Alto Ingredients Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 6, 2023

Key Takeaways

  • Alto has successfully transformed from a supplier of low‐margin commodities to a provider of high‐margin specialty alcohols and essential ingredients, markedly improving its financial profile over the past three years.
  • In Q3 2023, the company delivered positive adjusted EBITDA of $4.7 million compared to a loss of $20.6 million in Q3 2022, though results were tempered by unscheduled downtime and elevated repair and maintenance costs that shifted production toward lower‐margin products.
  • Several short‐term capital projects—including expanded high‐quality alcohol production, increased corn storage capacity, and boiler replacements—are complete, while longer‐term initiatives (primary yeast, natural gas pipeline, cogeneration, biogas conversion, and carbon capture and sequestration) are being re-evaluated amid >70 % cost inflation to ensure sustainable long-term returns.
  • For 2024, specialty alcohol contracting is on track to exceed 2023 volumes at premiums to fuel‐grade ethanol, with a target of 90 million gallons aimed at capturing a larger share of the beverage‐grade market.
  • Progress on a dedicated carbon capture and sequestration pipeline and storage system—designed to reduce installation costs and risks—is expected to drive an incremental $65 million in annual adjusted EBITDA by mid-2026 and $125 million by year-end 2027 once all near- and long-term projects are in service.
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Earnings Conference Call
Alto Ingredients Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Day, and welcome to the Alto Ingredients Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Betsy, and thank you all for joining us today for the Alto Ingredients' 3rd quarter 2023 results Call. On the call today are President and CEO, Brian McGregor and CFO, Rob Olander. Alto Ingredients issued a press release after the market closed today providing the details of the company's financial results. The company has also prepared a presentation for Call. Please refer to the company's Safe Harbor statement on Slide 2 of the presentation available online, which states that some of the comments in this presentation and conference call Forward looking statements and considerations that involve risks and uncertainties.

Speaker 1

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 is disclosed in Altery 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.

Speaker 1

The company defines To support the company's review of non GAAP information, a reconciling table is included in today's press release. Then Brian will wrap up and open the call for Q and A. It's now my pleasure to introduce Brian McGregor. Please go ahead, sir.

Speaker 2

Thank you, Kirsten. Thank you all for joining us today. As a new CEO, I've spent the last 90 days on the road meeting with customers, investors And the dedicated teams of our facilities have been listening, learning and collaborating to reinforce our continued mission to profitably provide ingredients that make I'm proud of our talented team and our overall accomplishments to date. We continue to successfully transform our company From a supplier of low margin commodities to a provider of high margin differentiated specialty alcohols and essential ingredients in consumer, pharmaceutical, food, Beverage and Industrial Products. This strategic realignment has greatly improved our financial profile over the past 3 years.

Speaker 2

We continue to make good progress, although we are subject to intermittent operational and commodity market challenges. Q3 2023 results reflect a positive contribution from improved ethanol crush margins, particularly in September, As corn basis declined as the harvest commenced, however, unusually high unscheduled downtime lowered our anticipated production volumes and shifted our mix towards lower margin products. Combined with higher repair and maintenance costs, we did not generate the results we anticipated. Despite these operational challenges, we delivered positive adjusted EBITDA in Q3 2023 and a significant improvement over Q3 2022. We expect the extensive repairs and maintenance Work completed during the quarter to benefit future periods, uptime and reliability going forward.

Speaker 2

Rob will provide greater detail in a few minutes. First, I'll review our various initiatives. In early 2023, we outlined our revenue enhancing and cost reducing capital initiatives. Each project has a different timeline, return on investment and risk profile. As such, We've intentionally evaluated and prioritized funding needs and options for each project separately with the overarching goal of remaining fiscally responsible.

Speaker 2

We have already completed several of our short term projects. These include expanding our high quality alcohol products, Installing additional corn storage capacity and replacing boiler equipment at our PIKEN site along with other various upgrades in our plant systems. For our more capital intensive projects, we have engaged experts, 3rd party front end engineering and design firms or FEED firms to conduct deeper analysis on scope, timing and cost. These projects include primary yeast, Carbon Capture and Sequestration or CCS, natural gas pipeline, cogeneration and biogas conversion capabilities. Here are a few material updates.

