Alto Ingredients Q3 2024 Earnings Report

Alto Ingredients EPS Results

• Actual EPS: -$0.04
• Consensus EPS: $0.02
• Beat/Miss: Missed by -$0.06
• One Year Ago EPS: -$0.05

Alto Ingredients Revenue Results

• Actual Revenue: $251.81 million
• Expected Revenue: $274.94 million
• Beat/Miss: Missed by -$23.13 million
• YoY Revenue Growth: N/A

Alto Ingredients Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 5:00PM ET

Alto Ingredients (NASDAQ:ALTO) (NASDAQ: ALTO) is a diversified producer of alcohol-based products and specialty ingredients for industrial, food, beverage and personal care applications. The company’s core offering centers on ethanol produced for fuel markets, as well as an expanding portfolio of natural and organic alcohols, glycerin and other ingredient solutions. Alto’s product lines serve a range of end markets, including renewable fuels, confectionery, flavorings, cosmetics and sanitizers.

Headquartered in Dallas, Texas, Alto Ingredients operates a network of production facilities across the United States. Major sites include fermentation and distillation plants in California and Oregon, which supply fuel ethanol and industrial alcohol to domestic customers. Complementing these operations, the company has invested in specialty production capabilities that enable it to develop high-purity and value-added ingredients for regional and export markets. Alto’s geographic footprint allows it to leverage local grain feedstocks while addressing industry demand for cleaner, sustainable solutions.

Originally incorporated in 2003 under the name Pacific Ethanol, the company grew through strategic acquisitions of ethanol and ingredient assets, culminating in a rebranding to Alto Ingredients in 2020. This shift reflected a broader corporate vision to expand beyond fuel ethanol into higher-margin specialty alcohols and natural ingredient offerings. Alto’s management team brings a combination of renewable fuels, food-grade production and specialty chemicals expertise, positioning the company to serve evolving customer needs in renewable energy and consumer product sectors.

Alto Ingredients Q3 2024 Earnings Call Transcript

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.

Presentation

[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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kirsten Chapman of Alliance Advisors Investor Relations. Please go ahead.

[Kirsten Chapman, Head of Investor Relations at Alliance Advisors]

Thank you, Megan, and thank you all for joining us today for the Alto Ingredients Third Quarter 2024 Results Conference Call. On the call today are President and CEO Bryon McGregor and CFO Rob Olander. Alto Ingredients issued a press release after the market closed today providing details of the company's financial results. The company has also prepared a presentation for today's call that is available on the company's website at altoingredients.com. A telephone replay of today's call will be available through November 13th, the details of which are included in today's press release. A webcast replay will also be available at Alto Ingredients' website. Please note that the information on this call speaks only as of today, November 6th. You're advised that any time-sensitive information may no longer be accurate at the time of replay.

[Kirsten Chapman, Head of Investor Relations at Alliance Advisors]

Please refer to the company's safe harbor statement on slide two 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. 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 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.

[Kirsten Chapman, Head of Investor Relations at Alliance Advisors]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

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 million, and adjusted EBITDA was $12.2 million. Rob will discuss our financial results in greater detail in a moment. First, I'd like to comment on today's TSA announcement. 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 toward a more sustainable and prosperous future.

[Bryon McGregor, President and CEO at Alto Ingredients]

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. This translated into greater production of specialty alcohols, reaching 42% of total Pekin sales volume, 7 percentage points higher than the same period last year. We remain on track to sell 90 million 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.

[Bryon McGregor, President and CEO at Alto Ingredients]

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. We expect a synergistic effect and increased overall loading efficiencies. The planned cost of this second dock is less than $3 million and is scheduled for completion in 2025. At Magic Valley, we completed upgrades to Harvest 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.

[Bryon McGregor, President and CEO at Alto Ingredients]

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 system's 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. 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've begun to see some recovery.

[Bryon McGregor, President and CEO at Alto Ingredients]

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. 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. Also, when corn prices are low, corn suppliers typically require prices to at least cover their costs, driving up corn bases. 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 two Western plants compared to Midwest producers that have access to local corn supplies and cheaper bases.

[Bryon McGregor, President and CEO at Alto Ingredients]

Although the improvements we've made at our Magic Valley facility have delivered economic benefits, as we mentioned in our press release on October 15th, the recent increases in regional corn bases and declining protein and corn oil market prices have resulted in overall margin compression outweighing the economic benefits of our plant improvements. 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.

[Bryon McGregor, President and CEO at Alto Ingredients]

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 Columbia more economically resilient than Magic Valley. 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.

[Bryon McGregor, President and CEO at Alto Ingredients]

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 bio-based renewable offerings. The third-party certification we earned includes the 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.

