Q2 2021 Alto Ingredients Inc Earnings Call
Do you have the afternoon, ladies and gentlemen, and welcome to the Alto ingredients incorporated second quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
And instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone I was at a reminder, this conference call is being recorded I would now like to turn the conference over to your host Ms. Moriah Shilton of L. Each a investor.
Our relations. Please go ahead.
Thank you Jerome and thank you all for joining us today, but the alto ingredients second quarter 2021results conference call.
On the call today are Mike Candace CEO Bryon Mcgregor CFO.
Mike will begin with review of business highlights.
Brian will provide a summary of the financial and operating results.
Mike will return to discuss alto ingredients outlook and open the call for questions.
Also ingredients issued a press release after the market closed today, providing details of the company's quarterly results.
The company also prepared a presentation for todays call that is available on the company's website at alto ingredients Dot com.
A telephone replay of today's call will be available through August 10th the details of which are included in today's earnings 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 August 3rd.
You are advised that time sensitive information may no longer be accurate at the time of any replay.
Please refer to the Companys Safe Harbor statement on slide 2 of the presentation available on line.
Which states that some of the comments in this presentation constitute forward looking statements and considerations.
If all of a number of risks and uncertainties.
The actual future results of alto ingredients could differ materially from those statements.
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 smelter 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 being reported.
The company defines adjusted EBITDA as unaudited net income or loss attributed to alto ingredients before interest expense interest income provision or benefit for income taxes.
Asset impairments loss on extinguishment of debt.
Purchase accounting adjustments fair value adjustments and depreciation and amortization expense.
To support the company's review of non-GAAP information later in this call a reconciling table was included in today's press release it.
It is now my pleasure to introduce Mike canvas CEO Mike.
Thank you Maria and thank you everyone for joining us this afternoon and the second quarter, we generated our fifth consecutive quarter of gross profit producing net income of $8.1 million and adjusted EBITDA of $17 million for the first half of the year revenue was 5.
Hundred $17 million net income was over $12 million and EBITDA was over $30 million. This represents a year over year improvement in EBITDA of $14 million, a further testament to the benefits of our transformation efforts to specialty alcohol.
And essential ingredients.
As part of these efforts, we continue to improve our balance sheet in line and invest in our infrastructure to meet today's demand expand our product offering.
And pursue new long term accretive growth opportunities.
Looking ahead, we are expanding and deepening and strengthening our relationships with key customers as a certified leading producer of a growing variety of specialty alcohols that are used in common everyday consumer goods, including vinegars spirits mouthwash cash.
Medics and cleaning products through.
Through the integration of operations and production at our Pekin campus, along with our enhanced certifications, we can provide surety of quality supply and redundancy all material differentiators among a growing supply base.
These and other distinctions position us well as we contract specialty alcohol volumes for 2022 and beyond.
Thus improving over time, the utilization of our expanded specialty alcohol production capacity.
As we announced on May 17th we sold our fuel grade ethanol production facility in Madera, California to Seaboard energy for a total consideration of $28.3 million.
Price of $19.5 million in cash and $8.8 million in assumption of liabilities. We use the cash proceeds to retire company debt, which will save approximately $700000 per quarter in interest expense and an additional $400000.
Per quarter and negative EBITDA carrying cost for this facility, we have been working diligently on the sale of our fuel grade ethanol facility in Stockton, California, and have interested parties that will either restart or repurposed.
Facilities, and we will share more when appropriate.
Our capital improvement projects. This year are on track and expected to expand revenue and increase efficiencies and plant reliability, our east expansion in Pekin facility upgrade projects alone are scheduled for completion in Q3 and will be fully operational before year end.
We expect the projects to contribute approximately $5 million annually and EBITDA, representing a full payback in less than 2 years.
Additionally, we are expanding our annual corn oil production capacity at our Pekin site by approximately 4000 tons, which will contribute an estimated $4.5 million in EBITDA annually beginning in 2020.
