Q3 2021 Alto Ingredients Inc Earnings Call
Good day, and thank you for standing by and welcome to Ultimate Ingredients, Inc. Third quarter of 2021 financial results at this time, all participants on a listen only mode. After the speaker's presentation there'll be a question and answer session.
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Mariah Chilton. Please go ahead.
Thank you Justin and thank you all for joining us today for the auto ingredients third corner 2021 without the conference call.
On the call today, I'm, Mike, Kansas C E L combined Mcgregor CFO.
Like what became a thorough review of business highlights.
Brian will provide a summary of the financial and operating results than myself, returning to discuss alto ingredients outlook and open the call for questions.
I'll tell ingredients issued a press release after the market closed today, providing details with the company's quarterly results.
The company also preparing a presentation for todays call that is available on the company's website at all two ingredients dot com.
A telephone replay of today's call will be available to November 16th.
Cause of which are included in today's earnings press release.
A webcast replay will also be available and also ingredients website.
Please note that the information this call speaks only as of today November 9th.
You advice at time sensitive information may no longer be accurate at the time of any replay.
Please refer to the company Safe Harbor statement on side two of the presentation available online but.
Which states that some of the comments in this presentation constitute forward looking statements and consideration that if.
I have a number of risks and uncertainties.
The actual future results default to 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 and also ingredients filings with the SEC.
Except that's required by applicable law the company it seems no obligation to update any forward looking statements.
And Madison for pay per marks non-GAAP measures will be referenced.
Management, you says he's not get measures to monitor the financial performance of operation and.
And believes these measures will assist investors in assessing the company's performance for the periods being reported.
The company defines adjusted EBITDA unaudited net income or loss attributed to auto ingredients before interest expense interest income provision or benefit for income taxes asset impairments laughin extinguishment of debt purchase accounting adjustments fair value adjustments and depreciation and amortization expense.
To support the companies your view of non-GAAP information later in this call.
Reconciling table was included in today's press release.
Does not my pleasure can choose my Kansas C E O Mike.
Thank you Mariah and thank you everyone for joining us today in the third quarter, we made progress advancing our strategic initiatives by expanding our essential ingredients business investee and improvements to our infrastructure and subsequent to the quarter and completed the realignment of our operations.
In September we launched our first dry mill enhanced protein project with the installation of harvesting technologies patented co.
Co pay Mac system at our Magic Valley, Idaho facility.
We decided to install the technology at this point, because it's advantaged an approximate location to serve the growing demand for high protein feed a nearby cabinet poultry pork and agriculture mortgage.
Adding high protein production will enhance the profitability and sustainability of this operation.
We plan to restart production by year end into commission, the new protein system in the first half of 2022.
Upon completion the system will produce over 33000 tons of feed annually with the protein content greater than 50%. It will also provide the added benefit of increasing corn oil yields by 50% are almost 9 million pounds annually.
We expect the combination of additional corn oil sales and the sale of high value proteins at premium prices to generate over $9 billion annually and EBITDA based on current market prices.
After the successful completion of the installation of Magic Valley, we expect to roll out the system at our other three dry mills.
Conservatively, assuming similar economics of this technology across all four meals, we expect $40 million in additional EBIT da on an annual basis. This is one example of how we are enhancing protein production at our dry bills to grow and diversify our revenues.
Versus and bolster the quality and quantity of our earnings.
We completed our east expansion project in the third quarter and the additional used production is now fully contracted through 2022.
Further we will complete our feet dry or upgrades and achieve full operation before year end.
Starting in 2022, we expect both projects will contribute approximately $5 million annually and the EBIT da.
We also finished the expansion of our annual corn oil production capacity and our pecan site by approximately 4000 tonnes contributing an additional estimated $4.5 million in EBITDA annually starting in 2022.
As discussed in our second quarter earnings call and anticipating challenging market conditions in the third quarter, we scheduled a major repair and maintenance shutdown and infrastructure upgrade at our peak in wet mill well.
Well the facility was idle we upgraded the electrical infrastructure improved redundancy and plant cooling supply and replaced condensers and various pumps and doing so we significantly improve the efficiency and reliability of our production capabilities to further support customer demand.
