Alto Ingredients Q3 2024 Earnings Call Transcript

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November 6, 2024

Key Takeaways

  • Q3 2024 consolidated gross profit improved to $6.0 million and adjusted EBITDA was $12.2 million as the Pekin campus boosted production capabilities and specialty alcohol volumes to 42% of sales, up 7 percentage points year-over-year.
  • Finalized a definitive CO₂ transportation and sequestration agreement with Vault to inject and store biogenic CO₂ from the Pekin campus in Illinois, moving the company closer to lowering its carbon footprint and monetizing its emissions.
  • Despite successful upgrades at Magic Valley, rising regional corn basis and declining protein and corn oil prices have led to margin compression, prompting the company to engage Guggenheim Securities on strategic alternatives and potentially idle the plant before Q4 ends.
  • Ethanol prices declined and inventories rose in Q3 amid weakening domestic demand and lower carbon credit prices, while elevated transportation costs from higher U.S. corn export demand are pressuring western operations versus Midwest producers.
  • Net sales fell to $252 million from $318 million year-over-year resulting in a $2.4 million net loss, but operational cash flow of $18.6 million and reduced net loss compared to Q3 2023 reflect improved financial resilience.
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Earnings Conference Call
Alto Ingredients Q3 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and welcome to the Alto Ingredients, Inc. Third Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Kirsten Chapman of Alliance Advisors, Investor Relations. Please go ahead.

Speaker 1

Thank you, Megan, and thank you all for joining us today for the Alto Ingredion's Q3 2024 results conference 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 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 November 13, the details of which are included in today's press release.

Speaker 1

A webcast replay will also be available at Alto Ingredients' website. Please note that the information on this call speaks only as of today, November 6. You're advised that any time sensitive information may no longer be accurate at the time of 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 on today's call constitute forward looking statements and considerations that involve risks and uncertainties. The actual future results of Alto Ingredients could differ materially from those statements.

Speaker 1

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 disclosing the 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 or income, provisions for income taxes, asset impairment, unrealized derivatives, gains and losses, acquisition related expense and depreciation and amortization expense.

Speaker 1

To support the company's review of non GAAP information, a reconciling table was included in today's press release. On today's call, Brian will provide a review of our strategic plan and activity. Rob will comment on our financial results. Then Brian will wrap up and open the call for Q and A. It's now my pleasure to introduce Brian MacGregor.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, Kirsten. Thank you all for joining us today. In Q3 2024, our Pekin campus increased its production capabilities and uptime compared to the prior year quarter, improving its profitability despite fluctuation and fluctuating market conditions. As a result, Q3 2024 consolidated gross profit improved to $6,000,000 and adjusted EBITDA was $12,200,000 Rob will discuss our financial results in greater detail in a moment. First, I'd like to comment on today's TSA announcement.

Speaker 2

We've taken a significant step forward in our commitment to sustainability by finalizing a definitive CO2 transportation and sequestration agreement with Vault. Under the terms of the agreement, Vault will handle the transportation injection and sequestration of CO2 from our Pekin campus into the Mount Simon Sandstone formation in Illinois. This partnership marks a critical milestone on our journey towards a more sustainable and prosperous future. While we await EPA submission and approval, address financing and source equipment, this agreement brings us closer to achieving our goals of lowering our carbon footprint and monetizing the value of the biogenic CO2 we produce at our Pekin Campus. Regarding our operations, in Q3, our Pekin Campus wet mill increased productivity by its highest level since 2020, reflecting in part the results of our successful biennial repairs and maintenance outage in Q2.

Speaker 2

This translated into greater production of specialty alcohols, reaching 42% of total peak and sales volume, 7 percentage points higher than the same period last year. We remain on track to sell 90,000,000 gallons of specialty alcohols in 2024 and expect to match this volume in 2025. We continue to modernize our equipment and facilities to improve reliability, lower our operational costs and reduce our carbon footprint. In addition to assigning the TSA, we are currently building a second alcohol loading dock at our Pekin campus. Our goal with this project is to improve river logistics by expediting the shipping costs, adding redundancy and expanding our capabilities to accommodate a wider array of barges.