In preparation for these improvements and taking advantage of what we expect will be choppy market conditions in Q3, resulting from low pre harvest corn inventories and tight fuel ethanol margins. We have scheduled in mid August a repair and maintenance shutdown at our Pekin wet mill, we expect the <unk>.
Pack to be limited to the third quarter in terms of reduced revenues and increased repair and maintenance expenses.
This however will not impact our ability to meet our contractual supply obligations for specialty alcohol or essential ingredients, but will instead improve our efficiency and reliability and better align our production with customer demand.
Finally, looking to the future there are opportunities for us to enhance our protein production at our dry mills debt.
We'll grow and diversify our revenue sources and bolster our quality and quantity of earnings we continue to make good progress and look forward to share sharing more information. Soon we also remain actively engaged in discussions with various part parties to developing <unk>.
<unk> captured program at our Pekin site, we look forward to sharing more information over the next few quarters regarding this profitable opportunity with that I'd now like to turn the call over to Brian for a discussion of the financials Bryan.
Thank you Mike.
I'll discuss a few financial highlights and metrics for the quarter and provide an update on our expectations on certain metrics for the year.
For the second quarter of 2021.
Net sales were $298 million up from $219 million in the first quarter due to an increase in specialty alcohols fuel grade ethanol and third party gallons sold as well as an increase in the average price per gallon sold.
Of the $65 million production gallons sold in the second quarter 24 million gallons consisted of specialty alcohols up 5 million gallons sequentially over last quarter.
Most of the specialty alcohol sold during the quarter was under fixed price contracts established last fall.
While the average price of this contracted volume was lower than current prices. So what's the price of corn, which we hedged concurrently Lockheed and positive margins.
Now sales of specialty alcohol during Q2 or at higher prices with a tighter margins to corn.
The Q2 year over year decline in total specialty gallons sold reflects more of the uniqueness of last year's transitory Spike and sanitizer and disinfected demand.
Obscuring our growth and other specialty alcohol products sold to.
To this point the comparative Q2 year over year decline in sanitizer disinfectant consumption was partially offset by our increased fixed price contracted specialty alcohol sales last fall.
And growing specialty alcohol exports.
While we anticipate continued volatility and sanitizer and disinfected demand over the foreseeable future. We expect a more stable new demand supply equilibrium will ultimately be achieved as COVID-19 impacts dissipate.
The sequential increase in quarterly sales of fuel grade ethanol is attributable to both the steadier production from our Pekin dry mill and the increase in third party gallons.
Third party gallons sales the latter of which was driven by terminal constraints in California, and our ability to service customers by using our Stockton facility as a terminal.
The average price per gallon of fuel grade ethanol largely reflects the current high correlation between ethanol and elevated corn prices.
We should also note that while demand and prices for certain essential ingredients products have risen industrywide co product prices on average have not kept pace with rising corn prices, resulting in declining co product returns both sequentially and year over year.
Gross profit was $15.2 million up from $13.8 million last quarter due to additional specialty alcohol and fuel grade ethanol sales.
SG&A expense in the quarter was $7.2 million.
Generally in line sequentially, although slightly inflated due to heightened costs related to our strategic initiatives.
Accordingly, we are revising our guidance.
To account for this activity and now expect SG&A to range from 27 million to $30 million for the full year 2021.
We have a $1.9 million asset impairment this quarter, reflecting results from our negotiations for the sale of our Canton, Illinois assets.
Since our acquisition of <unk> in 2015, we've used this non operating facility as a source for spare parts and supplies at our other operating facilities.
Having largely use all productive and complementary equipment. We are now in negotiations to sell the remaining parts.
Along with the associated property and hope to complete the sale before year end.
Our interest expense in the second quarter was $1 million, 45% lower than the $1.9 million, we paid in Q1 and 78% reduction from the same quarter last year as we continued to pay down high interest rate debt.
The outstanding balance of our senior notes currently has $700000 we.
To fully repay the remaining term debt in 2021.
During the second quarter, we recorded income from loan forgiveness of $3.9 million, which is related to 1 of our payroll protection program loans from last year.
