Alto Ingredients Q1 2024 Earnings Call Transcript

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May 6, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Alto Ingredients, Inc. 1st Quarter 2024 Financial Results Conference Call. All participants are 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 LHF Investors. Please go ahead.

Speaker 1

Thank you, Kaley, and thank you all for joining us today for the Alta Ingredients' Q1 2024 results conference call. On the call today are 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 made available through May 13, the details of which are included in today's press release. A webcast replay will also be available at Alto Ingredients' Web site.

Speaker 1

Please note that the information on this call speaks only as of today, May 6. You are advised that any 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 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 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 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, interest income, provision for income taxes, asset impairments, loss on extinguishment of debt, unrealized derivatives, gains and losses, acquisitions related expense and depreciation and amortization expense. To support the company's review of non GAAP financial information, a reconciling table is included in today's press release.

Speaker 1

On today's call, Brian will provide a review of our strategic plan and activities. Rob will comment on our financial results. Then Brian will wrap up and open the call for questions. It's now my pleasure to introduce Brian McGregor. Please go ahead, sir.

Speaker 2

Thank you, Kirsten. Thank you everyone for joining us today. We began 2024 with a refined vision to produce a variety of essential ingredients and the highest grade beverage alcohol in the industry and prioritize our carbon capture and storage or CCS initiative. We are leveraging the unique capabilities of our peak in campus and our other year. However, relatively low but improving crush margins and various weather factors impacted our financial results in the Q1.

Speaker 2

That said, high quality alcohol sales from our Pekin campus increased year over year contributing toward an overall improved gross profit and adjusted EBITDA on a comparative basis. Rob will discuss our financial results in greater detail. I'll begin by reviewing CCS and our ongoing strategic projects. With CCS, our goal is to create value for Alto, our customers, our surrounding communities and our shareholders by substantially reducing our carbon footprint. Our Pekin Campus facilities, their CO2 production and their location provide Alto a unique CCS opportunity.

Speaker 2

We continue to negotiate the terms of our proposed agreements with potential financial partners and with Vault, a leading CCS developer focused on the development, capitalization and operation of carbon storage assets. Our plan is to work with Vault to safely transport the CO2 to a geological reservoir nearby and permanently store it securely deep underground. As noted in March, together with Bob, we are driving ahead with our respective activities for system design, community outreach, vendor negotiations and schedule alignment requirements to procure equipment for compression and to support the installation of additional power. Vault completed the 2 d seismic geologic survey and has begun data analysis. They've also advanced the work required to submit the EPA Class 6 permit application.

Speaker 2

Our CCS project provides compelling economics that we believe we can enhance with more efficient lower cost energy production. To this end, we are evaluating multiple capital options. We are in discussions with a highly regarded independent energy company. This potential partner has been engaged to complete their FEED study for an energy cogeneration facility that would build that they would build, own, operate and maintain on our site. This facility will lower Alto's capital expenditures, improve operating efficiencies and reduce our forecasted long term energy costs.

Speaker 2

We are also continuing conversations with our current utility provider to expand energy supply capabilities as an alternative to cogeneration. Our specialty alcohol products include highly differentiated 192 proof and low moisture 200 proof grain neutral spirits that create customer opportunities higher up the value chain. In Q1 2024, we sold 26,000,000 gallons of specialty alcohol, up from 21,000,000 gallons in Q1 2023. As mentioned in March, for 2024, we contracted approximately 93,000,000 gallons of fixed price specialty alcohol at an average premium to renewable fuel of $0.31 per gallon. Our biennial park excuse me, our biennial peak and campus web mill outage was completed in April.

Speaker 2

The plant was offline for 10 days while we executed the scope of work with over 4 50 discrete tasks focused on corrective and preventative maintenance as well as upgrades to plant infrastructure. With the outage complete, the plant has safely returned to operation and is ramping up to target production rates. These efforts will result in more consistent and higher production rates, improving reliability as we approach the summer driving season. At Magic Valley, we have been diligently working on our corn oil and high protein technology to return the facility to a more sustainable profitability by reducing the impact of periodic low crush margins and higher destination corn basis. As outlined in March, we are working with our high protein system vendor, Harvest Technology, to achieve the intended production rate, quality and consistency of our corn oil and high protein output at the facility.

Speaker 2

While the plant is hot idled, we are using the downtime to accelerate routine maintenance activities to optimize plant efficiency upon restart. Equipment for the new system modifications has been ordered and based on current delivery and installation schedules, we expect to resume production in late June or early July. As a reminder, Harvest Technology is paying for the direct cost of equipment and design changes associated with the corn oil and high protein systems. As noted previously, as always, we evaluate our path to increase margins, improve profitability and deliver the highest return to our shareholders. We continue to assess our current portfolio of assets.

