Q3 2022 Alto Ingredients Inc Earnings Call

Good afternoon, and welcome to the auto ingredients incorporated third 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 todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Kirsten Chapman L. H a investor Relations. Please go ahead.

Thank you Gary and thank you all for joining us today for the Alto ingredients third quarter 2022 results conference call on the call today are Mike canvas C O and Bryon 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 todays call that is available on the company's website at all to ingredients Dot com a telephone replay of today's call will be available through November 14th the details of which are included in today's press.

Really.

A webcast replay will also be available at all to ingredients website.

Note that the information on this call speaks only as of today November 7th.

Advised that time sensitive information may no longer be accurate at the time of any replay.

Please refer to the company's safe Harbor statement on slide two of the presentation available online, which states that some of the comments in this presentation constitute forward looking statements and considerations that involve a number of risks and uncertainties.

The actual future results of alto ingredients could differ materially from those statements factors that could cause or contribute.

Cause such differences include but are not limited to events risks and other factors previously and from time to time disclosed an alto ingredients filings with the SEC.

Except as required by applicable law the company assumes no obligation to update any forward looking statements.

In management's prepared remarks, non-GAAP measures will be referenced management uses these non-GAAP measures to monitor the financial performance of operations and believes that 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.

Before interest expense interest income provision benefit for income taxes asset impairments loss on extinguishment of debt acquisition related expense fair value adjustments and depreciation and amortization expense to support the company's your view of non-GAAP information later in this call a reconciling tape.

So what's included in today's press release on today's call Mike will begin with some.

Financial highlights and review, our vision and quarterly activities.

Brian will then provide additional detail on our Q3 2022 financial results then Mike will wrap up with a summary before opening the call for Q&A is now my pleasure to introduce my candidacy. Please go ahead Mike.

Thank you Kirsten and thank you everyone for joining US today, we are excited about our recent developments and look forward to sharing them with you in.

In the quarter, we continued our efforts to improve our long term position by upgrading equipment and operating systems. This will increase plant efficiency reliability redundancy and capacity and we have plans for larger capital intensive growth programs, we entered into a six year term.

Term loan for up to $125 million announced today, recognizing the importance of accelerating our diversification growth strategies, including carbon capture and sequestration corn oil protein and east expansion as well as R&D and natural gas.

Pipeline installation is.

Previously noted we expect these projects to contribute significantly to both our top and bottom lines and to further insulate our results from commodity and margin swings.

While expected third quarter was challenging and our results were negatively affected by low commodity margins driven by record corn basis, logistical constraints and repairs and maintenance associated with a maintenance shutdown of our ICP facility.

I am proud of our team who has skillfully managed supply chain constraints and logistical issues and prevented disruption with our customer base.

Brian will review the financial details later, yes, I'll highlight year to date through September 32022, we have capitalized over $25 million of infrastructure improvements and spent an additional $3 million in related costs that flowed through cost of goods sold further.

In both the operating margins and our bottom line results.

Now I'll review, our progress on our major Capex projects at our Idaho plant. The first phase of the co pro Max system to increase corn oil extraction is completed and we are pleased that the yield is growing significantly beating our initial expectations.

Given these positive results we plan to proceed with similar installations at our other dry mills. The second phase to separate produced enhanced protein is on scheduled to be completed in Q1 2023.

Once the system is fully operational and tested we will evaluate and schedule additional deployments.

Regarding our corn storage expansion in Illinois, we are well into our construction, which we expect to complete before year end the doubling of our storage will enable us to hold core in reserves during holidays winter weather and through logistical issues with the supply chain. We expect this.

<unk> storage capacity to reduce the volatility of our production input cost rigor.

Regarding our efforts to enhance our specialty alcohol, we prioritized upgrading the equipment at our wet mill and have made great progress this quarter.

This additional equipment, including a deep meta Liza column has been delivered and installed and we expect these upgrades to be fully operational in Q1 2023.

With its best in class equipment, and our recently achieve quality certifications, we will now be able to meet the highest quality requirements and service additional beverage customers at both our ICP distillery and Pekin wet mill.

This will provide production redundancy, providing surety of supply to our customers and enable us to improve our product mix and capture higher premiums and the alcohol value chain.

In addition to our stated projects. We have also taken advantage of opportunities to replace and upgrade older equipment, specifically at our Pekin campus for instance, the two new boilers. We recently purchased when installed will increase efficiency improve reliability and reduce energy.

Cost.

As mentioned earlier, we entered into a term debt financing for up to $125 million by increasing our financial flexibility with a supportive partner focused on our growth and development. We have created the ability to execute our capex strategy for long term success.