We've applied for forgiveness for the remaining $6 million loan and our.
Waiting SBA approval.
Income available to common shareholders was $8.1 million or <unk> 11 per diluted share compared to income of $4.4 million or <unk> <unk> per diluted share in the first quarter.
Turning to our balance sheet on June 32021, our cash and cash equivalents were $50.8 million compared to $44.1 million on March 31.2021.
With the cash proceeds of $19.5 million from the sale of our Madera plant, we reduced our high interest rate.
Parent debt outstanding, bringing our remaining term and planned debt loan balances to less than $18 million.
Proceeds from the future sale.
We're from future asset sales will be used to further retire debt bolster liquidity and fund future capital projects.
In closing, let me provide some additional detail around our anticipated 10 day.
Wet mill outage, Mike mentioned earlier.
We budgeted approximately $4 million in 1 time repair and maintenance expenses in Q3 related to the outage.
To minimize the impact of lost revenues and higher cost of goods sold we scheduled repairs. During what we believe will otherwise be a challenging operating environment due to low pre harvest corn supplies and excess fuel grade ethanol inventories and elevated production.
We do not expect the impact of this outage to impact our $60 million gross profit on our contracted specialty alcohol guidance provided earlier this year.
Mike back to you.
Thank you Brian to summarize over the past year, we have rationalized, our operating footprint to focus on our profitable and most strategic operations and at the same time, we significantly improved our balance sheet.
As such we are now actively pursuing opportunities to expand through enhanced service and product offerings and accretive vertical integration and while our transformation is ongoing we have a solid profitable platform for long term growth.
Which will create value for shareholders partners and employees.
Operator with that we'll open up the call for Q&A.
Ladies and gentlemen, if you have a question at this time. Please press star and then the number 1 key on your Touchtone telephone. If your question has been answered already a restarting move yourself from the queue. Please press the pound key.
First question comes from Amit Dayal with H C. Wainwright Your line is open.
Thank you and good afternoon, everyone.
First question I guess is on the gross margin guidance.
The 60 million you are continuing to batesville from specialty alcohol sales.
How much impact whether positive or negative can we see this from any ethanol sales from.
On a year.
Hi, Matt, It's Brian I would say that fuel ethanol has not been overly contributory to that year to date.
If youll recall in <unk>.
January and February of this year ethanol margins were.
We're generally 30 to 40 <unk> negative.
They started to recover and we saw some pretty good recovery in Q2.
They have been volatile as of late and have sometimes materially lagged increases in corn prices.
But I would say year to date debt margins overall have been have not yet recovered to breakeven or better now that does not mean that we haven't been operating at.
Above breakeven fuel margins. It just means that its been on hold that we've had to feel if youre looking at on a year to date basis.
Understood. Thank you for that and then.
You are indicating that there is maybe some softness.
In terms of capacity going towards sanitizer disinfectant sales.
But GAAP being filled already with <unk>.
Sales to other applications.
It certainly.
<unk>.
Significant.
It has made a significant.
What's the word I'm looking for.
The gain last year that we had in Q2 and Q3 was an anomaly right. Those are unique those are black Swan events.
So we were able to take advantage of the opportunities those are not necessarily easily duplicated will but we have to a significant degree.
<unk> been able to replace at least the volume sales.
Through either the contracted volume we made last fall.
And as well spot industrial sales this year.
But they would not be at the same prices that you were able to get at peak.
Prices in Q2 or Q3 of last year.
That's understandable.
And just last question on asset sales that you are still pursuing.
Are you expecting to be potentially done with asset sales by the end of this year.
Good day.
Get pushed out to next year potentially.
No I think definitely our intention is to complete that in the near term and again as I mentioned in the remarks.
The Stockton, California facility that we are working with.
We would hope to be able to announce something on that definitely by year end. So that is definitely our intention and we're working hard at it.
And so that's all good thank you so much.
Thank you so net net.