Speaker 2

Beginning with our specialty alcohol sales, our 2024 contracting season is going well. We are on pace to exceed 2023 delivered gallons at premiums to fuel grade ethanol. As mentioned previously, our goal is to move Up the value chain and capture a larger share of the beverage grade market, where our high quality, low moisture and location differentiations Create competitive advantages. Regarding Magic Valley, we continue to line out this facility to achieve the performance guarantees of the installed high protein and Corn Oil Technology. While this process has taken longer than we anticipated, we remain resolute in our efforts to improve the consistency of the facility's product Output and optimize the plant's production.

Speaker 2

We continue to evaluate the rollout of the high protein and corn oil technology at our other locations. In the interim, we have achieved comparable improvements in corn oil yield at our peak and dry mill through process optimization unique to its ICM design. Regarding primary yeast, we have just received preliminary results from our FEED study. While the findings are promising, inflationary pressures And supply chain constraints have materially impacted the installation cost with increases of over 70% from our original estimate and extended our construction period from 18 months to 27 months. As a partial offset to this change, the anticipated operational costs have declined and the market price for primary yeast has improved.

Speaker 2

In short, we are evaluating this project and funding alternatives to make this unique opportunity a reality. Considering these results, we are Critically reviewing all our projects to better ensure that the construction costs reflect current market conditions. We remain fiscally vigilant given The current challenging capital market environment and are giving priority to those projects with sustainable long term profitability. As previously reported, we completed the installation of our new grain silo in the Q2 of 2023. We have seen the benefit of this expanded capacity and reduced costs for delivered corn and lower operating costs through more timely silo clean outs.

Speaker 2

We expect the added capacity to further benefit operations this winter. Regarding the natural gas pipeline and co We are now negotiating engineering procurement and construction contracts. We continue to make progress on our carbon capture and sequestration project. With our development partner, we are designing an Alto dedicated pipeline and sequestration system located within a relatively short distance of our facility, Materially reducing installation costs and decreasing external risks. Based on the current economic environment, the preliminary FEED study We are now targeting to increase annual adjusted EBITDA incrementally by over $65,000,000 by the middle of 2026 With the completion of our near term projects and by approximately $125,000,000 by year end 2027 when our yeast, CCS and other long term initiatives are fully realized.

Speaker 2

Before I turn the call to Rob, I'll mention that we remain steadfast in our sustainability efforts to be a good community steward while addressing our customers' current and future needs. This quarter, our Pekin facility earned Safe Food, Safe Feed, another third party product safety certification for our cornmeal and germ products, further differentiating our products and services. We plan to publish our sustainability report publicly by year end and look forward to providing key disclosures in this format on an annual basis. Now I'll turn the call to our CFO, Rob Bolander.

Speaker 3

Thanks, Brian. Due to strong crush margins, Our Q3 gross profit improved over the same period in 2022. However, there were several factors that substantially tempered results in the current period. Corn basis levels increased by $0.31 compared to Q2 2023, illustrating a sharp increase In addition, as Brian noted, we incurred significant increases in unexpected repair and maintenance costs. The associated downtime reduced anticipated production of $3,700,000 and shifted our product mix to more wet ingredients that carry lower margins.

Speaker 3

Year to date, our specialty alcohol sales were impacted by lower consumer demand. We are working with our customers to roll a portion of the 2023 contracted volume commitments into 2024. As such, Sales and profitability were lower than expected for the Q3. Additionally, we incurred higher feasibility and legal costs associated with our strategic capital projects. On the positive side, during the Q3, we received an additional $2,800,000 cash grant as the USDA closed out the biofuel producer program.

Speaker 3

Adjusted EBITDA was positive $4,700,000 for the 3rd quarter compared to negative $20,600,000 for the same period in 2022. Looking ahead to the 4th quarter, Although crush margins remain positive currently, we will refrain from providing projections for several reasons. First, During Q4, customer commitments are not solely based on market demand, rather they are reflective of buyers managing their fuel grade inventory balances with the goal of minimizing inventory levels by year end. 2nd, winter buying patterns tend to start the day after Thanksgiving and typically demonstrate a deep decline in volumes from Q3. 3rd, with an intention to take advantage of higher crush Margins in Q3, we postponed our planned winter facility outages until October.

