Alto Ingredients Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 7, 2023

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the Alto Ingredients Second 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 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.

Speaker 1

Thanks, Jamie, and thank you all for joining us today for Alto Ingredients' Q2 2023 results conference call. On the call today with me are President and CEO, Brian McGregor Director and Interim COO, Mike Candrus 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 Today's press release. A webcast replay will also be available at Alto Ingredients' website.

Speaker 1

Please note that the information On this call speaks of only as today, August 7. 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 2 of the presentation available online, which states that some of the comments in this presentation constitute forward looking statements and 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 Alta 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.

Speaker 1

Management uses these non GAAP measures to monitor the financial performance of operations 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 Brian will provide a review of our strategic plan and activities, Rob will comment on our financial results and then Brian will wrap up and open the call for Q and A. It is now my pleasure to introduce Mike Candrus. Mike, please go ahead.

Speaker 2

Thank you, Kirsten, and thank you, everyone, for joining us today. I'm pleased to announce, As issued in the press release this morning that Brian MacGregor 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, Brian and I have been working closely together for many years and even more so the last Brian is recognized for his strong leadership, strategic vision and outstanding management capabilities. Prior to Alto, Brian developed and managed capital financing for over 40 global industrial and infrastructure projects valued in excess of $12,000,000,000 Then as a critical player at Alto for over 15 years, He gained a deep understanding of our markets and business needs.

Speaker 2

The Board and I are confident he will lead the team to drive Alto Ingredients' Sustainable Profitability. Congratulations, Brian. Graub 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.

Speaker 2

Congratulations, Rob. Now I will hand the call to our President The CEO, Brian McBrayker. Thank you, Mike.

Speaker 3

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 we'll 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.

Speaker 3

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.

Speaker 3

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 and we will fulfill those capital needs as appropriate.

Speaker 3

Working diligently on our capital initiatives, we have made progress on each of them. It's important to note, however, 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, 1st 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.

Speaker 3

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 Q4 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 use have also risen.

Speaker 3

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 peak and campus operation yield approximately 700,000 metric tons of carbon a year, which we intend to monetize through carbon capture and sequestration. And as frequently Our campus is ideally located above the Mount Simon sandstone formation, one of the most significant carbon storage resources in the U.

Speaker 3

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 $30,000,000 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 jet fuel, Blue Ethanol, Synthetic Natural Gas and Sustainable Aviation Fuel or SAF.

Speaker 3

To further this initiative, we contracted the FEED study 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.

Speaker 3

As such, We do not expect to reveal our strategic partners until mid-twenty 24. 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, pyramid 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 Beacon Campus. It will also support our future energy needs for our capital projects.

Speaker 3

Additionally, 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 Beacon 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. As part of that pursuit during Q2, we achieved Ecovada's silver medal status at both ICP and Peacom indicating sustainability ratings in the 80th percentile amongst our peers.

Speaker 3

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.

Speaker 4

Thanks, Brian. Our gross profit increased significantly from Q1 2023 and our production capacity utilization increased 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. 2nd, Washington State Recently approved a new low carbon fuel standard that justifies the economics of shipping our Columbia ethanol production north, basically opening a new low carbon fuel market for the plant.

Speaker 4

For Q2 2023, We improved adjusted EBITDA to $16,000,000 Looking ahead, July's crush margins were strong, so 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 $8,000,000 in CapEx, bringing investment year to date to $18,000,000 We also purchased 400,000 shares of our common stock for $1,000,000 Since beginning the share repurchase campaign last September, we have bought back 1,600,000 shares for a total of $4,000,000 at an average overall price of approximately 2 point $0.50 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 $23,000,000 and our total loan borrowing availability was up to $114,000,000 to support business operations and growth initiatives.

Speaker 4

Borrowing availability includes $49,000,000 under our operating line of credit, $40,000,000 under our term loan facility and an option to request up to an additional $25,000,000 on that facility. With that, I'll turn the call back to Brian.

Speaker 3

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 Capital Investment and partnerships with strategic third party industrial enterprises 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 non core facilities including Aurora, Madera and Stockton and invest those proceeds in more productive and profitable alternatives.

Speaker 3

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 parts carries far greater intrinsic value than the individual pieces 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 $65,000,000 by the end of 2025 with the completion of our near term projects and by approximately $125,000,000 by the end of 2026 when our CCS, cogeneration and other long term initiatives are fully realized. Now I'd like to open this call for questions.

Speaker 3

Operator?

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Eric Stine from Craig Hallum. Please go ahead with your question.

Speaker 5

Hi, everyone.

Speaker 3

Hi, Eric.

Speaker 5

Hey. So you just came off $16,000,000 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 you are expecting Sequentially to be directionally higher. I mean, 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 fair way to think about it? Or are there other Factors that should drive our thoughts.