Converting the need to rely solely on organic cash flow. This financing will facilitate the timely completion of capital projects that are larger in magnitude scope and cost benefit to all stakeholders by building a more stable business with our bolstered capital resources, we plan to undertake.

These key projects simultaneously.

Consistent with our sustainability improvement program, we intend to add new natural gas and renewable natural gas pipelines to connect directly to nearby major hubs. This will increase our access to more competitive natural gas better address our future energy needs, including supporting.

Carbon capture and improve our ability to monetize the renewable natural gas we currently produce a player.

Overall this will further reduce our carbon footprint and enhance the value of our products. This project is in the design and permitting phase and is expected to be completed in 2024.

Additionally, after 24 years of being a valuable and reliable supplier to the pet food industry, we intend to commercially develop primary east through an aerobic fermentation process at our wet mill.

Extending our brand along the value chain is a natural progression to other high quality and increased margin markets, including flavors neutral.

Sutter gold production baking and meat supplies, although primary east production has a different process and different market many existing as well as prospective customers have expressed interest in this product for years.

Finally, our capital raised facilitates our decision process and speed to begin carbon capture and sequestration.

The options initially focused on just selling our CIO to the various pipeline developers at levels not attractive to us.

Inflation reduction act with changes to the queue 45, and the benefits of producing clean ethanol are significant as such we are working with and are currently in later stage negotiations with various parties to finalize the best option for altos carbon sequestration future due to.

We are finalizing the selection of both our front end engineering and design partner and our carbon transportation pipeline and sequestration developer and.

In summary, we are highly motivated to further reduce the impact of commodity exposure. These efforts are improving our position to capture a variety of new opportunities and drive profitable growth 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.

And metrics for the third quarter of 2022.

As stated on our call in August we entered a late harvest with high corn basis, and low corn inventories.

Create a silver lining reduce our relative use of corn and minimize the impact of short term higher commodity prices, we scheduled much of our fall repair and maintenance for August .

However, the third quarter was also hindered by continued supply chain constraints and rail interruptions, causing additional planned outages of over six days contributing to negative margins at our western facilities.

As the single largest receiver of corn on the Union Pacific system, We are working closely with our railroad and suppliers to improve the consistency and timely delivery of corn supply to our western facilities.

For the third quarter of 2022, net sales were $337 million up from $306 million in the third quarter of 2021, reflecting primarily the addition of our Idaho plant production.

Alcohol sales were $203 million.

Production gallons sold reached 76 million.

Up 32% from third quarter 2021, as the Idaho plant came online specialty alcohol contributed 23 million gallons, increasing 18% over the third quarter 2021, due to expanded capacity and increased demand.

And we expect to exceed our contracted volume of 90 million gallons for 2022 by year end.

Cost of goods sold were $357 million versus $309 million in the third quarter of 2021.

This increase included the charges associated with the Uncapitalized portion of our infrastructure upgrades as well as the logistical and service disruptions higher corn basis and greater delivery costs.

Notably corn basis costs significantly increased in the quarter by approximately $11 million.

Also we recorded $3 million of noncash.

Net loss on our forward derivative positions.

SG&A expenses were $7 million, including expenses related to our Eagle alcohol acquisition and higher stock compensation expenses compared to $6 million in the third quarter of 2021.

The resulting net loss available to common shareholders was $28 $4 million were <unk> 39 per share compared to $3 5 million or five cents per share in the third quarter of 2021.

Adjusted EBITDA was negative 20 million $26 million compared to positive adjusted EBITDA of $3 million in the third quarter of 2021.

Our cash and cash equivalents were $28 $5 million as of September 32022.

Compared to $57 4 million.

At June 32000, 2022.

Reflecting our quarterly loss.

Quarter and capital expenditures.

In addition, we have $37 million of availability under our asset based line of credit.

During the quarter, we spent $15 million in capex in anticipation of our recently announced capital raise.

In September we announced a $50 million share buyback program during the quarter. We purchased approximately 250000 shares for an aggregate of $1 million, we will provide periodic updates on the programs progress.

Our working capital at September 30th remained strong at $132 million.

Announced today, we fortified our capital resources by closing a six year term loan for up to $125 million.

The term loan allows for periodic draws in an aggregate amount up to $100 million.

With an additional $25 million available subject to satisfying certain conditions.

This financing will reimburse our strategic upgrades increase our working capital and fund our larger capital intensive long term projects. In addition, we renewed our revolving line of credit improving our.

Borrowing terms and extending the maturity date by another five years.

Looking ahead, while fuel demand typically slows in the late fall and winter periods in comparison to the rest of the year. We are encouraged by recent crush margin improvements over the September lows, particularly in the last half of October and November month to date.

Okay.

Sorry for the interruption.

[noise] I'll start again, while fuel demand typically slows in late fall and winter periods in comparison to the rest of the year.

