Alto Ingredients Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2023

Key Takeaways

  • Despite a Q1 net loss of $13.5 M and negative adjusted EBITDA of $4.5 M, crush margins improved sequentially and March delivered positive margins, positioning the company for positive adjusted EBITDA in Q2.
  • Near-term capital projects—including distillation upgrades, corn oil and high-protein expansions, an 850,000-bushel silo and a natural gas pipeline—are expected to add over $65 M of annualized EBITDA by end 2025.
  • Magic Valley plant has resumed operations and is set to achieve full production of premium corn oil and protein by Q2 end, targeting approximately $9 M of incremental annual EBITDA.
  • Long-term initiatives such as primary yeast production, carbon capture & sequestration, and cogeneration aim to boost annualized EBITDA to $125 M by end 2026.
  • The company maintains strong liquidity—roughly $180 M in committed and uncommitted financing—and continues share repurchases, with no equity raise planned despite current market valuation.
AI Generated. May Contain Errors.
Earnings Conference Call
Alto Ingredients Q1 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Day, and welcome to the Alto Ingredients First 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 Please note this event is being recorded. I would now like to turn the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.

Speaker 1

Thank you, Betsy, and thank you all for joining us today for the Alto Ingredients First Quarter 2023 Results Conference Call. On the call today are Mike Candrus, CEO and Brian McGregor, CFO. Altra Ingredients issued a press release after the market closed today, providing details on 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 May 15, the details of which are included in today's press release.

Speaker 1

A webcast replay will be available on the website as well. Please note that the information on this call speaks as of today, May 8. You are advised that any time sensitive information may no longer be accurate the time of any replay. Please refer to the company's Safe Harbor statement on Slide 2, the presentation available online, which states that some of the comments in the presentation constitute to forward looking statements and considerations that involve a number of risks and uncertainties. The actual future results Other factors previously and from time to time disclosed in Alto Ingredients' filings with the SEC.

Speaker 1

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 the operations and believes these measures will assist investors in or loss before interest expense, interest income, provision for income taxes, asset impairments, loss of extinguishment of Debt, acquisition related expense, fair value adjustments and depreciation and amortization expense. To support the company's review of any Non GAAP information reconciling table was included in today's press release. On the call today are Mike will provide a review of the strategic plan and activities, and Brian will comment on our financial results.

Speaker 1

Then Mike will wrap up and open the call for questions. It's now my pleasure to introduce Mike Candra, CEO. Please go ahead, sir.

Speaker 2

Thank you, Kirsten, and thank you, everyone, for joining us today to review the Q1 of 2023. Since our call in March, we have continued to make good progress on our transformative capital projects, which will drive our near and long term EBITDA expansion goals. I will discuss this further in a minute. We are also pleased with the current market improvements, which are positively impacting our business. Crush margins have been improving since December.

Speaker 2

Notably, each month this year has improved sequentially. March 2023 ended with regional natural gas prices, Corn basis and ethanol prices greatly improved over December of 2022, all of which benefited our business. For the month of March, we generated positive bottom line financial results. Should the strong crush margins continue, We would expect positive adjusted EBITDA for the Q2 of 2023. Brian will review the financial results in detail shortly.

Speaker 2

Even though we have positive crush margins today, we don't control commodity pricing. This This is exactly why we are implementing a series of near and long term projects aimed at reducing our exposure to those volatile markets. We continue to transform Alto Ingredients by further diversifying our products and optimizing operations to expand margins and increase profitability. We are excited about our capital improvement initiatives and their return profiles. With the completion of our near term projects, we expect to increase annualized EBITDA by over $65,000,000 by the end of 2025, an increase to 125,000,000 dollars annually by the end of 2026 when our carbon capture and sequestration, cogeneration and other initiatives are fully realized.