Speaker 3

It's a great question, Eric. I think, Well, from your mouth to God's ears, but I think that what I'd say as well as we're also coming into a harvest that with corn Prices rising, basis rising and there's still questions as to when the harvest will occur. That being said, we're seeing positive, as Rob said, Positive crush margins through the quarter and through actually right now through year end. But We would think it would be a disservice to comment on the Q4 to be sure. But again, we've been able to lock in some spreads.

Speaker 3

We're feeling good about the quarter and expect positive EBITDA margins for Q3.

Speaker 6

Okay.

Speaker 5

I'll just leave it there. Maybe just on carbon capture. So the $30,000,000 and I know that's definitely a longer term But

Speaker 3

just to

Speaker 5

be clear, that's $30,000,000 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. And 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 kind of got all options on the table?

Speaker 3

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 to the company, particularly since we're the one that's generating the CO2, right? The $30,000,000 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. And 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.

Speaker 3

But they are certainly contributory and beneficial to the bottom line, Right. As you drop those in, and 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, So that we can make sure that we get execution and get the best execution available.

Speaker 5

Okay, got it. Maybe last one for me. Just on high protein, I know the early on and you did a lot of diligence about it, but Co Pro Max, it was a newer technology. 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 versus your Maybe your original expectations?

Speaker 3

We had hoped To be able to accelerate through that, through the, if you will, the start up, clearly the implementation of the Co Pro Max technology is significant in regards to the profile of the facility. And so as You would have with any project where you were 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 the operations of that facility. We've seen good results Individually and all these both in corn oil and in protein, on par with what you're hearing in the open market. But the real challenge is being able to do it on an ongoing sustainable basis and be able to do it at capacity for all for the full operation of the facility. So we're working hard at that.

Speaker 3

We're making good progress, but it's taken longer than we expected. And but we remain optimistic and we expect to be able to do that, have that in full At full capacity by on or before year end or into Q4.

Operator

Okay, thanks. And our next question comes from Sameer Joshi from H. C. Wainwright. Please go ahead with your question.

Speaker 6

Thanks for taking my questions. Brian, congratulations and Rob too. And Mike, Nice to see you moving towards retirement and trying to enjoy life. So My first question is just following up on the CCS, Primary East and Natgas FEED studies. Do you have any estimate on this front end engineering for each of these?

Speaker 6

Is it going to be completed within the next few months? Or How is it progressing?

Speaker 3

Yes. So we expect to have first off, thanks Sameer. Appreciate your comments. We expect to have the feed study we 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 Gene study done, we've actually obtained as we mentioned in the prepared remarks, we've obtained all of our easements.

Speaker 3

And 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. And 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 carbon sequestration on a good firm foundation. And those we need to continue to progress and then we're working Concurrently on the carbon sequestration, you're making good progress there as well.

Speaker 6

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?

Speaker 3

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 4th And what would be the otherwise the 4th quarter exercise, I think that's partially because we've seen corn prices come off materially from where they were earlier In Q2. So that's all positive and we're getting good feedback and again we're really excited about the product. I would say though that it's 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.

Speaker 6

Understood. And on the ethanol sales, we understand the crush spreads 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?

Speaker 3

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. But yes, I think that it's all integral. I think that we've also seen generally some discipline in the market space with regards to just production values and production volumes. That's also been helpful and contributory to that.

Speaker 6

Okay. And just last one, I know you have access to borrowing capacity of $110,000,000 to $115,000,000 Do we know What is the cost of this capital? And is it related is it tied to LIBOR or any other Such a parameter?

Speaker 3

So it consists of Yes, I think we do. I mean, you have to figure out or we'd have to do the math, but I think as Rob laid out, you've got 3 sources, Ongoing cash from operations and retained cash and earnings. But 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%? Yes.

Speaker 3

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

Speaker 6

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

Speaker 3

Thank you.

Operator

Thank you. And 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.

Speaker 3

Thank you, Jamie. Thank you all again for joining us today. We'll be in New York City at the H. C. Wainwright Conference in September 11 to 12.

Speaker 3

Have a great day.

Operator

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

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Key Takeaways

  • The company completed a planned leadership transition with Brian McGregor named President and CEO and Rob Olander appointed CFO, reflecting strong succession planning and continuity.
  • In Q2 2023, Alto delivered net income, generated positive adjusted EBITDA of $16 million and achieved positive operating cash flow, driven by improved ethanol crush margins and specialty alcohol economics.
  • Major transformational projects are underway—including upgraded high-proof grain neutral spirits production, expanded corn oil and protein capacity, a new natural gas pipeline, cogeneration enhancements, primary yeast production and a planned carbon capture and sequestration (CCS) facility targeting over $30 million in annual EBITDA from tax incentives by end-2026.
  • Financial flexibility remains strong with $23 million in cash, $114 million of borrowing availability, $18 million in YTD capex, and $4 million spent on share repurchases as management prioritizes efficient capital deployment.
  • Alto earned a silver medal Ecovadis rating in Q2, underscoring its commitment to sustainability and positioning low-carbon ethanol and renewable natural gas as core growth areas.
A.I. generated. May contain errors.
Earnings Conference Call
Alto Ingredients Q2 2023
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