Long term and extend our planned outage schedule to now be at 24 month intervals.
While the decision to schedule the shutdown in Q3 proved correct. The shutdown combined with volatile market conditions negatively impacted revenues and increased operating expenses, resulting in a net loss for the quarter.
Still we generated approximately $3 million in positive EBIT VA for the quarter and.
And I'm pleased to further report that the with Neil returned to profitable operations of September This places us and an improved position to operate more reliably and efficiently which is integral to meeting the needs of our specialty alcohol, an essential ingredient customers.
We continue to work with existing and new customers to be their certified producer of a growing variety of specialty alcohols that are used in common everyday consumer goods, including vinegars spirits, mouthwash cosmetics and cleaning supplies to name a few.
To proactively address are growing customer needs, we've been extending the certifications we obtained at the end of 2020 from our ICP distillery to our pecan wet milk, we expect to complete this effort by the end of the year and by doing so provide unique redundancy across the entire pizza.
Campus and further security of quality supply to our customers.
With regards to specialty alcohol sales in 2022, do too volatile commodity price activity customers have taken a more measured approach to contracting annual volumes in comparison to prior years, which are normally completed by now.
As a result, we expect negotiations to extend through the remainder of the queue for some while we can not provide details at this time, we fully expect to contract for more gallons of 2022, then in 2021.
Turning to our balance sheet is announced on November 8th we completed the sale of our fuel great ethanol production facility in Stockton, California, two Pelican acquisition LLC for $24 million in cash while retaining the economic benefits of servicing <unk>.
<unk> customer needs using the plants terminal capabilities and longer term as the exclusive marketer of gallons produced when the facility resumes operations.
This sale removes $600000 per quarter and negative EBITDA carrying costs, adding to the $400000 per quarter for.
Madera facility sold in the second quarter.
As previously noted this sale completes the realignment of our fuel grade ethanol production, we began over 21 months ago.
The proceeds from our asset sales were integral to our strategy and contributed to the retirement of approximately $150 million in term debt over the same period.
Dust, achieving our stated goals to prepay this expensive and restrictive term that by year end 2021.
In doing so we not only eliminated over $16 million in annual interest expense, but also as importantly, we remove structural and financial impediments that contributed to our past financial challenges to.
Today, we will be reinvested and sustainable and profitable business segments strengthening core operations and further diversifying our product offerings and specialty alcohol's an essential ingredients.
We remain actively engaged with discussions with various parties to develop a carbon capture and sequestration program at our Pecan campus. We look forward to sharing our plans in the coming months as we review and this is really important all of our options. This is even more important.
Considering the recent enhancements made to the 45 Q tax credits for carbon capture and sequestration and the federal infrastructure Bill and.
In addition to improvements we made to our use production we are pursuing opportunities that expand our east product offerings to include higher quality more versatile products marketable to the food industry. Finally, we are actively pursuing opportunities to extend our specialty alcohol.
Business through accretive vertical integration, we look forward to providing additional information as appropriate.
And now like to turn the call over to Brian for a discussion of our financials Brian.
Thank you Mike.
I will provide some additional color around our results and metrics for the quarter and provide an update on our expectations on gross profit for the year.
For the third quarter of 2021, net sales were $306 million up from $298 million in the second quarter due to an increase in third party gallons sold as well as an increase in our average price per gallon soul.
The sequential increase in quarterly sales of third party gallons was driven by our ability to service customers using our Stockton facility is a terminal at a time when there is a shortage of available storage in the region.
The average price per gallon of fuel grade ethanol largely reflects the current high correlation between ethanol and elevated corn prices.
We had alcohol sales of $253 million and $53 million in revenue from sales of are essential ingredients.
Of the 58 million production gallons sold in the third quarter 20 million gallons consisted of specialty alcohol's down 4 million gallons sequentially over last year.
The sequential decline in the production and sale of our specialty alcohol fuelled grade ethanol gallons and essential ingredients are primarily attributable to the shutdown of our web milk.
Most of the specialty alcohol sold during the quarter was under fixed price contracts established last fall.
While the average price of this contract volume was lower than current prices. So is the price of corn, which we hedged concurrently logging in positive margins.
Spot sales and specialty alcohol during Q3 were high prices higher prices, but it tighter margins to corn.