Speaker 2

Regarding diversification, our strategy is to pursue multiple paths. We are increasing production of our most differentiated and highest quality products. Our near term focus includes grain neutral spirits, Corn oil and high protein and our longer term plan includes primary yeast as well as carbon capture and sequestration. Regarding costs, our near term initiatives are to improve plant efficiency, reliability and where appropriate, Redundancy by adding corn storage and installing our own natural gas pipeline. Our long term vision includes upgrading equipment, converting our biogas to renewable natural gas and building energy cogeneration capabilities at our Pekin campus.

Speaker 2

We are confident in our ability to fund our near term capital projects through our term loan facility, Current working capital resources and expected cash generated from operating activities. As far as funding our longer term projects, We continue to hold productive discussions with strategic partners and we will assess our capital needs at that time. Let me provide updates on our capital projects. First, I'll review our high quality alcohol strategy. As discussed previously, we completed the upgrade of our distillation system at our peap and wet mill to produce the highest quality 190 proof and low moisture 200 crew GNS products on the market.

Speaker 2

We also added Breakbulk and distribution capabilities, enabling tote and drum packaging and distribution through the acquisition of the Eagle Alcohol. Recently, we have added new beverage customers and we are working to place our GNS product on a spot purchase basis for the remainder of 2023. More importantly, this fall, we expect to place additional volumes with new and existing customers during our annual contracting period for 2024. Our valuable certifications will be advantageous as we work towards qualifications by various customers. Beginning in 2024, we estimate these products Regarding our expanded production of corn oil and high protein, as previously discussed, in December, we moderated production At our Columbia plant, we temporarily idled the Magic Valley facility to minimize the impact We have now resumed production at our Magic Valley facility and completed all material installations of the Co Pro Max Corn oil and high protein system.

Speaker 2

We are currently aligning all the new and existing operating systems at the plant to ensure Optimal efficiency. We plan to achieve full production of both higher corn oil volumes and higher quality Drive protein at the facility by the end of the second quarter. We anticipate sales for these products at increased values to begin in the Q3 of 2023. We estimate corn oil and high quality protein will combine to contribute approximately $9,000,000 of EBITDA annually. Beginning in late 2023, Management plans to start a staged rollout of the corn oil technology installation at our other 3 dry mills.

Speaker 2

Although each facility is a slightly different size, on average, we expect to produce similar financial results to Magic Valley. When fully installed, we estimate the corn oil installations at the 3 other plants in aggregate will contribute over $14,000,000 and EBITDA annually. After the high protein system is fully and successfully operational at Magic Valley, we will evaluate and Anticipate rolling out the high protein technology at our other dry mills with similar expected economics. We estimate the high protein installations at our other three plants in aggregate will contribute over $13,000,000 in EBITDA or over $27,000,000 annually in the aggregate with corn oil expansion. Regarding longer term initiatives for high margin offerings.

Speaker 2

We plan to expand into primary yeast production. Having completed successful Product trials, we have selected a highly qualified third party engineering group to complete our front end engineering and design for FEED We expect the study to be completed in Q3. This project would extend the past upgrades made to our yeast operations. We estimate the primary yeast product will contribute approximately $19,000,000 of EBITDA in the first 12 months and has the potential to increase to over $25,000,000 annually thereafter. We are targeting beginning construction in early 2024 and completing in the summer of 2025.

Speaker 2

As you know, we also have a significant opportunity in carbon capture and sequestration. As previously discussed, we produce Approximately 700,000 metric tons of carbon a year at our Pekin campus. Our advanced negotiations for this important and game changing Project proceed in earnest. We have selected a 3rd party feed firm to determine capture, compression and engineering design. We expect this study to be completed in Q3.

Speaker 2

We are also finalizing the selection of a development partner to provide turnkey transportation, sequestration and monitoring services. Our goal is to have CCS operational in 2026. As we discussed last quarter, based solely on a conservative assumption of annual Carbon production at $85 per metric ton, reflecting the 45Q incentive established Under the Inflation Reduction Act, we believe we can generate over $30,000,000 annually in EBITDA. To be clear, this is after operating at sequestration cost and does not include any of the substantial economic benefits of the environmental attributes associated with low carbon ethanol. On to a review of our strategies to improve plant efficiency, Reliability and capacity.

