Q2 2022 Alto Ingredients Inc Earnings Call

August 8, 2022

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Good afternoon and welcome to the Alto Ingredients second quarter 2022 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 1 on your telephone keypad. To withdraw your question, please press star then 2.

Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman with LHA Investor Relations. Please go ahead.

Thank you, Gary. Thank you all for joining us today for the Alto Ingredients second quarter of the 2022 results conference call. On the call today are Mike Candres, CEO , and Brian McGregor, CFO . Alto 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 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 the August 15th meeting of the Alto Ingredients conference.

substitute forward-looking statements and considerations that involve a number of risks and uncertainties. The actual future results of the 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 Alto Ingredients filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements.

management's prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believe 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 of income taxes, asset impairments, loss on extinguishment of debt, acquisition related expense, fair value adjustments, and depreciation 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.

On today's call, Mike Candres will begin with some highlights and review the vision and quarterly activities. Brian McGregor will then provide detail on our Q2 financial results. Then Mike will wrap with a summary and open the call for Q&A. It is now my pleasure to introduce Mike Candres, CEO . Mike, please go ahead.

Thank You Kirsten and thank you everyone for joining us today. Our diversification into specialty alcohols and essential ingredients continues to serve us well.

As we continue to build for the future, our plan includes upgrading equipment and operating systems to increase efficiency and plant reliability.

expanding our corn storage capacity, enhancing our specialty alcohol production, and broadening its distribution, and reinvesting in essential ingredients.

In short, these capital projects strengthen and improve our current asset base and will generate even greater profitability.

Before I update you on our progress, I'll note we reported positive net income and adjusted EBITDA for the second quarter of 2022, which included $22.7 million in cash from the USDA's Biofuel Producer Program.

Brian will review this and other financial information in more detail in a moment.

I'll now review our efforts related to our long-term strategic plan.

During this time of macroeconomic challenges, we are managing projects within our control. In the second quarter, with our improved liquidity, we accelerated a litany of repair and maintenance projects as well as several equipment upgrades throughout the portfolio.

First, we recently purchased two new boilers for the Pekin campus.

They will enhance our steam capabilities at both Pekin and ICP and increase the interconnectivity between the two facilities.

With the greater capacity of these state-of-the-art boilers, we will replace three of our old units.

More reliable and efficient, our new system will have lower energy usage and costs.

Plus, the additional redundancy will increase our control of energy access across the campus.

Regarding our EGLE alcohol acquisition, the brake bolt, tote, and drum sails are in line with our expectations, although currently increased brake costs have resulted in some profit compression.

The integration is complete and we have made progress against our plan to leverage Eagle's distribution to add totes and drums to Alto's offering. And through Eagle's relationships, we have expanded our customer base.

We believe this will produce significant benefits for years to come.

We have prioritized upgrading our specialty alcohol equipment at our Peak and Wet Mill.

Over the years, many beverage customers have raised their quality standards. And with these upgrades, our equipment will be best in class, and we will be able to meet the highest quality requirements and enable us to service additional beverage customers, further increasing the synergy of the Eagle transaction.

In Idaho, we are on track with our essential ingredients expansion.

This project consists of two phases. The first, representing the further extraction of corn oil, and the second, the separation and production of enhanced protein.

Construction of the Corn Oil Extraction Phase is now complete.

based on better than expected preliminary results. We intend to accelerate the installation of the Corn Oil Extraction Technology and our other dry mills.

We remain on track with the second phase to commence high protein production at Magic Valley in early 2023. And once the installation at Magic Valley is complete and operational, it will inform us how we roll the technology out to our other facilities.

Also, we are expanding our corn storage at our Pekin facilities and expect to complete the project by mid-November.

This will approximately double the number of days of storage at the site and meet our goal to have additional capacity in place before the holidays and winter weather.

We have also made numerous additional upgrades at our facility. To name a few, we have completed the upgrade and expansion of ICP's corn oil production. We have increased corn oil storage and railcar loadout capabilities across all locations. We have made logistics improvements at ICP, which included truck access to the plant and scale upgrades. And at the wet mill, we upgraded control systems at the front end of the process.

Regarding carbon capture and sequestration, the U.S. Senate's recent approval of the Inflation Reduction Act is very exciting and significantly improves our project economics, raising the carbon capture tax credit from $50 per metric ton to $85 per metric ton.

As previously discussed, we produce approximately 700,000 metric tons of CO2 a year at our Pekin campus.

These facilities sit atop the Mount Simon Formation, identified as one of the best and largest aquifers in the country for sequestration.

To maximize the inherent value of our CO2, we have been actively pursuing numerous options, ranging from the development of a stand-alone project to the sale of the CO2 to one of the various pipelines currently under development in our area.

Approval of this legislation will greatly clarify our strategy and options and will accelerate our decision and implementation of this important project.

Before I turn the call over to Brian , I'd like to welcome Gabby Gray as an independent director, who was recently elected to our board at our annual shareholder meeting. She is a chemical engineer with fast experience in refining, and has been advising the board for the past year regarding plant operations and optimization, as well as process safety management.