Speaker 2

We will write updates if and when appropriate. Before I turn the call over to Rob, I have a few corporate updates to review. As part of our sustainability efforts, we finished our annual scope 1 and 2 greenhouse gas verifications during the quarter. In April, as part of our succession planning, we announced our new COO, Todd Benton. I'd like to congratulate Todd on his promotion and MyKendra's on his forthcoming retirement.

Speaker 2

Todd has over 25 years experience at the Pekin facility and 30 years in the industry. With his good relations, with the workforce, deep connection with the community and extensive record of achievement for operational excellence, the Board and I look forward to his contributions to our ongoing safety, operational efficiency, reliability and sustainability efforts. Now I'll turn the call over to our CFO, Rob Bolander.

Speaker 3

Thanks, Brian. I'll now review the financial results for the Q1 of 2024 compared to the Q1 of 2023. We sold 99,000,000 gallons during both Q1 of 2024 and 2023. Q1 2024 net sales were $241,000,000 compared to $342,000,000 in Q1 2023, reflecting lower market prices in 2024. Yet Q1 2024 gross loss improved by $800,000 and adjusted EBITDA improved by $3,400,000 compared to Q1 of 2023.

Speaker 3

These improved results reflect better than ethanol crush margins, increased sales of specialty alcohol and the positive impact of our efforts to lower costs and expand operating efficiencies. However, the following factors impacted the results. First, as you know, 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. In recent years, we have seen extreme volatility in the price of natural gas resulting from foreign wars, political events and extended periods of subzero weather conditions. To mitigate the risk of high price volatility, we locked in a significant portion of our gas needs at fixed prices in advance of Q1 2024.

Speaker 3

Year to date, the market has experienced historically low prices due to higher production and supply coupled with lower consumer demand. While our positions benefited us during the cold spell in January, we recognized an incremental loss of $4,900,000 related to natural gas hedging activities in Q1 of 2024. Also, and as covered on our last call, the extreme cold weather in January at our Pekin campus restricted barge deliveries and increased standby fees. To manage inventory levels, we transported more product by rail, which is a higher cost motor transportation. Further, this extreme cold weather necessitated a shift to lower margin feed products and reduced production rates across the facility, decreasing specialty alcohol production.

Speaker 3

At our Columbia facility, our Q1 production was hindered by issues with our centrifuges. To address this, in mid March, we installed 2 upgraded more reliable models that will reduce ongoing maintenance costs. We commissioned 1 unit and the other will begin operating in May. We also rebuilt the remaining units, enabling the plant to return to target run To date, the plant is running well. Given these events, Q1, twenty twenty four repairs and maintenance expense was $7,500,000 $1,000,000 higher compared to Q1 2023.

Speaker 3

As this increase reflects the timing of the accelerated costs, we remain on track for our estimate of $34,000,000 in repairs and maintenance for 2024. As of March 31, our cash balance was $29,000,000 and our total loan borrowing availability was $91,000,000 to support our business operations and capital investment initiatives. Our borrowing availability includes $26,000,000 under our operating line of credit and $65,000,000 subject to certain conditions under our term loan facility. In Q1, 2024, we generated $1,400,000 in positive cash flow from operations. We invested $4,600,000 in CapEx, in line with our $25,000,000 plan for 2024.

Speaker 2

With that, I'll turn

Speaker 3

the call back to Brian.

Speaker 2

Thank you, Rob. Looking ahead, ethanol crush margins have continued to improve in Q2 and the market outlook for the next three quarters remains favorable. While we are forecasting lower feed prices for the rest of the year, we have solid corn inventories and improved export demand for ethanol. In addition, the EPA summer waiver for the 15% blends will facilitate sustained use of higher blend renewable transportation fuel. Operationally, we expect that our recent work should result in more consistent and higher production rates, improving reliability and profitability.

Speaker 2

Longer term, the updated guidelines around tax credits for including ethanol in the production of sustainable aviation fuel further validates our CCS efforts. Finally, we are pleased with the progress we have made with our CCS initiative and the value we expect to deliver to stakeholders. Operator, we are ready to begin question and answer.

Operator

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

Speaker 3

Hi, Brian. Hi, Rob.

Speaker 2

Hi, Eric.

Speaker 4

Hey. So just starting with carbon capture, you gave a lot of detail there, but I guess I was unclear about things that had been done versus things that were to come. And so just curious if you could just run over that maybe with a little more detail and then just talk about you gave some additional steps that are needed and maybe a timeframe for some of those steps?