We are encouraged by our recent crush margin improvements on the September lows, particularly in the last half of October and November month to date, which began with the corn harvest and resulting improvements in corn basis.

We expect this strengthening in margins to translate into much improved results in the fourth quarter.

Regarding our contracts for specialty alcohol for 2023, we expect to maintain or grow share with our existing customer base, while adding new accounts in the beverage category once our pekin GNL production system.

Improvements are online in early 2023.

Based on our equipment and operating system upgrades, we expect to see modest improvements.

P&L in early 2023.

With funding from the new term loan and associated accelerated investment and further diversification of our specialty alcohol and essential ingredient products, we expect to add over $20 million annually and EBITDA growth by the end of 2023, and an additional $30 million annually by 2025, and this does not yet <unk>.

<unk> expected results from projects under development, including primary use expansion and carbon capture and sequestration.

We look forward over the coming quarters to discuss the progress we've made with that I'll turn the call back to Mike.

Thank you, Brian and the team has created the financial flexibility to accelerate the next phase of our transformation. During 2022, we have diligently completed strategic repairs and maintenance to diversify our product offerings increased production yields and improved plant efficiency.

With the recent capital proceeds we will implement additional projects furthering our specialty alcohols and essential ingredients diversification strategy.

As we broaden our products and execute on our capital plan, we expect to minimize the effect caused by commodity pricing fluctuations and enrich our margin profile and as Brian indicated generate an incremental $50 million of EBITDA annually by 2025.

And this does not include the significant benefits financially of carbon capture and aerobic east.

We are excited about the future and look forward to delivering additional value to all our stakeholders with that I would 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 were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Our first question is from Eric Stine with Craig Hallum. Please go ahead.

Hi, Brian .

Hi, Eric.

Hey.

Maybe just before getting to the capital projects.

Just some commentary on the contracting season, and obviously it sounds like you're confident in growth there.

But just maybe how the conversations are going I know you have some new certifications that.

You got early last year, but you had missed kind of missed the window.

Those are playing into it and I don't know if youre willing to give kind of a thought of what the year over year increase might be in terms of contracted.

But any details there would be great.

Sure so.

As we indicated last year about this time, we are actually with our.

It was a.

It was a slow report last year as well given late harvest.

So I think it was during our fourth quarter results that we indicated that we had contracted 90 million gallons of.

Volume for 2022.

And we are well on our way to exceeding that amount, probably an approximate $100 million by year end.

Our expectation is to be able to match that or exceed that number in 2023, and that's before we actually bring online are.

Our improvements to the to the specialty alcohol production.

And that will be done.

Early 2023, and we expect to continue to be able to sell into that market. So I would expect you know production and ore sales to exceed that which we've done last year, so year over year over year.

Improvement in the volume.

Yes.

Okay, and then I mean on the specialty alcohols than we should think about that more as not necessarily contracted right. I mean, the volume sold more back half loaded, but just not contracted.

No no when you expect to have gone to have contracted volume for the full year of 2023, and then with the.

With full operation of the <unk> column any other improvements that we've made at that facility.

It has to be able to sell into.

And of the highest grade.

Product beverage.

Your line.

Throughout the year, so much like we did last year.

You see incremental sales throughout the year.

Right. So we saw approximately 10 million gallons of additional <unk>.

Specialty alcohol sales in 2022.

And we would expect to be able to do.

Do the same in 2023.

Okay.

No that's great.

Maybe just obviously more detail it sounds like you're getting close to.

To just taking further steps on carbon capture.

I mean anything you can share there does this make it more or less likely that you partner with someone.

Yeah.

It sounds like direct sequestration may be more of the route that you are going.

Any details.

There would be helpful as well.

Well, what I'd say Eric is that.

Obviously with the recent changes this is a very significant item for not only us but the industry.

And one of the reasons.

One of the primary reasons, we wanted to be able to enhance our financial capabilities.

And working with Orion.

We wanted to be able to pursue a multitude of options. So we have identified some very good options for us again we're.

We're taking bids from various contractors that will provide us with a friend in feed engineering.

That's the compression stage kind of behind the fence line and people to actually do the sequestration of pipelining. So it could be that we would partner with somebody but we havent gone that far yet we're evaluating the opportunities. The good news is with this financing in place.

This has really risen to the top of something we want to get done and we want to get it done quickly.

Got it thanks a lot.

The next question is from Amit Dayal with H C. Wainwright. Please go ahead.

Thank you good afternoon, everyone, Brian maybe for you.

You're talking about around 20 million of adjusted EBITDA improvements expected in Green Street.

What should we benchmark. This against you know should we use sort of a florida, 6% gross margin normalized level.