I'd also like to thank John Prince for his service and wish him the best in his retirement from the board.

With that, Brian , over to you for a review of the financials.

Thank you, Mike.

I'll provide some additional color around our results and metrics for the second quarter of 2022.

Net sales were $362 million, up from the $298 million in the second quarter of 2021.

This increase is primarily due to the addition of our Idaho plant production and higher average sales price per gallon of renewable fuel, which largely reflects fuel and corn supply constraints that translated into higher ethanol prices.

For the quarter, while crush margins were positive, they did not reflect the full cost of delivered corn to our sites. In short, the improvement in board crush was largely offset by the rise in corn basis.

As such, our specialty alcohol and higher value essential ingredient production

contributed the majority of the quarter's gross profit.

Alcohol sales were $275 million.

and essential ingredient sales were $83 million.

We sold 77 million total production gallons.

And the 17% increase from the second quarter of 2021 was partially offset by a reduction in third-party sales, reflecting our strategy to focus our marketing and trading efforts around core assets.

Specialty alcohols contributed 26 million gallons in line with our 2022 contracted volume of 99 million gallons.

The 6% increase over second quarter 2021 reflects the expanded capacity as well as increased exports and industrial demand.

Cost of goods sold were $353 million versus $283 million in the second quarter of 2021.

This reflects high corn basis, greater delivery costs, and logistical and service disruptions. Notably, our freight costs significantly increased year-over-year and doubled sequentially.

Also, we recorded $10 million of non-cash unrealized gains on our forward derivative positions.

This was largely offset by a $10 million non-cash lower of cost or market adjustment on ending inventories, largely related to an unplanned power outage at our peak and campus resulting from a lightning strike to the local utility.

SG&A expenses were $9 million compared to $7 million in the second quarter of 2021. This increase, which we expected reflects expenses related to our EGLE alcohol acquisition and the associated accrual for future contingent payments.

As Mike mentioned during the quarter, we recorded income related to a $22.7 million cash grant from the USDA, which was part of the CARES Act to support companies that experience renewable fuel losses related to the COVID-19 pandemic.

We are deploying the funds to support ongoing operations, including facility maintenance, and we have already accelerated some of our important infrastructure projects as Mike previously mentioned.

Net income available to common shareholders was $21.5 million, or $0.29 per diluted share, compared to $8 million, or $0.11 per diluted share, in the second quarter of 2021.

The Jassid Ibadal was $29.9 million compared to $17 million in the second quarter of 2021.

Our balance sheet is clean and strong, with cash and cash equivalents totaling $57 million as of June 30, 2022, compared to $50.6 million at December 31, 2021.

At June 30, 2022, our working capital was more than $178 million and over $125 million out of our outstanding $52 million revolving line of credit balance.

This represents an improvement of over $16 million from December 31, 2021.

Increases include the USDA grant, higher accounts receivable and inventory balances, which were offset by $15 million invested in Eagle Alcohol and over $15 million in capital improvements and repair and maintenance expenses already incurred for the six months, for the six months, for six months of 2022.

We have no additional debt and we expect to further strengthen our liquidity as we complete the renewal of our revolving line of credit in 2-3.

Looking ahead to third quarter, although forward crush margins remain positive, we are coming into a late harvest with high corn basis and low corn inventories.

In anticipation, we have scheduled much of our fall maintenance and repairs in Q3 to reduce our relative use of corn and minimize the impact of short-term higher commodity prices.

With that, I'll turn the call back to Mike.

Thanks Brian . In summary, only two years ago, in the second quarter of 2020, we began the ELTO ingredients transformation to emphasize higher margin products, specialty alcohols and essential ingredients.

In this short time since April of 2020, we have generated significant financial benefits, yielding over $70 million in net income and $190 million in adjusted EBITDA.

And more is on the horizon. With a strong balance sheet, we have accelerated critical infrastructure projects. These projects continue our ongoing work to increase plant efficiency, reliability, redundancy, and capacity.

blended with our efforts to extend our distribution and expand our relationships.

We are improving our position to capture a variety of opportunities and drive profitable growth.

Finally, I'd like to invite investors to meet with us at the H.C. Wainwright Conference in New York City in September .

With that, I'd like to open the call for questions. OperatorFrom Communications

We will now begin the question and answer session.

To ask a question, you may press star then 1 on your telephone keypad.

If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster.

Our first question is from Char Perez with Guggenheim. Please go ahead.

Hi, good afternoon team. It's actually Constantine here for sure.

im mabe.

I just wanted to start off with the kind of work that you're doing around the carbon capture and storage. Obviously the IRA that is kind of being contemplated is a big benefit.

Just thinking about the threshold for an investment decision and potentially some of the timing around the engineering work and partnerships that you have done if there's anything there.

Yeah, so as we said in our hits, Brian , with we mentioned in our prepared remarks, Mike mentioned, there is, you know, we're pursuing a number of different options concurrently, and really just need to, you know,

make a decision with regards to which way is the most beneficial for shareholders and for the company.