The Q3 year over year decline in total specialty alcohol down 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 this point the comparative Q3 year over year decline in sanitizer and disinfectant consumption was partially offset by our increased fixed price contracts and specialty alcohol sales last fall.
And growing specialty alcohol exports.
While we anticipate continued volatility in sanitizer and disinfected demand over the foreseeable future.
We expect a more stable new demand supply equilibrium will ultimately be achieved as COVID-19 impact dissipate.
We should also note that while demand and prices for certain essential ingredients products have risen industrywide co product prices on average have lagged rising corn prices, resulting in declining co product returns both sequentially and year over year.
We expect Q4 coproduct returns to increase with the improvements made at our peak in campus.
Gross loss was $3 $4 million down from $15.2 million of gross profit last quarter due to the wet mill outage and high corn prices and basis.
Expanding on this the one time EBITDA impact of the web know outage, considering both lost revenue an additional repair and maintenance expenses totaled.
Totalled over $7 million.
Regarding the high cost of procuring corn in Q3 with the solid harvests largely complete we've seen a decline in both corn prices and basis.
Still.
At higher prices than historical average.
SG&A expenses in the quarter.
Was five $5 million down significantly from the prior quarter tracking within our SG&A range of between $27 million and $30 million for the full year 2021.
Our interest expense in the third quarter was $429, 60% lower than the $1 million, we paid in Q2 and only approximately 110th of what we paid in the same quarter last year as we continued to pay down high interest rate debt.
And with the proceeds from the sale of our stock the facility. We have now paid off the outstanding balance of our term debt.
During the third quarter, we recorded income from loan forgiveness of $6 million.
Which is related to our second and last payroll protection program loan from last year.
Net loss available to common shareholders was $3.5 million or five per share compared to income of $8 $1 million or 11 per share per diluted share in the second quarter.
Turning to our balance sheet on September 30th 2021, our cash and cash equivalents were $36 million compared to $58 million on June 30th 2021.
This $15 million decline in cash reflects our previously announced capex projects on which we spent $8 million in the third quarter and our previously mentioned fee can repair outage totaled $7 million we.
We expect capex to range between seven and $10 million in the fourth quarter.
With future opportunities in Capex projects anticipated, we expect to secure some rational level of debt to finance these projects.
In addition, we plan to further optimize our asset base line of credit to eliminate restrictions from future enterprise level cache allocations.
Having deleveraged our balance sheet of high cost debt.
Implemented operational improvements at our facilities and expanded our addressable markets with a diversified product portfolio took.
Today, we have access to the most attractive that finance options to support our liquidity needs than any time in our history.
Before I turn the call back to Mike I would like to provide an update on our financial guidance for the full year.
2021.
Now that we have sufficient visibility around our financial performance and expectations. We are comfortable providing full year 2021 gross profit guidance on a consolidated company basis.
We conservatively expect altos gross profit to be a minimum $40 million, excluding any impact from derivatives in the fourth quarter.
This increase from nine month consolidated gross profit of $25 million consider as many variables and their impact on gross profit from are.
From our contracted specialty alcohol's, including high volatile excuse me.
Highly volatile commodity prices.
Normally hi, logistical costs, including corn basis, the shutdown of the wet mill and the recent improvements in ethanol margins.
Given the unusually positive short term spreads and ethanol and corn, we began to we began locking in the margin on our fuel grade production through year and.
And given the volatility we've experienced this year in commodity markets and our expectations of this will continue if not increase.
We've secured our utility costs for the next 12 months and other variable input costs, including corn through at least Q1 <unk>.
Next year to mitigate these risks.
Mike back to Ya.
Thank you Brian to close out my prepared remarks, I'd like to summarize the projects. We are on track to complete this year that will increase our EBITDA starting in 2022.
First our east facility and pecan drier upgrade should both contribute approximately 5 million and EBITDA.
Annually second or expanded annual corn oil production capacity at the peak in sight will contribute an estimated $4.5 million.
Third we removed over $4 million, a negative EBIT da carrying costs from or sold facilities in court or cold Pro Max project should contribute approximately $9 million of EBITDA annually as we are bringing the project online we would expect 5 million.
