Alto Ingredients Inc. Q1 2023 Earnings Call

Good day and welcome to the Alto ingredients first quarter 2023 financial results conference call.

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

Thank you Betsy and thank you all for joining us today for the algae ingredients first quarter 2023 results conference call on the call today are Mike canvas, CEO and Bryon Mcgregor CFO algae ingredients issued a press release after the market closed today, providing details on the company's financial results. The company has also prepared a presentation.

For todays call that is available on the company's website at alto ingredient dot com.

The telephone replay of today's call will be available through May 15, the details of which are included in today's press release. The webcast replay will be available on our website as well please.

Please note that the information on this call speaks as of today may eight you're advised that any time sensitive information may no longer be accurate at the time of any replay.

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

The actual future results without two 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.

Obviously 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.

In management's prepared remarks, non-GAAP measures will be referenced management uses these non-GAAP measures to monitor the financial performance of the operations and believes these measures will assist investors in assessing the company's performance for the periods being reported the company defines adjusted EBITDA as an audited net income or loss before.

For interest expense interest income provision for income taxes asset impairments loss of extinguishment of debt acquisition related expenses fair value adjustments and depreciation and amortization expense to support the company's review of any non-GAAP information a record a reconciling table was included in today's press release.

On the call today are Mike will provide a review of the strategic plan and activities, Brian will comment on our financial results then Mike will wrap up and open the call for questions. It's now my pleasure to introduce Mike Cancerous CEO . Please go ahead Sir.

Thank you Kirsten and thank you everyone for joining us today to review the first quarter of 2023 since our call in March we have continued to make good progress on our transformative capital projects, which will drive our near and long term EBITDA expansion goals I will discuss this further in.

The minute.

We are also pleased with the current market improvements, which are positively impacting our business crush margins have been improving since December .

Notably each month. This year has improved sequentially March 2023 ended with regional natural gas prices corn basis.

And oil prices greatly improved over December of 2022, all of which benefited our business for the month of March we generated positive bottom line financial results should the strong crush margins continue we would expect positive adjusted EBITDA for the second quarter of 2000.

'twenty three.

Brian will review the financial results in detail shortly.

Even though we have positive crush margins today, we don't control commodity pricing. This is exactly why we are implementing a series of near and long term projects aimed at reducing our exposure to those volatile markets.

We continue to transform alto ingredients by further diversifying our products and.

Advising operations to expand margins and increase profitability. We are excited about our capital improvement initiatives and their return profiles with the completion of our near term projects, we expect to increase annualized EBITDA by over $65 million by the end of 'twenty.

<unk> 25, an increase to $125 million annually by the end of 2026, when our carbon capture and sequestration co generation and other initiatives are fully realized.

Regarding diversification our strategy is to pursue multiple paths.

Our increasing production of our most differentiated and highest quality products. Our near term focus includes grain neutral spirits, corn oil and high protein and our longer term plan includes primary east as well as carbon capture and sequestration.

Regarding costs, our near term initiatives are to improve plant efficiency reliability, and where appropriate redundancy by adding corn storage and installing our own natural gas pipeline.

Our long term vision includes upgrading equipment converting our biogas to renewable natural gas and Dolby energy co generation capabilities at our Pekin campus.

We are confident in our ability to fund our near term capital projects through our term loan facility current working capital resources and expected cash generated from operating activities as far as funding our longer term projects, we continue to hold productive discussions with strip.

T J partners, and we will assess our capital needs at that time.

Let me provide updates on our capital projects first I'll review, our high quality alcohol strategy.

As discussed previously we completed the upgrade of our distillation system at our Pekin wet mill to produce the highest quality 190 proof and low moisture 200 crude.

DNS products on the market.

We also added right bolt and distribution capabilities, enabling tote and drummed packaging and distribution through the acquisition of Eagle alcohol.

Recently, we have added new beverage customers and we are working to place our DNS product on a spot purchase basis for the remainder of 2023.

More importantly, this fall, we expect to place additional volumes with new and existing customers. During our annual contracting period for 2024 are valuable certifications will be advantageous as we work towards qualifications by various customers.

Beginning in 2024, we estimate these products will contribute approximately $5 million in EBITDA annually and continue to grow over time.