There are certain advantages to going it alone and building the plant, especially with regards to distance and pipeline.

And at the same time there's also risks that you absorb with that as compared to you know going with a pipeline and and and being able to allocate those risks you know onto a third party.

So, clearly with this...

approved legislation, it certainly changes the economic

dynamics but also then makes it much more clear for us as to how we want and where we would potentially want to go with this.

be assured that we are very much cognizant of the importance of timing and have been very active in this, you know, in our process not only for the, you know, for the last six, particularly the last six months, but I'd say over the last year and, you know, we hope to move quickly in making a decision and moving forward.

and providing more clarity around that. Understanding that if we were to go it on our own, it would also be important not to get out in front of.

of some of the other work that needs to be done and laying the groundwork if you're going to be, you know, out trying to lay some pipeline, right, to not change the economics around that. So just ask everybody to be patient and we look forward to, you know, to being able to provide a lot more information in that regard.

Excellent. That's a lot of great detail. And maybe if you just have any commentary on the engineering work that's been done at this point, is there anything else you want to add?

the cost structure that you're contemplating in your...

in your planning and how does that kind of relate with maybe some of the broader industry benchmarks that we've seen.

Yeah, I think they're very much similar. I would say that, you know, depending which direction you're going, you know, some of that work has been done, but I would say the long pull and attempt at this point is largely you're permitting. And not necessarily your engineering and design. There's a lot of work that has been done in that regard. And there's actually been a lot of field work that's been done as well as identifying locations and the like. So it's not as if we're the only party in that neighborhood. And indeed, there's a reason that the pipelines are coming by our location.

or near our location, relatively, you know, for injection purposes.

Okay, excellent. And maybe a last one for me. In terms of the capital location more broadly, have your considerations changed given the backdrop year to date between the IRA and the commodity environment? Any changes to the amount and timing of capital that you plan to deploy on cost efficiency versus increasing protein and other product extensions?

Certainly, yes, and as Mike had indicated, there's a lot of projects that actually we haven't really enumerated yet that we look forward to sharing more on, and those may actually have an impact as well as to how we prioritize those projects.

There are some that may actually have even a better return on investment than currently the ones that we've identified for you, and so we'll stage those appropriately to make sure that we're bringing the best and highest return to the fore and accelerating those projects.

Does that help?

Yes, I think so.

Yeah, I just do not to be too obtuse, but the idea is as well is that we don't really want to talk about projects that haven't yet been approved or, you know, that may have some confidentiality associated with it that, you know, we wouldn't want to disclose before their time.

Certainly, and I appreciate that. Thanks for taking the questions.

Thank you.

The next question is from Eric Stein with Craig Hallam. Please go ahead.

Hi Mike, how are you?

Hi, Eric.

Hey, so just going back to the the carbon capture a little bit in in putting aside the

you know the the fact that you you don't want to get in front of some capital projects that you might already have underway or you know are getting closer. You know is this more a decision between speed to market and that potentially the pipeline or at least the activity there those that are being built are a little bit further along or greater economics it just seems you know I don't know what the capex would be.

Eric, I think the really good news is we have a lot of interest, a lot of options, a lot of folks we've been talking to. It is a critical decision for the company, both from a capital standpoint, future economics, and we really have been diligent in terms of trying to vet all the different options that we have out there. We've seen a lot going on inside our flagship CBD walnut and we've also seen that we've

with this legislation and the potential change there, it greatly changes the economics of some of these options. And so, uh,

If everything goes as planned and it passes, it's certainly going to kind of shake up the, some of the work that we've done up to this point. I kind of feel like we're fortunate. We are where we are. We haven't launched into a, uh,

one of the options that maybe would change with this legislation. So I think we're going to be really, really thoughtful as we go through this. And you're right, it does take a lot of capital to go it on your own, but the economics are very compelling. So those are the kind of things we have to sort out and we're working hard at it.

Okay, yeah, I guess I'll stay tuned on that in terms of some of the strategic projects, operational initiatives. Let's check that back.

Comparing what you've got in your deck with what you had last quarter, so it doesn't look like you've necessarily taken on additional projects, it is more about acceleration, I guess confirming is that the case, and then should we look at that as I think you laid out $50 million in incremental EBIT as part of these projects, should we just...

you know, look at that as you've pulled that forward two quarters or something along those lines.

I think that's right. You know, definitely the projects that we have, particularly Corn Oil, is what I mentioned in the script. It definitely is giving great returns and it's one that we've kind of shifted to phase one, phase two of the Co-Pro Max.

The economics are there. We're very

you know, very much looking at the project of, you know, generating the returns that we've talked about. But the corn oil part, we can't accelerate that. So, you know, we're constantly looking at these projects, and it's a very dynamic situation. So, given where we are as a company, we're going to take advantage of the things that give us the greater returns. And that's one example of a shift that we've made.

as opposed to rolling out ProPro Max.

full-on at all our locations. We're going to accelerate the corn oil portion and then we'll look to when we complete the protein piece in Magic Valley, and I would add that you know we're already talking to potential customers in Magic Valley about what that would look like and we're very optimistic about the returns where we will get on the protein side also.