Speaker 2

Regarding additional corn storage at our Pekin site, the 850,000 Bushell Silo is now fully operational and contributing to improved corn procurement costs, plant reliability and plant operating costs to Pecan Campus. We estimate the silo to conservatively contribute over $2,000,000 to EBITDA annually. Regarding our new natural gas pipeline, we completed the 3rd party FEED study and are working on the initial routing steps, which enables the project to advance to definitive land agreements and the construction permit application process. Community interaction has been initiated around the pipeline and initial feedback has been positive. We are planning our new pipeline to bypass our utility with the goal of optimizing procurement, usage and expense, which will contribute to our sustainability efforts.

Speaker 2

When fully operational, the pipeline will reduce our energy cost by approximately $3,000,000 annually. Upon completion, the new gas pipeline will create the opportunity for us to convert and monetize our current biogas Waste stream into Renewable Natural Gas or RNG. Based on our current output, we estimate we could produce and sell RNG for more than $3,000,000 in EBITDA annually. Regarding cogeneration of Pekin, We completed our FEED study with a 3rd party expert. The design is intended to address our current needs, Support the increased energy requirements for both our primary East and CCS projects and offset grid electrical power consumption.

Speaker 2

In addition to supporting these projects and based on current energy prices, we estimate that Cogeneration will contribute Approximately $15,000,000 in EBITDA annually. Renewable products are part of the Alto Ingredients DNA and producing them safely is one of our core tenants. Each of our capital initiatives advances and addresses sustainability. While these and our continual process improvements are labeled as ESG, our decisions to ensure safety, quality and sustainability or simply good business. I'll review our actions over the past year.

Speaker 2

Our work with NASDAQ On ESG included a materiality survey to determine areas of focus and we have completed all the initial road map action items. We have strengthened and communicated our environmental health, safety and security policy and objectives, added consistent standards and details to our code of ethics and supplier code of conduct implemented a supplier transparency program With components such as supplier scorecards and on-site auditing and in some cases partnered with CDEX, A leading data platform with over 74,000 members to improve our sustainability performance and to ensure that we are ethically sourcing our goods and services. Looking ahead, we have launched a 3 year employee engagement program with Gallup to identify areas of opportunity and facilitate communication at all levels, and we completed our first engagement survey in December 2022. This employee engagement is more than a survey. It's a comprehensive program with tools and training to achieve our goals for supporting one of our most important assets, our employees.

Speaker 2

Diversity has been a focus for recruiting internally and at the Board level, and we will include further metrics in our mid-twenty 23 sustainability reporting. We have completed our Scope 1 and 2 greenhouse gas emissions inventory and have third party verification For both 2021 2022 at all production facilities. This information combined with our key projects such as carbon capture, Improving energy efficiencies and cogeneration and boiler upgrades and maximizing biogas utilization will lead us to set and achieve carbon reduction targets and help us do our part to meet sustainable development goals. We look forward to sharing our ESG progress with everyone midyear. With that, Brian, over to you for a review of the financials.

Speaker 3

Thank you, Mike. I'll provide additional color around our Q1 2023 results. I'd like to reemphasize that our business can For instance, reductions in ethanol usage during the 4th and 1st quarters or winter period With increased driving activity in spring and summer periods, it is normal demand for ethanol increase and margins improve. Therefore, the simple annualization of a quarter will not provide an accurate projection for a quarter. While January proved challenging But better than December, we benefited from significant sequential ethanol margin improvement in February March.

Speaker 3

As a result, Our Q1 2023 gross loss of $3,000,000 improved greatly over Q4 2022. For Q1 2023, net loss available to common stockholders was $13,500,000 and adjusted EBITDA was negative $4,500,000 In Q2 2023, with the continued improvement in margins to date and as Mike mentioned, assuming they remain strong, we can expect to generate positive adjusted EBITDA. In addition, the refuel outlook is improved as E15 was recently approved by the EPA for summer blending. Our cash balance was $21,200,000 at the end of March compared to $36,500,000 at the end of 2022. The change in cash represents $10,000,000 invested in our projects, dollars 3,500,000 for Crude Eagle earn out payments and $1,700,000 is for 860,000 shares.