The calculations to you those who write about the 20 million of adjusted EBITDA improvements for next year I know you've had variance is lost.

Fourth quarter or any one of those very strong and this quarter. It looks like the third quarter of this year, there's a little bit of an anomaly.

Just wanted to see what would be sort of a normalized level of EBIT.

Prior to all of these improvements.

And maybe you can come out you know.

And then improvements youre expecting.

Okay.

I mean, it's a great question and.

We.

As you mentioned, it's a challenge to be able to forecast.

<unk> prices, particularly in where things have been so dramatic.

There was inflation or.

War in Europe , other things and then some.

<unk> constraints.

And logistical constraints that being said if you look over the last five year history.

Of the industry Youre looking at somewhere between 15, and 15% to 20% EBITDA margin. So whether you want to use an average.

What that would translate in for US is as you're probably looking at somewhere around north of 30% to $40 million of the baseline of EBITDA and then you wanted to incrementally add these numbers on top of that.

But.

Yeah.

Yeah. Our expectation is this year. This year is definitely an anomaly, especially after what was.

What was a bit of a volatile linearity last year, but finished on a very strong note.

Are you seeing improvements already I know, that's sort of a month and a half almost into the fourth quarter.

And then.

Other pricing coming through so far.

Yes, we have seen significant improvement, especially over the last three to four weeks.

Often September lows as I mentioned in the prepared remarks.

And it looks.

It would probably be too premature to forecast the 2024 like we saw last orin.

Q4 last year.

Duplicating that.

And particularly in light of the fact that we are.

Corn supply still are.

Corn basis is higher than it was last year, but we're seeing much stronger margins in this fourth quarter, but I guess, what I would also emphasize and thats why as you see them.

The emphasis in the <unk>.

Most of material comments that we've made is that our goal and desire is to continue to further our diversification and move away from what is otherwise.

Clearly a volatile market.

And be able to provide stability of earnings.

Understood well that's fine.

How many days was the <unk>.

Maintenance maintenance related shutdown for in the third quarter Brian .

Yeah about a week.

We can ask but again, if you think about that is there's a multiplying vacuum you have to bring it down and then bring them back up.

The impacts associated with that so and then on top of that repairs and maintenance unusual or significant repairs and maintenance that would come along with that.

And these are all done right, there's nothing in the fourth quarter alone.

That's correct.

There maybe saw a little bit of we may be doing some just normal types of scheduled outages, but nothing nothing material.

Okay understood. That's all I have for now I take another question. Thank you.

Thank you.

Again, if you have a question. Please press Star then one.

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

Hey, good afternoon guys.

David just wanted to touch on a couple of things real quick one was I know you guys had talked about hedging out a lot of your input costs like utilities natural gas last year.

Yes.

For that in 2023.

Yes, we've already we've locked our positions and particularly through the winter strip.

On natural gas and Thats well on electricity through.

Through through much of next year.

Got it.

I heard on your last question for me.

Do you expect your kind of baseline EBITA to be around.

$40 million or so given historic crush margins.

It sounds like even zero, then you guys would still be cash flow positive.

With where you're at with your current upgrades before the new stuff comes online.

That's correct.

Okay and then on these section 45 credits.

$85, a ton and 650 650000 tons.

Roughly consumer application.

That's correct, that's correct, just Chesapeake and David.

Right Okay.

And it sounds like that's been a pretty.

Yes, that's in his current capacity right.

The three facilities.

Alright.

And you are in the final stages of getting this locked down so can we hope to actually hear something on this on the Q4 call you think.

Possibly.

There is some working.

Working working with people that have to go out and secure the spa.

Spot to sequester, sometimes want to get that done ahead of time before announcing just for.

The ability to to not let the prices go crazy on them.

To be able to do that with farmers or wherever you.

You are going to sequester the <unk>, but our hope is we're pretty far along we have been evaluating our options for a while now and again as I mentioned the motivation to.

Lock in some really good financing with a really good partner that understands kind of where we're heading as a company was very important to us.

And will allow us to accelerate that decision.

Got you.

If I'm doing some back of the envelope math that gets me about 50 or $60 million a year for you guys.

Even if you have to put 80 or $100 million in upfront that's a pretty fantastic IRR. This is online in three to four years.

It's about right here.

And that would be just based on just the carbon tax credits that doesn't include any of the benefits that you get an uplift in price for product.

Associated with the low carbon footprint right. So you are blue ethanol clean fuels clean fuel sustained to aviation fuel right.

Great.

Blue ethanol got it. Thank you that's very helpful. Good to hear.

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

Yes. This is a very exciting time for us and I want to thank everybody for joining us today and for your continued support and we look forward to chatting with you next quarter and thank you very much.

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

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