But, you know, we're constantly looking at what makes sense, where we need to go, how to deploy the capital. We want to be very prudent as we do that. And at the same time, other projects come up from time to time and we need to evaluate them and where they stack up in the return profile.

So it's an ongoing deal and it's very dynamic.

Okay understood on that and maybe last one for me just one more model related but you mentioned the the turnarounds that you plan to do in the third quarter I mean any clarity on links or you know maybe it's an overall utilization rate you expect in the quarter would be helpful.

Yeah, I would expect that there'd probably be, well, it's difficult to say because we actually had a number of interruptions, as you see, if you look on the total, you know,

production.

rate that we had as compared to capacity for the quarter we were down a little bit quarter over quarter railroad interruptions and the like particularly for our western plants.

So if you look at it in the aggregate, it may be about the same, but we're trying to manage as best we can to make sure that we're taking advantage of these windows where you see cost increasing to be able to.

to efficiently do your repairs and maintenance and scheduled outage before you move into the winter periods.

So we're glad we have that optionality and and you know we expect that you'll see a moderation in in in basis and in corn prices once we get into harvest.

Okay, thank you.

Thank you.

The next question is from Amit Dayal with

Thank you. Good afternoon, everyone. With respect to the alcohol distribution business, I know you commented a little bit that you are seeing some great cost related impacts on margins in that business. But you know, there's talk about potential recession, etc.

Can you give us any sense, you know, how your position for that type of a market environment for this segment?

Yeah, you know.

We've said before the EGLE acquisition really had multiple layers to it. There's the base business in St. Louis, what they currently were doing. That business was a $30-plus million business with about $4 million of EMA DA. During the integration and with some of the freight logistics.

There's been some pressure on that, but we're fully, now that the integration is behind us, we're fully expecting to have that piece of the acquisition continue to generate good performance. But the other parts of the acquisition are equally or maybe even more important, and that is adding vertical integration with totes and drums for our Alto business and expanding that capability.

and not just, you know, be in a position where you provide bulk product, we now have the option to do totes and drums. We will also look to expand that distribution business. We think it's a good business and we, the expansion could be within ELTO, but it could also be taking the EGLE platform and expanding that geographically. And then the last piece of that acquisition really is around using the relationships

that EGLE has built over the years to enhance our sales into the beverage space with specialty alcohol and just generally grow the alto business with the relationships the EGLE folks have.

So it's kind of a

You know, multifaceted acquisition. It isn't just buying the St. Louis distribution.

Maybe the thing I'd add to that as well is that any of the freight impact, the compression that we've seen, Oldham Wood will adjust itself, right? I mean, as you go into new contractors and negotiations, you make sure and make the appropriate adjustments for that. While you may not have the flexibility in the given year under a one-year contract, you certainly make sure and adjust and true up in the renewal periods. And who does that?

Brian also potentially play out for the ethanol sales as well. I mean, you know

thoughts around those types of...

drivers could mount faster than what you're seeing for the forward crush margins. Could we see some upside maybe towards the end of the year?

I don't know that you would see it at the end of the year, but you would certainly see, you know, as we go into contracted negotiations or contract negotiations in fourth quarter because of the late harvest for our specialty alcohols that you would be making the appropriate adjustments where this, you know, when you've got fixed price contracts, it's unusual to have freight adjustments. So you have to work your way through that and you make your...

As you enter those new fall negotiations for 2023, you make the appropriate adjustments for your input costs.

Thank you.

understood. Thank you. I think Brian you mentioned some planned shutdown in the third quarter. How long will this be for week or two?

Yeah, I don't know that it would be a week, but you know some of the, you know, call it two, three, four days and a couple of the plans. It does not actually include the wet mill this year. The wet mill will be done about every, we did the last, I guess it was the last August that we did the wet mill, so you probably got somewhere between another, you know, nine months to a year before we would bring down the wet mill. And that by far has the most significant impact because of the continuous fermentation and all of the associated.

services and production around that, that that has a material.

you know, shut down or an impact of probably, you know, one to two weeks. Right.

That's all I have for questions offline.

Thank you. Okay, thank you. Thank you.

Again, if you have a question, please press star then 1.

The next question is from David Bastian with the Kingdom Capital Advisors. Please go ahead.

Hi Mike, hi Brian , good afternoon. The first question is on the specialty alcohol. You provided the guidance for the 90 million gallons that were contracted this year. Are we going to get guidance on gross profit there like we did last year?

I guess I'd say is we haven't been able to give it so far, you know, and it's a good question. It's certainly something that we've tried to tackle. I don't know that it would give you much comfort if, you know, by the end of the Q3 we can give you Q4, but we'll give you as much guidance as we can and visibility as we can.

long as we can but we're not able to give you that guidance for this quarter.