Speaker 3

Given Alto's significantly undervalued market price, These repurchases as a beneficial return on investment and effective use of current capital resources. Our liquidity remains strong and more than sufficient for our immediate needs. Our March 31 working Capital was $118,000,000 compared to $121,000,000 at December 31, 2022. We have $40,000,000 in unutilized committed borrowing and $25,000,000 in uncommitted funds under our term loan facility to support our immediate capital improvement plans. In aggregate, these resources represent more than $180,000,000 to support our business operations and growth initiatives.

Speaker 3

While we have no intention of conducting an equity raise, currently or at these irrational prices, our shelf This summer and as part of good long term financial planning, we intend to refresh it. While it is difficult to provide guidance for the full year of 2023, We expect to benefit from approximately $10,000,000 of EBITDA generated from the capital projects we have already completed or will complete this year. In addition, we filed from our term loan and the associated accelerated investment in the further diversification of our specialty alcohol and essential ingredient products. As previously stated, we expect to almost double our annualized EBITDA by year end 2025 compared to our average EBITDA over the past 3 years and nearly double it again when our other projects are fully operational by year end 2026. We look forward over the coming quarters to discuss the progress we've made.

Speaker 3

With that, I'll turn the call back to Mike.

Speaker 2

Thanks, Brian. In summary, we are excited about our revenue diversification plans, margin Engine and plant optimization initiatives. We are executing as planned and pleased with our progress, particularly in the Q1. Further, the increasingly positive renewable ethanol crush margins are encouraging. We are optimistic and expect positive adjusted EBITDA for the summer based on current crush margins.

Speaker 2

Regarding our near term which we expect will achieve roughly $65,000,000 of additional annualized EBITDA by the end of 'twenty five And with our longer term initiatives, including CCS and cogeneration, we expect to increase annualized EBITDA to approximately 125,000,000,000 by the end of 2026. We look forward to sharing our progress. With that, I'd like to open the call for questions. Operator?

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question today It comes from Amit Dayal with H. C. Wainwright.

Operator

Please go ahead.

Speaker 4

Thank you. Good afternoon, everyone. Just quickly guys on the 2Q outlook with respect to the positive margins you're seeing, are you expecting net profit for the quarter or Positive adjusted EBITDA for the quarter?

Speaker 3

Good question, Amit. Right now, we're comfortable giving positive EBITDA. Yes. Our hope is to also be able to generate positive, but it feels very early still. I know we used to give I mean, no longer guidance, but it's a world with lots of facts that continue to change.

Speaker 3

So we're comfortable with a positive number for right now at least.

Speaker 4

Understood. No, I appreciate that. Thank you. And then, our specialty alcohol sales at this point mostly in the spot market, Brian, or is there any contracted volume that is also coming into play for you?

Speaker 3

So As we mentioned last quarter, we entered the year with about $90,000,000 of value or 90,000,000 gallons of contracted volume. The comments that Mike made with regards to gallons sold in the spot market represents the highest quality, 190 proof or 200 proof the dry product that's coming off of the improvements that we completed in the Q1 of this year.

Speaker 2

Yes, I could have been a lot more or a little more clear about that. That was really referring to we missed the contracting cycle on GNS Coming out of 2022, and so now that the system is up and running and producing wonderful, We are looking at the spot market for the remainder of this year, but fully intend to hit the contracting cycle for 2024 when we get to the fall.

Speaker 4

Understood. And just one last one for me. This EBITDA improvements you're expecting in 2023, has any of that materialized in 1Q? Or Are we expecting those to come through in the second half of the year?

Speaker 3

You mean the $10,000,000 that I mentioned previously?

Speaker 4

Yes, yes, yes.