Speaker 2

We expect a synergistic effect and increased overall loading efficiencies. The planned cost of this second dock is less than $3,000,000 and is scheduled for completion in 2025. At Magic Valley, we completed upgrades to harvesting technology system to capture high protein and corn oil products and restart the facility to prove out the system and to benefit from positive crush margins at the time. In October, our facility consistently achieved average ethanol production rates at full capacity. Our protein content reached 50% or greater and we've been able to expand our corn oil yields.

Speaker 2

We commend the yeoman efforts of our operational team along with the technical support provided by Soilnet. This restart has informed us of the technology systems capabilities as we consider deployment at our other dry mills in the future. I'll have more to say on Magic Valley in a few minutes. Turning to a market review. Q3 began with solid ethanol crush margins supported by strong exports.

Speaker 2

Domestic demand began to weaken with a decline in miles driven attributable in part to weather related events. As ethanol production remained relatively high, it has outpaced demand resulting in higher ethanol inventory levels and lower ethanol prices. In Q3, carbon prices were approximately 80% lower in Oregon and Washington and 20% lower in California compared to the same period last year. While carbon prices remained low in October, we began to see some recovery. In Q4, we expect corn prices to remain low reflecting a good harvest resulting in a strong carryout into 2025 which is a good thing.

Speaker 2

However, with corn prices lower in the U. S. Compared to international prices demand for U. S. Corn exports will likely increase straining logistics and driving up transportation costs.

Speaker 2

Also, when corn prices are low, corn suppliers typically require prices to at least cover their costs, driving up corn basis. This is one reason why we expanded our corn storage capacity at Pekin and are considering increasing storage even further. While higher transportation costs impact all ethanol producers, they have a more substantial impact on our Western operations. In short, higher transportation costs significantly increase the price for delivered corn at our 2 Western plants compared to Midwest producers that have access to local corn supplies and cheaper basis. Although the improvements we've made at our Magic Valley facility have delivered economic benefits, as we mentioned in our press release on October 15, The recent increases in regional corn basis and declining protein and corn oil market prices have resulted in overall margin compression, outweighing the economic benefits of our plant improvements.

Speaker 2

To address these challenges, we continue to pursue opportunities to maximize the Western plant's strengths and advantages. We've engaged Guggenheim Securities to actively explore our alternatives to monetize or optimize these assets including through potential partnerships. Further, we will continue to explore operational opportunities and assess market trends. Unless there are notable improvements in economics at our Magic Valley facility, we plan to idle the plant before the end of Q4 and believe that will have a positive impact on the company's financial results. Finally, while our Columbia facility is also experiencing margin compression, the combination of lower transportation costs, premiums earned on lower carbon ethanol and revenues generated from our CO2 sales make Colombia more economically resilient than Magic Valley.

Speaker 2

Turning to our sustainability efforts. We completed our 2023 sustainability report and have increased our disclosure on topics such as environmental, health, safety, quality and social metrics. Our core values of responsibility, integrity and quality drive our mission to produce the highest quality, sustainable ingredients that make everyday products better. We proudly offer the 100% bio based renewable products from our specialty alcohol and essential ingredients to renewable fuels and plant based proteins. Our highly efficient dry grind facilities are striving for carbon intensity scores below 50 by optimizing efficiency, upgrading energy infrastructure and selecting sustainable feedstocks.

Speaker 2

Our dedication to sustainability and social responsibility extends to our customers, employees, investors, partners, suppliers and consumers and our focus on product quality and safety. We conducted material assessments with internal and external stakeholders and identified multiple long term market opportunities to viably expand biobased renewable offerings. The 3rd party certification we earned include areas of oversight on risk management, chemical storage, handling, transportation and disposal, multiple food safety initiatives, quality management, good manufacturing practices and requirements for all active pharmaceutical ingredients and excipient products and supply chains for waste streams. Now I'll turn the call to Rob.

Speaker 3

Thanks, Brian. I'll review the financial results for the Q3 of 2024 compared to the Q3 of 2023. We sold 96,800,000 gallons consistent with 97,100,000 gallons sold during Q3 2023. However, due to lower market prices in Q3 2024, net sales were $252,000,000 compared to $318,000,000 in Q3 2023. Total gross profit was $6,000,000 compared to $4,200,000 in Q3 2023.