Regarding our expanded production of corn oil and high protein as previously discussed in December we moderated production at our Columbia plant temporarily idled the magic Valley facility to minimize the impact of sustained high natural gas prices in the Pacific Northwest.

This created an opportunity at Magic Valley for Us to focus our attention on finalizing installation of the high protein technology. We have now resumed production at our Magic Valley facility and completed all material installations have been co pro Max corn oil and high protein system.

We are currently a widening all the new and existing operating systems at the plant to ensure optimal efficiency.

We plan to achieve full production of both higher corn oil volumes and higher quality drive protein at the facility by the end of the second quarter. We anticipate sales for these products and increased values to begin in the third quarter of 2023, we estimate corn oil and high quality pro.

<unk>.

Combined to contribute approximately $9 million of EBITDA annually.

Beginning in late 2023 management plans to start the staged rollout of the corn oil technology installation at our other three drive those although each facility has a slightly different size on average we expect to produce similar financial results the Magic Valley.

When fully installed we estimate the corn oil installations of the three other plants in aggregate will contribute over $14 million and the EBITDA annually.

After the high protein system is fully and successfully operational at Magic Valley, We will evaluate and anticipate rolling out the high protein technology at our other dry mills with similar expected economics, we estimate the high protein installations at our other three plants.

In aggregate will contribute over $13 million in EBITDA or over $27 million annually in the aggregate with corn oil expansion.

Regarding longer term initiatives for high margin offerings, we plan to expand into primary east production.

Having completed successful product trials, we have selected a highly qualified third party engineering group to complete our front end engineering and design or feed study.

We expect this study to be completed in Q3.

This project will extend the past upgrades made to our east operations. We estimate the primary east product will contribute approximately $19 million of EBITDA in the first 12 months enhanced the potential to increase to over $25 million annually thereafter.

We are targeting beginning construction in early 2024 and completing in the summer of 2025.

As you know, we also have a significant opportunity in carbon capture and sequestration.

As previously discussed we produce approximately 700000 metric tons of carbon a year at our Pekin campus.

Our advanced negotiations for this important and game changing project proceed in earnest we.

<unk> selected a third party feed firm to determine captured compression in engineering design. We expect this study to be completed in Q3. We are also finalizing the selection of a development partner to provide turnkey transportation sequestration and monitoring services.

Our goal is to have Ccs operational in 'twenty 'twenty six as.

As we discussed last quarter based solely on a conservative assumption of annual carbon production and $85 per metric ton, reflecting the 45 Q incentive established under the inflation reduction.

We believe we can generate over $30 million annually and EBITDA.

To be clear. This is after operating the sequestration cost and does not include any of the substantial economic benefits of the environmental attributes associated with low carbon ethanol.

Onto a review of our strategies to improve plant efficiency reliability and capacity regarding additional corn storage at our Pekin site. The 850000, social silo is now fully operational and contributing to improved corn procurement cost plant reliability.

<unk> and plant operating costs, the Pekin campus, we estimate the siloed to conservatively contribute over $2 million to EBITDA annually.

Regarding our new natural gas pipeline, we completed the third party feed study and are working on the initial routing steps, which enables the project to advance the definitive land agreements and the construction permit application process community interaction has been initiated around the pipeline and.

Initial feedback has been positive we are planning our new pipeline to bypass our current utility with the goal of optimizing procurement usage and expense, which will contribute to our sustainability efforts when fully operational the pipeline will reduce our energy cost by approximately <unk> <unk>.

Millions of dollars annually.

Upon completion, the new gas pipeline will create the opportunity for us to convert and monetize our current biogas waste stream into renewable natural gas for our N G.

Based on our current output, we estimate we could produce and sell our LNG for more than $3 million in EBITDA annually.

<unk> cogeneration to peak and we completed our feed study with a third party expert. The design is intended to address our current needs support the increased energy requirements for both our primary east and Ccs projects.

Ill say grid electrical power consumption. In addition to supporting these projects and based on current energy prices, we estimate the cogeneration will contribute approximately $15 million and EBITDA annually.

<unk> products are part of alto ingredients, DNA and producing them safely as one of our core candidates each of our capital initiatives address advances and addresses sustainability well these and our continual process improvements are labeled as ESG our decisions to ensure safe.