<unk> of EBITDA.
In 2022, and $9 million annually in 2023 and beyond and.
An aggregate these improvements alone in 2022 total $18.5 million in additional EBITDA compared to 2021 Bill.
Building on completion of the coat pro Max system in Idaho, and an accelerated rollouts. The remaining three mills, we could see an additional 34 million and EBITDA growth in 2023 2024.
Add to this the other opportunities such as vertical integration carbon sequestration and other high value projects under development you can see why we're excited and energized about the transformation, we've made to date and the future for the company.
Operator, we are now ready for Q&A.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key please standby when compiled a Q&A roster.
And our first question comes from Eric Stein from Craig Hallum. Your line is now open.
Yes, good afternoon at Aaron's Fahal on for Eric Thanks for taking the questions, Mike and Brian.
Hi, Eric.
Hello.
The first on our end can you just you talked a little bit about it but can you elaborate on just how you're seeing the supply demand imbalances at the current time.
And how you see that normalizing over the next few quarters.
Sure I think it's largely driven Aaron at this 0.1st and foremost by the export markets and the export demand.
And then logistical constraints are certainly.
Having an impact on the ability to distribute product you are talking particularly about fuel ethanol margins.
No actually I'm, sorry, Brian I was talking about more on the high grade Alcohol's I mean, you talked a little bit about exports, there too, but just coming out a COVID-19.
Scene.
Demand spike supply increase but is that starting to abate. It seems like the industry still an oversupply. So just you talked about that normalizing, but but can you elaborate a little further on that please.
Sure so.
As Mike pointed out we're still in deep in negotiations and contractual volume, we expect that to carry through two year and.
Given.
The people of the late harvest and a lot of the volatility around commodity so it's still difficult to provide any additional color at this point, but what we would say generally is again, we we expect me a little place more of our product that's our goal and but we also view this is along along ball or alone.
Along.
Strategy.
Sense of being able to place more product of being able to two places at higher values and into higher value products.
That being said, we do expect to see there is some additional supply we're certainly contributing to that we went from effectively.
A year and a half ago, something like 60, 70 million gallons 140 million gallons and potential production capacity. So the market is going to be able to absorb that and I think it's the goal of not only ourselves, but everyone else to make sure that we're not cannibalizing, our our our existing services and products.
Alright, and then.
You mentioned a little bit on carbon capture can you just provided an update on the opportunity. There obviously seeing increasing activity what are the next steps and can you kind of frame at a high level, just the opportunity and potential contribution there and then maybe just discuss a little bit of the impact from the recent and proposed legislation.
Yeah, Let me I'll give you a little bit of color and then Mike filling if I'm Mr. Evans absolutely.
So as you think about for a couple of things one is that with the latest infrastructure Bill we're seeing a lot of.
We've seen some significant benefits or expect to see significant benefits from that.
Really it's manifests itself in a couple of forms one is at the 45 Q program.
As would boost or the increase per.
The <unk>.
Tax credits available.
On a per metric ton basis.
Of soon to increase from.
$50 per gallon or $50 per metric ton too.
$85 per metric ton.
That will be eligible an available beginning.
At the time of completion for 12 years from the time that you begin to claim the credit.
And.
And it also.
Introduced direct pay so rather than having to go through and find and potentially have to pay for significant.
Day of significant fee to two parties that.
Would be able to monetize that.
Tax credit.
That means more of the economics share.
Is retained within within the structure.
The.
Positive thing for US is that we're in development or were in discussion with multiple parties and really just exploring kind of the full.
Ray of options everything from Henry and doing it on our own.
And internalizing all as much as that values possible to effectively selling you that the fence line and really it's just about being efficient in allocating risks amongst those parties, who can best absorbed those risks efficiently and effectively.
And a low cost more to come on that.
Mike and you want to yeah.
Only thing I would add error is.
<unk> before that.
We sit right on top of some great geology for carbon sequestration and because of that we do have a lot of options lots of folks we've talked to we understanding with the infrastructure Bill how things have changed is Brian described we want to be very thoughtful and the way.
We approach this and.
We want to be able to maximize value for the shareholders and profitability for the company.
When we do this and again.
It runs the gamut it runs the gamut from.