Speaker 2

Yes. So Eric there's I mean clearly coming to a final agreement with our with Vault is important as well as advancing discussions with financial partners and the like given the amount of work that still needs to be completed. That said, we've made good progress with regards to Revolt has made great progress with regards to a lot of the work that goes into the Class 6 permit. In addition to that, we're doing a lot of work with Vault around the community and making sure that we're responding to questions and comments and as well as reviewing citing and there's probably a slew of other things that I'm missing. That said, our goal is to have if we stay on track as we are to have our application in call it end of summer before Q4 of this year.

Speaker 4

And is that, you might have said in the past or maybe indications that that's an 18 months plus kind of review process? Or am I not thinking about that right?

Speaker 2

That's correct. Under the EPA's latest indications, they have upped the amount of time for review and expectations from 18 to 24 months. So our expectation is conservatively is that we can keep that hopefully within the 24 month period of time.

Speaker 4

Okay. And then just on the equipment side, you mentioned, I was unclear if you've ordered some of that equipment or are going to order that equipment. And I know that evaluating vendors, that was something that you were very focused on or talked about last quarter. So maybe where does that stand?

Speaker 2

Yes. So Eric,

Speaker 5

the long haul in the

Speaker 2

10th is clearly EPA Class 6 permit, right? And really the work that we do around that is really you have to purchase your compression equipment. And then on top of that we're layering in energy, right? So we need our energy, our power systems and the like to be up to speed. While those are also on the items, they're not as long as what you would expect under the Class 6.

Speaker 2

So it's really about staging those and making sure that you're spending the money at the right time and not being you don't want to be penny wise and pound foolish and spend it all upfront nor do you want to wait until you get your Class 6 permit before you start that process. So it's really about just finding that timing correctly and we're still working on that. But we have a pretty good idea and our goal is to actually to be able to if we can light up the plans is to be able to once you get your Class 6 permit to be able to have all of your other systems up and operational at or before the time you can go operational with your well your full sequestration system.

Speaker 4

Okay, got it. Maybe just last topic for me, just on the co pro max or the high protein think or think or anticipate maybe having the confidence that this is operating the way you originally envisioned? I mean, is this something where you think you need to see it run for 3 months, 6 months? How do you expect that to play out? Because I would assume that's a big part of whether you take it to other plants or not.

Speaker 2

Well, I'd love to say the next day. But I think that only time will tell. Our expectations are the changes that we're making, the upgrades that are being made to the facility and the additional tolerances and capacity that's being built into the system, we'll be able to more adequately address what we need and be able to achieve our goals and part of technology's goals around being able to improve not only meet the targets and the performance that we expect at Magic Valley, but then for us and them to be able to move forward on other locations, both at ours and clearly our technology has interest in using their technology elsewhere.

Speaker 4

Got it. Thank you.

Operator

Your next question comes from Amit Dayal with

Speaker 5

HCW. Thank you. Good afternoon, everyone. So Brian, with respect to sort of margin recovery for the rest of the year, I know you had indicated previously that 1Q margins may be pressured. But with visibility you have right now, do you see improvements and are they already sort of showing up in your operations for 2Q so far?

Speaker 2

So the only thing I would comment on is beyond what I've said, which is we're seeing margins continue to improve. They're in positive areas today. And we would expect them to continue to improve particularly as we move into the summer driving season. We did bring down the wet mill in April of this year and it was down for 10 days. And if you give full full out capacity for the quarter.

Speaker 2

That's a little too preliminary at this point to be able to provide exact ideas around Q2 results. But based on current operation operating rates, we're pleased with what we're seeing as results and figures crossed, we continue to see further improvement.

Speaker 5

Okay, understood. Thank you for that. And then with respect to CCS, are there any expenses that are outside of your CapEx budget that need to go into CCS development efforts? Or is that part of your CapEx for this year?

Speaker 3

Yes. I'll take this one. The majority of the costs are going to be involved in the CapEx plan, but there are some upfront more immaterial costs, aspects of certain FEED studies, certain legal costs to review commercial terms, contracts, things like that. But those are all fairly immaterial.

Speaker 5

Okay, understood. When do you expect to start incurring like larger portion of these costs for CCS? Is that like 2nd half of twenty twenty five timeframe or any sense on when those needs will start cutting off for you?

Speaker 2

Yes. So we would probably expect to see those somewhere around beginning Q1, Q2 of next year. Still a lot of the lift that's going to occur would be down payments on compression technology, right, making sure that you're in your queue and you've got the system starting to be built. And there won't be a on a relative basis the cost associated with developing the pipeline and the injection system really doesn't occur until after you've got your Class 6 permit in place. So it's a combination of things.

Speaker 2

But and again that would be largely for the account of Vault where ours will be more of a growing spend over that same period of time, call it, 36 months of expense beginning mostly in next year. And that's why it's important as well to bring the financial resources to the table to be able to connect the dots pretty well. And so you know what's on balance sheet, what's being addressed elsewhere and how we're going to make those ends meet.