Speaker 3

I'll review the various contributing factors. We benefited significantly from a lower consolidated corn basis, which declined $0.63 per bushel compared to last year. This was partially offset by market crush margins declining $0.10 from a year ago to $0.41 per gallon. The peak in campus contributed $6,200,000 to gross profit, improving tenfold year over year, in part due to improvements resulting from our scheduled repairs and maintenance in Q2 as well as a positive shift in sales mix. Specialty alcohol gallons sold increased by $4,000,000 compared to the same period last year.

Speaker 3

However, this was partially offset by a 24% decrease in our average price for essential ingredients as compared to Q3 2023. Our Western facilities had a gross loss of $2,300,000 compared

Speaker 4

to

Speaker 3

a gross profit of $1,500,000 in Q3 of 2023. The majority of this $3,800,000 year over year decline in gross profit was driven by downtime and greater costs associated with upgrading and restarting our Magic Valley facility. Additionally, the Columbia facility generated $1,600,000 less in revenue due to an 80% drop in carbon prices. Also, our consolidated realized derivative gains were $3,600,000 compared to $6,200,000 for the same quarter in 2023. I will review our hedging in greater detail in a moment.

Speaker 3

This quarter, we recorded $830,000 gain on sale of certain idled assets related to our purchase of Aventine. Our consolidated net loss was $2,400,000 compared to a net loss of $3,500,000 in Q3 2023. Adjusted EBITDA was $12,200,000 including the 3 point $6,000,000 in realized gains on derivatives for Q3 2024. This compares to $13,600,000 including $6,200,000 in realized gains on derivatives and a $2,800,000 USDA grant related to the biofuel producer program in Q3 2023. As of September 30, our cash balance was $34,000,000 and our total loan borrowing availability was $92,000,000 including $27,000,000 under our operating line of credit and $65,000,000 subject to certain conditions under our term loan facility.

Speaker 3

We generated $18,600,000 in cash flow from operations in Q3, bringing our year to date total to $6,300,000 of cash provided by our operations. We invested $500,000 in CapEx after accounting for various energy rebates, bringing our year to date CapEx total to $9,800,000 During Q3, on a consolidated basis, we recorded $8,100,000 in repairs and maintenance expense, in line with the prior year quarter and we are on track with our 2024 estimate of $34,000,000 Turning back to the derivatives, we are frequently asked about our hedging strategies and how they impact our financial results. While this is a complex area, I will provide a few highlights on how we use derivatives. 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. These strategies may include managing the spread between corn and ethanol prices, otherwise known as the crush margin.

Speaker 3

We may also take positions on corn and natural gas. Currently, our core strategy is to hedge the premium over fuel grade ethanol of our specialty alcohol contracts that have fixed sales prices of up to 1 year or longer. Through the use of derivatives, we are able to lock in premiums for the duration of the contract over production that otherwise would be sold as ethanol. For the positions that settle, we record the cumulative unrealized gains or losses on these positions since inception to realize. On the remaining unsettled positions, the change in market values at the end of each reporting period is reflected as unrealized.

Speaker 3

Unrealized activity is not an indication of what will be realized in future periods. The best way to determine the value or obligation to be realized in the future measured as of a specific date is to note the amounts on our balance sheet. The net derivative asset or liability reflects what Altra would realize if we liquidated all of our positions as of that specific period and date. With that, I'll turn the call back to Brian.

Speaker 2

Thanks, Rob. Executing on our vision, we deliver the highest quality ingredients to our customers every day. Our scheduled repairs and maintenance as well as our CapEx initiatives are delivering improved productivity. We've advanced our CCS initiative and furthered our strategy to reduce carbon emissions by entering in an agreement to facilitate the safe capture and storage of carbon emissions from our Pekin campus. We are positioned to manage changing market dynamics and to capitalize on the unique opportunities presented by our facilities.

Speaker 2

Our team is committed to improving profitability on sustainable consistent basis and we are optimistic about the future. Operator, we're ready to begin question and answer.

Operator

We will now begin the question and answer session. The first question comes from Eric Stine with Craig Hallum Capital Group. Please go ahead.

Speaker 4

Hey, this is Luke Persons on for Eric Stine today. So we have a couple of questions here. First, how should we be thinking about Magic Valley's targeted annual EBITDA uplift around $9,000,000 that was originally outlined? Does that outlook still stand given what's been demonstrated so far?