[Rob Olander, CFO at Alto Ingredients]

Thanks, Bryon. I'll review the financial results for the third quarter 2024 compared to the third quarter of 2023. We sold 96.8 million gallons, consistent with 97.1 million gallons sold during Q3 2023. However, due to lower market prices in Q3 2024, net sales were $252 million compared to $318 million in Q3 2023. Total gross profit was $6 million compared to $4.2 million in Q3 2023. I'll review the various contributing factors. We benefited significantly from a lower consolidated corn basis, which declined 63 cents per bushel compared to last year. This was partially offset by market crush margins declining 10 cents from a year ago to 41 cents per gallon. The Pekin Campus contributed $6.2 million 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.

[Rob Olander, CFO at Alto Ingredients]

Specialty alcohol gallons sold increased by four million compared to the same period last year. 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 $2.3 million compared to a gross profit of $1.5 million in Q3 of 2023. The majority of this $3.8 million 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 $1.6 million less in revenue due to an 80% drop in carbon prices. Also, our consolidated realized derivative gains were $3.6 million compared to $6.2 million for the same quarter in 2023. I'll review our hedging in greater detail in a moment.

[Rob Olander, CFO at Alto Ingredients]

This quarter, we recorded an $830,000 gain on sale of certain idled assets related to our purchase of Aventine. Our consolidated net loss was $2.4 million compared to a net loss of $3.5 million in Q3 2023. Adjusted EBITDA was $12.2 million, including the $3.6 million in realized gains on derivatives for Q3 2024. This compares to $13.6 million, including $6.2 million in realized gains on derivatives and a $2.8 million USDA grant related to the biofuel producer program in Q3 2023. As of September 30th, our cash balance was $34 million, and our total loan borrowing availability was $92 million, including $27 million under our operating line of credit and $65 million subject to certain conditions under our term loan facility. We generated $18.6 million in cash flow from operations in Q3, bringing our year-to-date total to $6.3 million of cash provided by our operations.

[Rob Olander, CFO at Alto Ingredients]

We invested $500,000 in CapEx after accounting for various energy rebates, bringing our year-to-date CapEx total to $9.8 million. During Q3, on a consolidated basis, we recorded $8.1 million in repairs and maintenance expense in line with the prior year quarter, and we are on track with our 2024 estimate of $34 million. Turning back to 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. We may also take positions on corn and natural gas.

[Rob Olander, CFO at Alto Ingredients]

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 one 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. 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.

[Rob Olander, CFO at Alto Ingredients]

The net derivative asset or liability reflects what Alto 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 Bryon.

[Bryon McGregor, President and CEO at Alto Ingredients]

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. Our team is committed to improving profitability on a 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. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Eric Stine with Craig-Hallum Capital Group. Please go ahead.

[Eric Stine, Senior Research Analyst at Craig-Hallum Capital Group]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

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.

[Eric Stine, Senior Research Analyst at Craig-Hallum Capital Group]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

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 had 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. That said, time will tell.

[Eric Stine, Senior Research Analyst at Craig-Hallum Capital Group]

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

[Operator]

Again, if you have a question, please press star then one. The next question comes from Justin Dopierala with Dome Capital Management LLC. Please go ahead.

[Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management]

Yeah. Hi. Thank you. It sounds like as far as CoProMax Magic Valley, it is operating as thought. But I mean, in the implementation of that, I mean, you guys must have lost tens of millions of dollars. So I guess my question is, have you considered seeking recourse against Harvest Technology in some way to be compensated for the losses that they were likely responsible for?

[Bryon McGregor, President and CEO at Alto Ingredients]

So 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 are 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, we don't expect this to be a permanent state. It certainly is a reflection of what's happening in the current market, but that's not permanent. And so we would still expect to see significant benefit from this improvement, 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 of the pain and the struggle that we've had over the last couple of years to try and bring this to the fore.

[Bryon McGregor, President and CEO at Alto Ingredients]

That said, the fundamentals behind the technology and the fundamentals of doing it at Magic Valley are all still sound.

[Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management]

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 millions of dollars. Would that be fair to say?

[Bryon McGregor, President and CEO at Alto Ingredients]

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

[Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management]

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?

[Bryon McGregor, President and CEO at Alto Ingredients]

Yeah. 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 and 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 to 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 the shareholders.

[Bryon McGregor, President and CEO at Alto Ingredients]

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'll want to make sure that we evaluate all of that, and that's part of the strategy.

[Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

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

[Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

Thanks, Justin.

[Operator]

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

[Bryon McGregor, President and CEO at Alto Ingredients]

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

[Operator]

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

Participants

Executives

• Bryon McGregor, President and CEO
• Rob Olander, CFO

Analysts

• Kirsten Chapman, Head of Investor Relations at Alliance Advisors
• Justin Dopierala, President, Founder, and Portfolio Manager at Dome Capital Management
• Eric Stine, Senior Research Analyst at Craig-Hallum Capital Group