Okay, could you maybe give some commentary on how the specialty market is looking for the remainder of this year and as you start looking towards contracting later this fall for 2023?

I would say that nothing's really changed. We were on track as we mentioned in our prepared remarks. We're certainly on track with the contracted volume and do we expect to sell you know in excess of what we had you know indicated to you in this industry. We indicated 90 million gallons and we're in track to sell in excess of that.

We're seeing a pickup in industrial and export sales as well.

And we would expect in 2023 to be able to place more product and hopefully be able to up.

you know upgrade and and upmarket that was those products particularly as we as as Mike mentioned in the

in his prepared remarks around

raising the quality of product at our wet mill to achieve the highest quality products available. And we hope to have that completed in Q3. you know at the end of Q3.

to be available. While we wouldn't expect to place all that product, you know, we would certainly expect to be able to place more of that product year over year.

into a higher value market.

Got it.

That's good to hear. Switching gears to the protein upgrades, you mentioned the 9 million uplift for 23. If you're going to get an extra 9 million or so gallons of corn oil in Magic Valley, at current prices, that would be almost a 9 million contribution on its own. So are you seeing a lot of that 25 million you're hoping for then getting accelerated as a result of accelerating the corn oil at the other sites? Yes.

I think that's a fair comment, David, and quite frankly, the preliminary results that we're seeing coming out of Magic Valley are very impressive. I think that's led to our decision to take Phase 1 and accelerate it across the platform. I certainly struggle and doubt that again.

Again, they're preliminary. The system was just completed, but we're very optimistic about where we can go with it.

Indeed, we're actually seeing with the corn oil part of the system, we're seeing significantly good results with regards to the protein.

So, we're excited about that even before having the protein plant facility in place. Fully, yeah, fully installed.

Great. That's awesome to hear. Thank you.

That's all for me.

Thanks Dave.

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

Thank you, Gary. Thank you again for joining us today and for your continued support. We feel very good about the future, the direction of the company, and again we want to thank you for your continued support and have a good afternoon. Thank you.

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

You

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Good afternoon and welcome to the Alto Ingredients second quarter 2022 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 2.

Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman with LHA Investor Relations. Please go ahead.

Thank you, Gary, and thank you all for joining us today for the Alto Ingredients second quarter 2022 results conference call. On the call today are Mike Candres, CEO , and Brian McGregor, CFO . Alto 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 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 the Q&A. The company 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 August 15th, the details of which are included in the Q&A session.

a number of risks and uncertainties.

The actual future results of the 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 Alto ingredients filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements.

To support the company's review of non-GAAP information later in this call, a reconciling table was included in today's press release.

On today's call, Mike Candras will begin with some highlights and review the vision and quarterly activities. Brian McGregor will then provide detail on our Q2 financial results. Then Mike will wrap with a summary and open the call for Q&A. It's now my pleasure to introduce Mike Candras, CEO . Mike, please go ahead.

Thank You Kirsten and thank you everyone for joining us today. Our diversification into specialty alcohols and essential ingredients continues to serve us well.

As we continue to build for the future, our plan includes upgrading equipment and operating systems to increase efficiency and plant reliability.

expanding our corn storage capacity, enhancing our specialty alcohol production, and broadening its distribution, and reinvesting in essential ingredients.

In short, these capital projects strengthen and improve our current asset base and will generate even greater profitability.

Before I update you on our progress, I'll note we've reported positive net income and adjusted EBITDA for the second quarter of 2022, which included $22.7 million in cash from the USDA's Biofuel Producer Program.

Brian will review this and other financial information in more detail in a moment. I'll now review our efforts related to our long-term strategic plan.

First, we recently purchased two new boilers for the Pekin campus.

They will enhance our steam capabilities at both Pekin and ICP and increase the interconnectivity between the two facilities.

With the greater capacity of these state-of-the-art boilers, we will replace three of our old units.

More reliable and efficient, our new system will have lower energy usage and cost.

Plus, the additional redundancy will increase our control of energy access across the campus.

Regarding our EGLE alcohol acquisition, the brake bolt, tote, and drum sales are in line with our expectations, although currently increased brake costs have resulted in some profit compression.

We believe this will produce significant benefits for years to come.

We have prioritized upgrading our specialty alcohol equipment at our Peak and Wet Mill.

This project consists of two phases. The first, representing the further extraction of corn oil, and the second, the separation and production of enhanced protein.

Construction of the Corn Oil Extraction Phase is now complete.

based on better than expected preliminary results. We intend to accelerate the installation of the Corn Oil Extraction Technology and our other dry mills.

Also, we are expanding our corn storage at our Pekin facilities and expect to complete the project by mid-November.

This will approximately double the number of days of storage at the site and meet our goal to have additional capacity in place before the holidays and winter weather.

and rebuilt one of the two turbines. These projects are some examples of our commitment to upgrade our facilities to improve efficiency and reliability.

We are also engaged in longer term projects. Regarding our renewable natural gas project at Pekin, we are currently in our engineering and design phase with a goal of making an impact by the end of 2023.