Speaker 5

Understood. Okay. Thank you, Brad. Just last one for me. In the presentation, you highlight pursuing other opportunities like SaaS, etcetera.

Speaker 5

Like how should we read into that? I mean, is this sort of a serious effort already underway or are you just sort of exploring at a high level? Just trying to get a sense of how some of those developments might take place?

Speaker 2

Well, there's a lot of there's clearly a lot of interest around SAF. There's a lot of resources that are going into it, not necessarily at Alto. Our focus is early around being able to make the product that would be eligible for SAF. That said, I think there's a lot of work that and a lot of lifting that still needs to be done between now and when our product is available. A lot of things can change.

Speaker 2

But I think there's a really growing interest and particularly with the latest treasury announcements, there is now a pathway and there's an opportunity to be able to really make where you have the ability to be able to capture the CO2 and sequester to really make a difference and be able to produce product that is eligible for and available to support the SSAF industry.

Speaker 5

Got it. Yes, that's all I have guys. Thank you so much.

Operator

Your next Your next question comes from David Bastian with Kingdom Capital Advisors.

Speaker 6

Hi, thanks guys. Couple of quick ones. You mentioned you expected the co product revenues to be down for remainder of the year, at least as a percentage of sales. Is that expected to be roughly ratable to last year in terms of percentages? Or are there any major puts and takes we should be thinking about?

Speaker 2

Yes, it's tough to say at the moment. I think we're down, 20% as an industry. If you look across the various different products, 20%, 30% from the peaks of last year. It's difficult to know whether there'll still continue to be some progression. I mean, there's still clearly a spread, a significant benefit in that.

Speaker 2

And it's still it's a compelling argument as to why you should be able you should be differentiating your product as much as possible taking advantage of that. But and that goes from everything from corn oil to high protein value products. That said, you're just not seeing the peaks that you would otherwise would have seen a year ago. And I don't that our expectation is that that's going to be a bit of the cycle, right? You need to be able to produce product that then makes its way.

Speaker 2

And there are times where you'll have excess product and it will soften prices and then demand will grow and find a place for it and you'll start to see prices start to increase. Still don't know exactly the length of that cycle, but we do know over the long run that there is significant demand for the products. And so our expectation is to see over the long run that those are the kind of investments that we should be making as well. And there's an opportunity again to further differentiate the kinds of products that we make and people will be willing to pay for that.

Speaker 4

Okay. Thanks, Bryan.

Speaker 6

Thanks for the color on the CapEx with carbon as well. I was curious if outside of the carbon capture opportunity, you guys expect CapEx to be at a similar level to last year as well on a quarterly basis or if there's any major changes there that we should be thinking about?

Speaker 3

Yes. I believe last year we had about $30,000,000 in CapEx for 2023 dollars and I believe $40,000,000 the year before. This year, we lowered the target to not to exceed $25,000,000 dollars and with about $4,500,000 $4,700,000 in CapEx in Q1, we feel that we're coming in at that plan.

Speaker 2

So David is your question is that going to be ratable or are you looking at are you asking if there's going to be a low and a big spend in other periods or let me understand what I want

Speaker 6

to confirm what you guys are thinking. So it sounds like 25% is about target year and we're on track for that. Thanks.

Speaker 3

Right. I would assume that'd be pretty ratable throughout the year.

Speaker 2

Okay. Got

Speaker 4

it. Thank you. That's all for me.

Operator

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

Speaker 4

Thank you, Kaylee.

Speaker 2

Thanks again for joining us today everyone. We appreciate your ongoing feedback and support. Have a good day.

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Key Takeaways

  • Carbon capture and storage initiative advancing with Vault, including a completed 2D seismic survey and EPA Class VI permit application planned by Q4, alongside evaluation of a cogeneration partner to lower energy costs and emissions.
  • Q1 financial results showed net sales of $241 million versus $342 million a year ago, yet gross loss improved by $0.8 million and adjusted EBITDA rose by $3.4 million on better crush margins and cost efficiencies.
  • Specialty alcohol sales increased to 26 million gallons in Q1 (up from 21 million), with 93 million gallons contracted at a $0.31/gal premium, and the Pekin facility’s 10-day outage is complete and ramping up for peak season.
  • Magic Valley upgrades are underway with Harvest Technology–funded equipment for corn oil and high-protein systems, targeting a late June/early July restart to boost co-product profitability.
  • Operational headwinds included a $4.9 million natural gas hedging loss amid record low prices, higher rail transport fees due to cold weather barge disruptions, and $7.5 million in Q1 repairs & maintenance, tracking to a $34 million full-year estimate.
A.I. generated. May contain errors.
Earnings Conference Call
Alto Ingredients Q1 2024
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