Speaker 2

So Luke, the original expectations were based on a fundamental contribution. The challenge is that the market conditions have changed dramatically since when we originally built those forecasts, particularly around corn oil values, protein values, and they were based on a corn price that was significantly higher than what we're seeing today. So that's difficult to actually ascertain at the moment. As we said in our prepared remarks, we see significant benefit from this improvement. But given the material deterioration, particularly in the Western market, that any of the material benefits that we experience are currently more than offset by the deterioration in crush margin for those facilities.

Speaker 4

Great. That's helpful. Thank you. And just a quick follow-up question here. Touching on the carbon capture side and the CCS Act, do you envision any change to the moratorium timeline for new permits given the recent ADM leaks?

Speaker 2

It's a good question. I mean, we certainly haven't seen any outward response from the EPA. What I would say generally though is that even from the time that ADM originally completed, well, not only submitted and have the approval, but then completed the well work. There's been significant changes in the way that the work is done, the quality of the casings, the depth, the strength and the like. So I don't know that it would be particularly applicable to whether it's ours or anyone else's going into the ground today.

Speaker 2

That said, time will tell.

Speaker 4

Perfect. That's helpful. Thank you. I'll pass it on.

Operator

The next question comes from Justin Staviarla with Domo Capital Management LLC. Please go ahead.

Speaker 5

Yes. Hi. Thank you. It sounds like as far as Co Pro Max, Magic Valley, it is operating as thought. But I mean in the implementation of that, I mean you guys must have lost tens of 1,000,000 of dollars.

Speaker 5

So I guess my question is, have you considered seeking recourse against harvesting technologies in some way to be compensated for the losses that they were likely responsible for?

Speaker 2

Justin, we clearly have explored and are exploring all options, both productive and probably less productive if we were to do it that way. And there is also opportunities. I guess what I would also say is that in response to not only your comments, but the question that was posed earlier was this we don't expect this to be a permanent state. It certainly is a reflection of what's happening at the market in the current market, but that's not permanent. And so we would still expect to see significant benefit from this improvement.

Speaker 2

And we see opportunities to be able to do it elsewhere. So we take those all into account. We understand and probably experience it more than most the pain and the struggle that we've had over the last couple of years to try and bring this to the fore. That said, the fundamentals behind the technology and the fundamentals of doing it at Magic Valley are all still sound.

Speaker 5

Okay. So I mean based on your response, it does sound like you are actually potentially seeking recourse of what could potentially be tens of 1,000,000 of dollars. Would that be fair to say?

Speaker 2

Yes. I mean, I wouldn't clarify any more than what I've already mentioned.

Speaker 5

Okay. And could you comment or provide a little bit more color on the Guggenheim hire and what precisely they're looking at and what the thought process is there?

Speaker 2

Yes. It's considering all the options and it's not as if as we've said historically, we have evaluated from time to time and have engaged in this process multiple times with Guggenheim and with other investment banks to see to make sure that we're maximizing and optimizing the return on investment for the company and for shareholders. So it would include any and all aspects of that, whether it's to bring in partners, whether it's sell the asset, whether it's to keep the asset on and to make further improvements to those facilities. What's the best way to liberate the real material benefits of those locations? I mean, yes, there are certain challenges that they face as you can see at the moment, but they also can contribute significantly to the benefit of the company and its shareholders.

Speaker 2

And there's still a lot of untapped opportunities and qualities about those sites that are unique that you can't duplicate elsewhere. So we want to make sure that we evaluate all of that. And that's part of the

Speaker 5

Yes, absolutely. I mean, each one of your sites clearly have much greater value than the stock is currently worth. Given that and given the lack of profitability and been in somewhat favorable or quite favorable operating environments, would this review also consider the sale of the entire company?

Speaker 2

As we've always said that we owe it and our responsibilities are to shareholders and we calculate or we include all of those options all the time.

Speaker 5

Excellent. I think you need to expedite the process. Thank you.

Speaker 2

Thanks, Justin.

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

Thanks, Megan. Thank you all for joining us today. We appreciate your ongoing feedback and support. Have a good day.

Operator

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

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