As previously discussed, we produce approximately 700,000 metric tons of CO2 a year at our Pekin campus.

These facilities sit atop the Mount Simon Formation, identified as one of the best and largest aquifers in the country for sequestration.

Approval of this legislation will greatly clarify our strategy and options and will accelerate our decision and implementation of this important project.

I'd also like to thank John Prince for his service and wish him the best in his retirement from the board.

With that, Brian , over to you for a review of the financials.

Brian , over to you for a review of the financials. Thank you, Mike.

I'll provide some additional color around our results and metrics for the second quarter of 2022.

Net sales were $362 million up from the $298 million in the second quarter of 2021.

As such, our specialty alcohol and higher value essential ingredient production

contributed the majority of the quarter's gross profit.

Alcohol sales were $275 million.

and essential ingredient sales were $83 million.

We sold 77 million total production gallons.

And the 17% increase from the second quarter of 2021 was partially offset by a reduction in third-party sales, reflecting our strategy to focus our marketing and trading efforts around core assets.

Specialty alcohols contributed 26 million gallons in line with our 2022 contracted volume of 90 million gallons.

The 6% increase over second quarter 2021 reflects the expanded capacity as well as increased exports and industrial demand.

Cost of goods sold were $353 million versus $283 million in the second quarter of 2021.

This reflects high corn basis, greater delivery costs, and logistical and service disruptions. Notably, our freight costs significantly increased year-over-year and doubled sequentially.

Also, we recorded $10 million of non-cash unrealized gains on our forward derivative positions.

This was largely offset by a $10 million non-cash lower of cost or market adjustment on ending inventories largely related to an unplanned power outage at our peak and campus resulting from a lightning strike to the local utility.

We are deploying the funds to support ongoing operations, including facility maintenance, and we have already accelerated some of our important infrastructure projects as Mike previously mentioned.

Net income available to common shareholders was $21.5 million, or 29 cents per diluted share, compared to $8 million, or 11 cents per diluted share, in the second quarter of 2021.

Adjusted EBITDA was $29.9 million compared to $17 million in the second quarter of 2021.

Our balance sheet is clean and strong, with cash and cash equivalents totaling $57 million as of June 30, 2022, compared to $50.6 million on December 31, 2021.

At June 30, 2022, our working capital was more than $178 million and over $125 million out of our outstanding $52 million revolving line of credit balance.

This represents an improvement of over $16 million from December 31, 2021.

We have no additional debt and we expect to further strengthen our liquidity as we complete the renewal of our revolving line of credit in 2-3.

Looking ahead to third quarter, although forward crush margins remain positive, we are coming into a late harvest with high corn basis and low corn inventories. In anticipation, we have scheduled much of our fall maintenance and repairs in Q3 to reduce our relative use of corn and minimize the impact of short-term higher commodity prices.

With that, I'll turn the call back to Mike.

In this short time since April of 2020, we have generated significant financial benefits, yielding over $70 million in net income and $190 million in adjusted EBITDA.

and more is on the horizon. With a strong balance sheet, we have accelerated critical infrastructure projects. These projects continue our ongoing work to increase plant efficiency, reliability, redundancy, and capacity.

blended with our efforts to extend our distribution and expand our relationships.

We are improving our position to capture a variety of opportunities and drive profitable growth.

Finally, I'd like to invite investors to meet with us at the H.C. Wainwright Conference in New York City in September .

With that, I'd like to open the call for questions. 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. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question is from Shahra Perez with Guggenheim. Please go ahead.

Hi, good afternoon team. It's actually Constantine here for sure. I just wanted to start off with the kind of work that you're doing around the carbon capture and storage. Obviously the IRA that is kind of being contemplated is a big benefit.

I'm just thinking about the threshold for an investment decision and potentially some of the timing around the engineering work and partnerships that you have done if there's anything there.

Yeah, so as we said in our hits, Brian , with we mentioned in our prepared remarks, or Mike mentioned, there is, you know, we're pursuing a number of different options concurrently, and really just need to, you know,

make a decision with regards to which way is the most beneficial for shareholders and for the company.

There are certain advantages to going it alone and building the plant, especially with regards to distance and pipeline.

And at the same time, there's also risks that you absorb with that as compared to going with the pipeline and being able to allocate those risks onto a third party.

And at the same time there's also risks that you absorb with that as compared to you know going with a pipeline and and and being able to allocate those risks you know onto a third party. So clearly with this

approved legislation, it certainly changes the economic dynamics, but also then makes it much more clear for us as to how we want and where we would potentially want to go with this.

be assured that we are very much cognizant of the importance of timing and have been very active in this, you know, in our process not only for the, you know, for the last six, particularly the last six months, but it's over the last year and, you know, we hope to move quickly in making a decision and moving forward.

and providing more clarity around that. Understanding that if we were to go it on our own, it would also you know be important not to you know to get out in front of

of some of the other work that needs to be done in laying the groundwork if you're going to be, you know, out trying to lay some pipeline, right, to not change the economics around that. So just ask everybody to be patient and we look forward to, you know, to being able to provide a lot more information in that regard.