Speaker 3

Yes, think of it as being spread out over the years. So yes, we're experiencing some of that. Some of that was not so you'll recall when we did the 10,000,000 Earlier in the quarter that we included it assumed we're restarting the Magic Valley facility in Q1. So, we're still comfortable with those numbers and but it would expect the balance of those to show up in the second half of the year.

Speaker 5

Okay. Thank you, guys. That's all I have.

Speaker 2

Thank you.

Operator

The next question comes from Eric Stine with Craig Hallum. Please go ahead.

Speaker 6

Hi, Mike. Hi, Brian.

Speaker 2

Hi, Eric. Hi, Eric.

Speaker 6

Hey, so Connect has confirmed just to follow-up on the previous question. So You talked about the $10,000,000 in incremental, I guess, second half of 'twenty three. And it might have been your phone or my phone, but it kind of cut out talking about, I'm not sure if you were talking about potentially how you see this rolling out $24,000,000 and then into 25,000,000 and I guess 65,000,000 approximately 65,000,000 incremental. At that point, the way it sounded to me and again, I just want to confirm this that Your typical 3 year average EBITDA has been about $30,000,000 Are you anticipating that you would Double that and that's kind of a soft outlook for 2024?

Speaker 5

So

Speaker 3

The way that we've been talking about this is That these projects are going to be adding incremental benefits, right, to whatever we would be producing on a run rate basis. So if $30,000,000 is a good base, that's something right, which includes both a good some really good quarters and some really bad 1st, yes, then it would be incrementally on top of that. So you'd be assuming that you're on run rate for $30,000,000 this year, Yes, additional $4,000,000 or $10,000,000 on that, so you bid $40,000,000 And then you'd have incremental additions in 2024 on top of that, which would include Gallons sold and G and S products sold for the full year, so you get the benefits of that. We would expect as well to see full run rates for the Magic Valley facilities and then incrementally over time you'd be adding additional corn oil Capacity and rolling out, as Mike mentioned, it's a kind of staggered rollout of the protein and corn oil projects In addition to then rolling out renewable natural gas, the pack tax pipeline benefits, Sorry, yeast and then of course in the bigger cogeneration and carbon sequestration. Included in that $10,000,000 of course is the benefits and the savings that we get from now having corn oil I'm sorry, from having corn storage, Additional cord storage at the facility.

Speaker 6

Yes. Okay. Got it. All right. So it sounds like that I guess I did Understand that correctly.

Speaker 6

So that's great. Maybe just turning to Magic Valley, I mean, can you just talk about kind of the process that you've completed it? I mean, how do you anticipate that rolling out? Is it a general ramp up and it's something where you get to bring it up, bring it back down, Make sure it's running correctly or do you anticipate that it's more of a smooth linear ramp up? And Maybe just some thoughts on what type of yields you're expecting either early on or as it plays out a little longer term?

Speaker 2

Yes. So the plant is back up and this is a fully integrated system within the plant. It's not just a bolt on to the upside. So what we're doing right now, Eric, is we're fine tuning All the different controls and mechanisms to make sure that the operators are trained, make sure everybody is Up to speed, we have Harvest technology on-site and we're dialing in the system. We expect to have that Within weeks dialed in and operating and then you go through a process on the high protein.

Speaker 2

We've already worked with Several of the people in the surrounding area in terms of acceptance of the protein product, which as we indicated is over 50%. And we expect to continue that sampling and working with various Folks in the area to get that product placed. So it will be a little bit of a ramp up as we go forward, So we fully expect by the end of this quarter, we'll be the system will be up and running producing Product corn oil, by the way, should come up right away. There's such a strong demand for corn oil that as soon as the system is Fully up and running. We don't anticipate having to do a lot of work to grow that market.

Speaker 2

So it's mainly on the protein side. Again, it will be a ramp up through Q3 and then we expect it to be fully integrated for Q4 and beyond.

Speaker 6

Got it. Okay. Maybe last one for me. Just on the carbon capture, I know that when you look out A lot of the cost, does that contemplate having a partner where you're potentially splitting the economics or would that be a number That's kind of a all in number for you.

