvesting technology to put in the tech into the put that system into place.

Given to answer your question with regards to other applications within the portfolio of assets that we have, it's certainly an open option still, but I think that we think it's prudent and to be measured and to see the success through, not only because we've been waiting a long time, but so have investors, to see the results of this investment. So we wanna see that through before we make any comments or decisions with regards to what we're gonna do going forward at our other sites.

Eric Stine (Analyst)

Okay. Thanks a lot.

Bryon McGregor (CEO)

Thanks, Eric.

Operator (participant)

Again, if you have a question, please press star then one. Your next question comes from Justin Dopierala with Domo Capital.

Justin Dopierala (Analyst)

Thanks for taking my questions.

Bryon McGregor (CEO)

Hello, Justin.

Justin Dopierala (Analyst)

Just to tack on to that last thing, in the prepared remarks, you mentioned that you're expecting a Magic Valley update later this summer. Is that something that would be prior to your next earnings call then?

Bryon McGregor (CEO)

It's a good question. We'll, to the extent that there's material disclosure, we'll make sure that we do that. Otherwise, it may line out appropriately with the Q3 call. If you think about it, you're not only talking about reaching achieving capacity, but really what you're also talking about is being able to place your product and, and get the penetration that you were hoping for with regards to higher proteins and, and, and corn oil and, and placement of that product. So, whether it's what we'd like to say is, is let's play it by ear, but we'll make sure that we provide information as, as appropriate.

Justin Dopierala (Analyst)

Okay, and I imagine the success of that would probably go a long ways towards your ability to be able to monetize the Western assets as well. Would that be fair to say?

Bryon McGregor (CEO)

Well, it certainly wouldn't hurt.

Justin Dopierala (Analyst)

Absolutely. You highlighted the-

Bryon McGregor (CEO)

It doesn't hurt us either to have that asset on, right? I mean, these are unique assets, so-

Justin Dopierala (Analyst)

Exactly. Right.

Bryon McGregor (CEO)

We want to make sure that we maximize value for shareholders, whether it's whichever way it is.

Justin Dopierala (Analyst)

Okay. You, you highlighted the shutdown costs of Pekin. I was wondering if you could quantify the impact of Magic Valley being idled as well, as far as that Western gross margin?

Rob Olander (CFO)

We don't typically provide those levels of specifics, but if you recall, we chose to bring the plant down earlier this year when the crush margin environment was less favorable. And so in large, that offset our operating losses, which kinda also underscores the reason why we're incorporating this technology, which is to improve our profitability and our crush margins in more challenging market environments. So it's hard to quantify the lost opportunity cost in that case.

Justin Dopierala (Analyst)

Got it. And, I guess just my last question for you guys is as you noted in July, crush margins have doubled, so I was a little bit surprised by your guidance of positive adjusted EBITDA versus coming out and announcing or guiding towards positive net income. Are there any major Q3 uncapitalized costs, costs we should be aware of, or are you guys just being ultra-conservative?

Rob Olander (CFO)

No, I'll take that one. Justin, we try to be conservative but also transparent in, in what's going on. Our comments stem from July being behind us now and us being pleased with the financial results. As we stated on the, the call, as long as the crash margins remain strong, and we continue to produce at the levels we are, it should be a very favorable quarter.

Justin Dopierala (Analyst)

Okay, thank you.

Rob Olander (CFO)

But keep in mind, we, we operate in a, commodity markets, and so things ebb and flow.

Bryon McGregor (CEO)

There's some things that just, we're beyond that impact net income that you may or may not be able to control. As an example, your realized gains and losses and unrealized gains and losses in derivatives and the like, so this probably falls in the conservative camp.

Justin Dopierala (Analyst)

Okay, thank you.

Bryon McGregor (CEO)

Underpromise. Underpromise, overdeliver.

Justin Dopierala (Analyst)

All right. Hold you to it.

Bryon McGregor (CEO)

I know you will.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Bryon McGregor for any closing remarks.

Bryon McGregor (CEO)

Thank you, Kaylee. Thanks, everyone, for joining us today. In September, we hope to see you at the H.C. Wainwright Annual Conference. We appreciate your ongoing feedback and support. Have a good day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.