Contracting with somebody to do it on your own or two and adopted defense line and.
Again, good news is we are talking to folks.
And as soon as we have reached conclusion on what is the best opportunity for us.
We will certainly inform everyone.
Alright sounds good I'll I'll pick in the queue. Thanks for taking my questions.
And thank you and again if you have a question that is star one again, if you'd like to ask a question that star one and our next question comes from MIT dial from H C. Wainwright. Your line is not open.
Thank you good afternoon, everyone.
Brian You you mentioned the.
Realized gross profit guidance for the year $40 million is the minimum how much higher.
Hi echoed this be if things move forward with you in the quarter.
Yeah. That's a great question is a bit difficult to peg.
Because there's.
Clearly this is Ah.
You're seeing some of the best fuel margins at the moment.
That we've seen in the very long time, probably since 2014 as an industry and those.
Those are those are significant and we remain optimistic at the same time there.
There are things that.
To some degree those margins.
Have a long way too too.
To go to make up for what has been largely.
Abysmal margin structure in the fuel ethanol business for the last six to eight months.
Particularly as bad as they were in the beginning of the first quarter.
The other challenges clearly you saw and could see in our results for the for Q3 was.
Not only do we have the wet mill.
The costs associated with that that impacted both revenue and additional cost of goods sold.
And.
But additionally, just the corn basis alone I mean normally we would see.
In in a normalised market basis that we pay in Peking.
Is basically.
Apart, sometimes negative in relation to Chicago <unk>.
III splendid 95 cents and you were looking at well over one dollar dollar and a half.
Some point in that market. So you can see that kind of impact. So while you saw some moderation and corn prices and they kind of came off a little bit in the queue. Three what you weren't seeing what the basis was really all work and you couldn't lock it in.
It just wasn't available so you were really paying having to pay spot prices on the basis.
So not to not to beat around the bush too much but.
We are we are optimistic about the number.
The $40 million the minimum.
But.
I am low to peg the upside on this but.
It's a significant step up even to the 40 from what was what we've been able to generate today it is $25 million.
Understood.
And Mike you mentioned potential of 40 million dollar EBITDA improvements from protein production.
The four dry meals.
Is this on top of the 18.5 million that you might see from the improvements you've already viewed.
It would be in addition.
Yeah. It would be in addition to what we've reported in the 18 five was just 5 million.
In 2022, because we will be installing the system during the first half of 2022.
So the $9 million benefit at Magic Valley.
We in the 18 fight we counted $5 million in there, we think thats with EBITDA contribution will be in 2022.
With all four drive <unk> are up and running it will be a total of $40 million.
So incremental.
Incremental 35 from the 2022 number and what's included in the 18 five.
Okay. Thank you for that.
Now would sort of a balance sheet.
And a much stronger position and all that.
You vindicating potential acquisitions of interest in acquisitions previously is that something that could come into play for you as you look to continue to diversify our end markets.
Furthermore.
Minor product portfolio.
Yes, absolutely and I think we indicated even in prior calls that.
Vertical integration, we ship primarily in bulk.
And the ability to go to smaller packaging.
Standardization totes drums.
Could be is something that we're looking at we think that's a value added.
What what we need to be doing longer term. So you can either do that through acquisition or you can do that through building it yourself and so we're looking at all those possibilities, but there are other things to enhance the specialty alcohol space that we're looking at I mentioned the.
Happened to redundancy at our at our location.
Because we have multiple plants on the same site.
That can produce high quality alcohol.
It was important that we had.
Certifications across the entire spectrum of the peaked campus and we'll have that complete by year and that's that's.
That's another way to enhance our specialty alcohol portfolio.
Okay. Thank you that's.
That's what I have for gnostic amount of the question definitely thank you. So much. Thank you. Thanks alright.
And thank you.
I am showing no further questions I would now like to turn the call back to Mike can dress for closing remarks.
Thank you Justin Thank you again for joining us today and for your ongoing support as you can tell we are excited about the progress we have made and the bright future. We have ahead of us we will be attending virtually the upcoming Craig Hallum Alpha Select conference on November 16th and look.
Forward to continuing our dialogue with you as we make further progress. Thank you and have a good afternoon.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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