Speaker 3

It's Great question, Eric. It could, but it may not require it as well. We're exploring all the various options. We're certainly in discussions With key relationships, talking about that, seeing best way to optimize the value for shareholders and for the company, right? So that's part of the negotiations and discussions both with the downstream parties, right, as well as independent parties And then talking with other and there's crossover as well as you start thinking about the environmental attributes associated with that.

Speaker 3

So there's a lot of demand for that product. And so part of the discussions is, of course, is lining that out and making sure that you have a good source of long time Customers that want that product. So it's a fairly complex and fully nuanced Opportunity, but clearly a significant one. And there's a lot

Speaker 6

of attention, a lot

Speaker 3

of resources committed to this at this point.

Speaker 6

Yes. And I guess that's why it would be 2026. Okay. I think that's it for me. Thank you.

Speaker 6

Thanks,

Operator

The next question comes from David Bastian with Kingdom Capital Advisors. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my question. First, I was wondering about the Essential Ingredients margins this quarter. It seemed like you guys got really good realizations I was curious what the key drivers were of that number being up?

Speaker 3

Yes. Actually, I think part of that was David is that We've clearly a big driver for us in that Essential Ingredients market is how well the wet mill is operating. So We saw really good results. We've been able to get yields up. If you go back over the last couple of years, we've changed our Larry, better term our cocktail, the enzymes and the requirements to meet certain requirements, whether it's at the wet mill or at the ICP distillery to be able to accommodate certain customers and the like, but that has not allowed us to get the yield that we otherwise would like.

Speaker 3

So we've made some changes to that and we're seeing a lot better yield out of that. So We've also had better alignment of our dryers to be able to maximize the value of our various co product or our various Essential Ingredients, I must have put a dollar in the swear jar there. But getting a lot better value for those various Corn values that you get out of the wet mill as well. Mike, anything else that you think?

Speaker 2

No, I mean, David, that's an absolute critical Paths for us to take the with the web mill, you have to get the value out of the essential ingredients. And as Brian mentioned, we've made Great progress in that regard.

Speaker 5

Got it. Thanks. That's helpful. Question on the liquidity. You mentioned the remaining draws on your term loan.

Speaker 5

I didn't see the Kinergy line of credit listed with

Speaker 3

your Liquidity levers, is there a reason for that? No, I think we tried to capture that in the prepared remarks. So that would be the assumption is Well, first off, on the balance sheet that the Kinergy line shows up under the long term debt. What we did mention was That we have excess of $40,000,000 in availability as of the month end of the quarter or into Q1. Okay, Yes.

Speaker 3

And so that was the $40,000,000 plus the $40,000,000 that's available for was it $40,000,000 or $60,000,000 40, so 40 plus the additional 40 that's available that's committed under the Orion facility, plus an additional 25 that's uncommitted but available. And then any improvements in operating income and And improvements in the working capital

Speaker 5

availability. Okay. That's helpful.

Speaker 3

That gets you to the 180

Speaker 5

Okay. And then on the working capital side, you listed that as a source of liquidity. How much do you think reasonably you'd be able to draw

Speaker 3

down on working capital if needed? Yes. So Yes. So another way to think about it is the working capital reflects it's another way to how I put this. It's a different perspective on the same question you had before, which is how much excess availability, right?

Speaker 3

But for the fact that You only get certain advance rates under the line of credit from Wells Fargo. So you may that difference is really just The amount of additional collateral they want on top of their existing borrowing base and excess availability. That makes sense.

Speaker 5

Got it. Okay. Thank you. That's all for me. Thanks.

Speaker 2

Thanks, David.

Operator

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

Speaker 2

Thank you again for joining us today and for your continued support. We'll be in New York City conducting a non deal roadshow with H. C. Wainwright later this month. Please let your Investor Relations team know if you would like to arrange a meeting.

Speaker 2

And with that, I'd like everyone to have a good day. Thank you.

Operator

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

Powered by Quartr