Excellent. That's a lot of great detail. And maybe if you just have any commentary on the engineering work that's been done at this point, is there...

the cost structure that you're contemplating in your...

in your planning and how does that kind of relate with maybe some of the broader industry benchmarks that we've seen.

Yeah, I think that they're very much similar. I would say that, you know, depending which direction you're going, you know, some of that work has been done. But I would say the long pull and attempt at this point is largely you're permitting. And not necessarily your engineering and design. There's a lot of work that has been done in that regard. And there's actually been a lot of field work that's been done as well as identifying locations and the like. So it's not as if we're the only party in that neighborhood. And indeed, there's a reason that the pipelines are coming by our location.

or near our location relatively, you know, for injection purposes. Okay, excellent. And then maybe a last one for me. In terms of just capital location more broadly, have your considerations changed given kind of the backdrop year-to-date between the IRA and the commodity environment? Any changes then maybe to the amount and timing of capital that you plan to deploy on cost efficiency versus kind of increasing

protein and other product extensions? Certainly, yes. And as Mike had indicated, there's a lot of projects that actually we haven't really numerated yet that we look forward to sharing more on. And those may actually have an impact as well as to how we prioritize those projects.

Does that help? Yes, I think so. Yeah, I think that's what the other folks were talking about.

Certainly, and I appreciate that. Thanks for taking questions.

Certainly, and I appreciate that. Thanks for taking the questions. Thank you. Thank you. Thank you.

The next question is from Eric Stein with Craig Haram. Please go ahead.

Hi, Mike Hebron. Hi, Eric. Hey, so just going back to the carbon capture a little bit in putting aside the... in putting aside the...

you know the the fact that you you don't want to get in front of some capital projects that you might already have underway or you know are getting closer. You know is this more a decision between speed the market and that potentially the pipeline or at least the activity there those that are being built are a little bit further along or greater economics it just seems you know I don't know what the capex would be.

you went standalone I'd love to hear that but you know it would seem like 50 million plus in EBITDA a year is pretty attractive to go at it alone you know unless there is a reason to go the other route. Eric I think you know the really good news is we have a lot of interest a lot of options a lot of folks we've been talking to

It is a critical decision for the company, both from a capital standpoint, future economics, and we really have been diligent in terms of trying to vet all the different options that we have out there.

with this legislation and the potential change there, it greatly changes the economics of some of these options.

If everything goes as planned and it passes, it's certainly going to kind of shake up the some of the work that we've done up to this point. I kind of feel like we're fortunate. We are where we are. We haven't launched into a

one of the options that maybe would change with this legislation. So I think we're going to be really, really thoughtful as we go through this. And you're right, it does take a lot of capital to do it on your own, but the economics are very compelling. So those are the kind of things we have to sort out and we're working hard at it.

Okay, yeah, I guess I'll stay tuned on that in terms of some of the strategic projects, operational initiatives. And it is clear that we're in the middle of a crisis that dip Suleiman also

Comparing what you've gotten your deck with what you had last quarter, so it doesn't look like you've necessarily taken on additional projects, it is more about acceleration, I guess confirming is that the case, and then I mean should we look at that as I think you laid out 50 million in incremental EBIT as part of these projects, should we just...

you know, look at that as you've pulled that forward two quarters or something along those lines? I think that's right. You know, definitely the projects that we have, particularly corn oil, is what I mentioned in the script. It definitely is giving great returns, and it's one that we've kind of shifted to phase one, phase two of the CoProMax. You know, we had you

The economics are there. We're very, you know, very much looking at the project of, you know, generating the returns that we've talked about. But the corn oil part, we can't accelerate that. So, you know, we're constantly looking at these projects and it's a very dynamic situation. So given where we are as a company, we're going to take advantage of the things that give us the greater.

greater returns and that's one example of a shift that we've made as opposed to rolling out ProPro Max.

full-on at all our locations. We're going to accelerate the corn oil portion and then we'll look to when we complete the protein piece in Magic Valley, and I would add that you know, we're already talking to potential customers in Magic Valley about what that would look like and we're very optimistic about the returns where we will get on the protein side also. But you know, we're constantly looking at what makes sense, where we need to go, how to deploy the capital.

We want to be very prudent as we do that. And at the same time, other projects come up from time to time, and we need to evaluate them and where they stack up in the return profile.

So it's an ongoing deal and it's very dynamic. Okay understood on that and maybe last one for me just one more model related but you mentioned the the turnarounds that you plan to do in the third quarter I mean any clarity on links or you know maybe it's an overall utilization rate you expect in the quarter would be helpful.

Yeah, I would expect that there'd probably be, well, it's difficult to say because we actually had a number of interruptions. As you say, if you look on the total.

be well it's difficult to say because we actually had a number of interruptions as you say if you look on the total you know production

rate that we had as compared to capacity for the quarter. We were down a little bit quarter over quarter. You know railroad eruptions and the like, particularly for our western plants.