Speaker 3

4th, as we fill our fixed Price specialty alcohol sales booked for the entirety of 2024, we are also building our hedge portfolio. The derivatives we use to preserve the margin on these sales don't qualify for hedge accounting treatment and the quarterly results We face unique factors in Q4 that cannot be forecasted with confidence. Therefore, it would be improperly speculative to guide investors towards a particular expectation in this regard. With the goal of improving our facilities for the long haul, in the second half of twenty twenty three, We have undertaken numerous repair and maintenance projects, which have better our position heading into 2024. Regarding liquidity, during the Q3 cash flow from operations was $23,000,000 Our quarterly capital spend was $7,000,000 bringing our year to date investment in our plants to $25,000,000 As of September 30, 2023, our cash balance was $26,000,000 and our total loan borrowing availability $118,000,000 to support business operations and growth initiatives.

Speaker 3

Our borrowing availability includes $53,000,000 under our operating line of credit, dollars 40,000,000 under our term loan facility and an option to request up to an additional $25,000,000 under the facility. With that, I'll turn the call back to Brian.

Speaker 2

Thank you, Rob. Throughout our strategic realignment, we have been committed to creating and pursuing opportunities to target long term profitability and maximize shareholder value. While the path has been and will continue to be dynamic, we remain agile and financially prudent. We'll continue to capitalize on the most promising and profitable opportunities. We remain enthusiastic about our prospects and confident in our long term growth strategy.

Speaker 2

Now I'd like to open the call to questions from our sell side analysts.

Operator

The first question today comes from Eric Stine with Craig Hallum, please go ahead.

Speaker 4

Yes, good afternoon, Brian and Rob. It's Aaron Smachal on for Eric. Thanks for taking the questions.

Speaker 2

Hi, Aaron.

Speaker 4

Hello. So maybe first for me, just on the 6 to 12 months kind of timeline, You called out yeast. I mean, are there other certain areas you can point to that are kind of driving that? And then just maybe speak to some of the confidence you have That we don't see extensions further than that. And then just on HyPro at Magic Valley, did that reach Full capacity in the quarter and just kind of some updated thoughts on the rollout to other plants there too, please?

Speaker 2

Sure. So that extension, we have 6 to 12 months, that's reflecting clearly the yeast project, but it also does include Extending out of the implementation of the HiPro installations. We want to make sure that we see that through And to a successful completion before we roll it out, there's lots of things that we're learning in the process. It has taken longer than we anticipated, but as we mentioned in the prepared remarks That we have seen success. The challenge is winding up that success across at full capacity.

Speaker 2

So we see good protein levels. We see good Corn oil levels, but being able to have those well aligned with the full capacity all at the same time on a sustainable basis has been a bit of a challenge. But we continue to chip away at it and make good progress. And so we remain optimistic about that. That said, we want to make sure that it's Fully achieved what it needs to achieve before we roll that out to other facilities.

Speaker 2

Did I cover your questions, Aaron?

Speaker 4

Yes. No, that was helpful. Thanks. And then maybe just on carbon capture, can you just provide a little more detail there Kind of just give us an update. Are you still thinking kind of similar contribution?

Speaker 4

And any changes to how you're kind of thinking Going to market and just any changes given legislation or kind of anything on the regulatory front?

Speaker 2

Well, clearly, it's dynamic, right? We're seeing lots of activity in the space or changes in activity. We feel Excited about the options is still ahead of us. And we're still in the we are working through And in negotiations for finalized documentation on the sequestration front, continuing to line out The funding for the installation of the compression, but all of the Our analysis so far continues to drive us towards this project. We think it's incredibly Transformative for us.

Speaker 2

It aligns with all the things that we do and the site is just a natural. So we're excited about that. We continue to move significantly forward. There is some we're we look forward to sharing more information on this, but there It would be prudent or imprudent at this time to share too much, but as we make significant progress that would be of the public nature, we'll gladly share that.

Speaker 4

Understood. Thanks. And then maybe last for me just on specialty alcohols. You kind of talked a little bit about some of the success you've had for contracting to date. You also kind of talked about some maybe rolling over into 2024.