Again, ladies and gentlemen, if you have questions at this time. Please press Star then the number 1 key on your debt still telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key. Your next question comes from Eric Stine with Craig Hallum Your line.
Open.
Hey, Brian.
Hi, Eric.
So just sticking on the asset side, I know that the Idaho, and Oregon facilities are a bit unique.
It sounds like those arent necessarily.
And your plans as far as the sales so maybe confirm that.
You can and then maybe discuss how they're unique and.
What types of potential investments you might make.
To make those more I guess more important to the platform.
Okay.
So, let's take Idaho first.
If you remember or recall, we we sold the grain handling assets so that facility to the person that.
Had bet our marketer for for many years in it.
Had performed very well for us.
We think we have the unique opportunity in that market.
That that would be a place we would look at if we were from a repurposing standpoint protein makes a lot of sense in that area and Thats 1 of the things when I mentioned that we are exploring.
Different possibilities with increasing protein that would be as a place we would definitely look at that it's a very unique market theres not a lot of other players in the area.
We have an affiliation with a with a really good market or in that area. So thats, Idaho as far as Oregon goes right now we are working with day.
We have a C O 2 plant adjacent to our facility in Oregon, and we're working with that group.
On evaluating longer term prospects and possibilities. So right now our focus mainly is on Stockton.
And.
We have repurposing.
Opportunities and thoughts around Idaho and Oregon.
More to come true.
Yes.
Got it no that's helpful.
And maybe then just turning to the upcoming contracting season.
I know that when your when your volumes and the timing of you, bringing bringing them online.
You missed the window with some of those volumes I mean, maybe.
Baby steps youre, taking in advance of the window.
I mean, if you have any early indications of what the demand might be and then I am curious.
Of the 140 million gallons do you kind of have a number in mind that that would be ideal.
2 contracts and leave the rest at spot.
Well I think.
Ideally, we would like to have a very large percentage of that contracted.
We're realistic and the fact the day I'd say it does take time to get to that point, we have been working very diligently our quality crew.
1 of the reasons, we we work very hard to get the enhanced certifications was to be able to qualify product with a larger variety of customers out there we've been working with our existing customers to expand.
Within their organization.
That is a that is a process and it's something that is part of the transformation. When we say the transformation is ongoing thats all a part of it.
You have to get qualified we're feeling very good about Q4 going into Q4.
We feel it will be an improvement, but again, it's a it's a process that you have to go through and it takes time. So we look at it as 2022.2023.
And again, we'd like to have a high percentage of that but we would want to keep cash.
<unk>, 15% for spot.
Okay got it.
Maybe then just last 1 from me on the on the coal products, you mentioned that the spot pricing hasnt.
Hasnt necessarily kept up our mirrored.
What's happened with corn I mean is that is that kind of your expectation for the remainder of the year going forward or I mean, do you see any indications that that could that GAAP could close a little bit.
I would think that it's Brian I would think that the GAAP would close I mean, it is actually near a fairly low point.
Kind of averages where you see.
Co products trade in relation to the dry matter on a dry matter basis to corn.
If you look back a year ago was trading over 120%.
To corn.
Today, you are looking at mid seventies.
Looking about this is not.
Alto spin.
Specific this is an industry wide.
Phenomenon.
And it largely is being driven by a couple of things 1 is just a significant amount of supply.
We're actually supply as you've seen growth in demand for soybeans and other proteins.
And so.
We would expect that to be more normalized.
The dry on a dry matter basis. These high value protein should be trading at if not at a premium to core values.
Okay. That's helpful. Thanks.
Thank you Eric.
Alright, I'm showing no further question at this time, although like to turn the conference back to CEO, Mike <unk>.
Thank you and thank you again for joining us today and your ongoing support as.
As you can tell we are very excited about the progress we've made and the bright future. We have ahead of US we will be attending virtually the upcoming HC Wainwright, 23rd annual Global Investor Investment Conference in September and we look forward to continuing our dialogue with US we may.
Further progress thank you all.
Sure.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
From.
Yes.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
[music].
Hello.