So if you look at it in the aggregate, it may be about the same, but we're trying to manage as best we can to make sure that we're taking advantage of these windows where you see costs increasing to be able to efficiently do your repairs and maintenance and scheduled outage before you move into the winter period.

So we're glad we have that optionality and and you know we expect that you'll see a moderation in in in basis and corn prices once we get into harvest.

we have that optionality and you know we expect that you'll see a moderation in in basis and in corn prices once we get into harvest. Okay, thank you.

Thank you. The next question is from Amit Dayal with HC Wainwright. Please go ahead.

Thank you. Good afternoon everyone. With respect to the alcohol distribution business, I know you commented a little bit that you are seeing some great cost related impacts on margins in that business. But you know, there's talk about potential recession, etc.

Can you give us any sense, you know, how your position for that type of a market environment for this segment? Yeah, you know, we've said before the the EGLE acquisition really had multiple layers to it. There's the base business in St. Louis, what they currently were doing. That business was a 30 plus million dollar business with about 4 million of EBA DA. During the integration and with some of the freight logistics.

product, we now have the option to do totes and drunks. We will also look to expand that distribution business. We think it's a good business and the expansion could be within ELTO, but it could also be taking the EGLE platform and expanding that geographically. And then the last piece of that acquisition really is around using the relationships that EGLE has built over the years to enhance our

our sales into the beverage space with specialty alcohol, and just generally grow the alto business with the relationships the Eagle folks have.

So, it's kind of a multifaceted acquisition. It isn't just buying the St. Louis distribution.

Maybe the thing I'd add to that as well is that any of the freight impact, the compression that we've seen, Oldham Wood will adjust itself, right? I mean, as you go into new contract and negotiations, you make sure and make the appropriate adjustments for that. While you may not have the flexibility in the given year under a one-year contract, you certainly make sure and adjust and true up in the renewal periods. Right. And who does that?

Brian also potentially play out for the ethanol sales as well. I mean, you know, if

drivers could not faster than what you're seeing for the forward crush margins. Could we see some upside maybe towards the end of the year?

I don't know that you would see it. I don't know if you see it. Yeah, I meant sorry I don't know that you would see it at the end of the year But you would certainly see you know as we go into contracted negotiations or contract negotiations in fourth quarter Because of the late harvest or our specialty alcohols that you would be making the appropriate adjustments Where this you know when you've got fixed price contracts It's unusual to have freight adjustments. So you have to you know work your way through that you make your

as you enter those new fall negotiations for 2023, you make the appropriate adjustments for your input costs.

I think Brian you mentioned some planned shutdown in the third quarter. How long will this be for a week or two?

services and production around that that that is that that has a material you know shut down or an impact of probably you know one to two weeks. Right.

That's all I have for questions offline. Thank you.

That's all I have for questions offline. Thank you. Thank you.

Again, if you have a question, please press star then 1.

The next question is from David Bastian with the Kingdom Capital Advisors. Please go ahead.

Hi Mike, hi Brian , good afternoon. My first question is on the specialty alcohol. You provided the guidance for the 90 million gallons of a contract this year. Are we going to get guidance on gross profit there like we did last year?

long as we can but we're not able to give you that guidance for this quarter.

Okay, could you maybe give some commentary on how the specialty market is looking for the remainder of this year and as you start looking towards contracting later this fall for 2023? Okay, thank you very much.

We're seeing a pickup in industrial and export sales as well. And we would expect in 2023 to be able to place more product and hopefully be able to up.

you know upgrade and and up market that was those products particularly as we as as Mike mentioned in the

in his prepared remarks around raising the quality of product at our wet mill to to achieve the highest quality products available. And we hope to have that completed in Q3.

to be available. While we wouldn't expect to place all that product, you know, we would certainly expect to be able to place more of that product year over year.

to be available. While we wouldn't expect to place all that product, you know, we would certainly expect to be able to place more of that product year over year into a higher value market.

Got it. That's good to hear. Switching gears to the protein upgrades, you mentioned the 9 million uplift for 23. If you're going to get an extra 9 million or so gallons of corn oil in Magic Valley, at current prices that would be almost a 9 million contribution on its own. So are you seeing a lot of that 25 million you're hoping for then getting accelerated as a result of accelerating the corn oil at the other sites?

Again, they're preliminary. The system was just completed, but we're very optimistic about where we can go with it.

Indeed, we're actually seeing with the corn oil part of the system, we're seeing significantly good results with regards to the protein. So we're excited about that even before having the protein plant facility in place. Fully, yeah, fully installed.

That's awesome to hear. Thank you. That's all for me. Thanks Dave. Thanks Dave. That's awesome.

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

Thank you, Gary. Thank you again for joining us today and for your continued support. We feel very good about the future, the direction of the company. And again, we want to thank you for your continued support and have a good afternoon. Thank you.

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

Q2 2022 Alto Ingredients Inc Earnings Call

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