Speaker 4

How much as we look at kind of Spot versus contracted, any ideas on what that rough split kind of looks like as we move forward for next year?

Speaker 2

So I think for Q3 of this year, I think we're running we're showing about 58 or 70. What's the number? We're tracking closer to

Speaker 3

85, so we're for 2023 with the fall off in demand, but we're a good portion of the way of contracting for 2024 and we are on track to achieve the 90,000,000 gallons for 2024. And some of the volume and consumer demand that's fallen

Speaker 4

Understood. Thanks for taking the questions. I'll turn it over.

Speaker 3

Thanks, Aaron. Thanks, Aaron.

Operator

The next question comes from Amit Dayal with H. C. Wainwright. Please go ahead.

Speaker 5

Thank you, guys. Good afternoon. Brian, any additional color on what caused some of the extended downtime? Was it Work that was going on at the Pekin facility or some other locations?

Speaker 2

So you may recall that We normally schedule the wet mill outage somewhere between 18 24 months. And because it is such a significant shutdown, it's not a shut it down for 2 days, We're well clean out things like that. It's significant. It constitutes somewhere between a week 2 weeks. And so while we're down, We will usually spend a significant amount of capital to make repairs and improvements to the facility while it slots down.

Speaker 2

We chose as we started when we had our last earnings call, we talked about Our expectations we were seeing we normally scheduled it in August because we have seen over the last couple of years That corn supply has dwindled and we've seen such high basis and overall corn prices In relation to ethanol prices that it made sense to bring it down during that time to minimize losses and to take advantage of that opportunity with margins where they were this year, particularly around crush And some additional supply of corn that was available in the local markets, we chose to instead postpone the wet mill into Q1 of next year or April of next year. That being said, there was still some work that needed to be done and there was Some capital or capital expenditures for equipment and materials that needed to be spent prior to the shutdown that will carry into That was incurred and expensed in Q3 that carry into the early next year that will be used in that During that shutdown. So you take that plus then we ended up Some water balance issues, some dryer issues. And as Rob said, the combination of those three things, the The increased repair and maintenance, reduced production and reduced sales and then the quality of sales were significantly impacted, resulting in a significant impact to what would otherwise have been a much better quarter.

Speaker 2

That said, as I mentioned, these repairs were timely and we would expect that To significantly benefit the plants going forward for the wet mill particularly going forward. But we saw impacts elsewhere in other plants probably not as notable, But I wouldn't call it a perfect storm, but we seem to have experienced a number of operational challenges across all three plants during the quarter With temperatures and other types of normal events that occur in the summer period.

Speaker 5

Got it. Understood. Thank you for that, Brian. And then in the press release and in your commentary, you highlight potential funding needs. Just to clarify, are these for projects that you walked us through in your commentary?

Speaker 5

Or Do we potentially also have working capital type funding needs that need to be addressed?

Speaker 2

I mean, I'll comment generally and then Rob will fill in. But the expectation is no. I mean, we have more than sufficient working capital needs for The company and for its operations, we will need additional capital to bring some of these projects to fruition, particularly as an example the East Project is significantly more than what we had originally anticipated, but we also have a number of interested parties and vendors and the like that we're working with to We'll bring that to fruition. Okay. No, no, I agree.

Speaker 5

Got it. Thank you for that. Just one last one, I guess, for me. On the 3rd party renewable fuel gallons, It looks like year over year decline on that front. Is that just a market situation or is that something a bit more, I guess, permanent in terms of how you are focused on bringing sort of other Products and improvements to the overall business?

Speaker 3

Yes, I'll take that, Amit. Yes, 3rd party volumes declined year over year. If you recall, we did sell our California plants And we also no longer market provide marketing services for the 2 other non owned Ethanol Plants. And I'll also comment that in Q3, we also had a bit of a timing issue On some of the 3rd party volumes, that were lower due to product in transit that did qualify to be recognized Sales in Q3, but will be recognized in Q4.

Speaker 5

Okay, understood. All right. I'll

Operator

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

Speaker 2

Thank you, Betsy. Thank you all again for joining us today. We hope to see you in New York in November. Have a nice day.

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