The quality and sustainability are simply good business I'll review, our actions over the past year.

Our work with NASDAQ on ESG included a materiality survey to determine areas of focus and we have completed all of the initial roadmap action items, we have strengthen and communicated our environmental health safety and security policy and objectives added consistent stand.

And details to our code of ethics and supplier code of conduct implemented that supplier transparency program with components, such as supplier scorecards and onsite auditing and in some cases partnered with C that are.

A leading data platform with over 74000 members to improve our sustainability performance and to ensure that we are ethically sourcing our goods and services.

Looking ahead, we have launched a three year employee engagement program with Gallo to identify areas of opportunity and facilitate communication at all levels and we completed our first an engagement survey in December 2022.

This employee engagement is more than a survey.

It's a comprehensive program with tools and training to achieve our goals for supporting one of our most important assets our employees.

<unk> has been a focus for recruiting internally and at the board level and we will include further metrics and our mid 2023 sustainability reporting we have completed our scope one and two greenhouse gas emissions inventory and have third party verification for both 2021 and 2002.

92 at all production facilities.

This information combined with our key projects such as carbon capture improving energy efficiencies and co in cogeneration and boiler upgrades and maximizing biogas utilization will lead us to set and achieve carbon reduction targets and help us do our part to meet sustainable.

<unk> goals, we look forward to sharing our ESG progress with everyone midyear.

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

Hey, Mike Upper.

I'll provide additional color around our first quarter 2023 result.

Like to reemphasize that our business can be impacted by seasonal swings in consumer demand for instance reductions in ethanol usage during the fourth and first quarters are warm winter period.

Clinton impact margins.

Increased driving activity in spring and summer periods. It is normal demand for ethanol Kris and margins improve there.

Therefore, the simple annualized.

The order will not provide an accurate projection for it.

While January proved challenging with better than December we benefited from significant sequential ethanol margin improvement in February and March as a result, our Q1 2023 gross loss of three.

$3 million improved greatly over Q4 'twenty two.

For Q1, 'twenty three net loss available to common stockholders was $35 million and adjusted EBITDA was negative $4 $5 million.

In Q2, 'twenty three with the continued improvement in margins today and as Mike mentioned.

They remain strong we can expect to generate positive adjusted EBITDA.

Jim.

Outlook is improved as EVP was recently approved by the EPA for summer blending.

Our cash balance was $21 $2 million at the end of March compared to 36 $5 million.

The end of 2022.

And cash represents $10 million invested in our projects $3 $5 million for accrued earn out payments and $1 7 million.

It was for 860000 shares.

Do you have an alpha is significantly.

Undervalued market price.

These repurchases as it benefits from a return on investment and effective use of our current capital resources.

Our liquidity remains strong as more than sufficient for our needs.

At March 31st working capital was $118 million compared to $121 million at December 31, 2022.

We have $40 million of Unutilized committed.

And the $25 million and $25 million in uncommitted tons under our term loan facility to support our immediate capital improvement plans in aggregate. These.

These resources represent more than $180 million.

To support our business operations and growth.

While we have no intention of conducting an equity raise currently or have to use irrational prices our shelf expires. This summer and as part of good long term financial planning, we intend to refresh it.

While it is difficult to provide guidance for the full year of 2023, we expect to benefit from approximately $10 million.

<unk> generated from the capital projects, we have already completed or will complete this year.

In addition, with funding from our term loan and the associated accelerated investment and the further diversification of our specialty alcohol and essential ingredient products.

Previously stated we expect to almost double our annualized EBITDA by year end 2025, compared to our average EBITDA for the past three years and nearly double it again when there are other projects are fully operational by year end 2026.

We look forward over the coming quarters to discuss the progress we've made with that ill turn the call back to Mike. Thanks, Brian in summary, we are excited about our revenue versus the plans margin expansion and plant optimization initiatives.

We're executing as planned and pleased with our progress, particularly in the first quarter.

Further the increasingly positive renewable ethanol crush margins are encouraging we are optimistic and expect positive adjusted EBITDA.

Based on current crush margins regarding our near term projects, which we expect will achieve roughly $65 million of additional annualized EBITDA by the end of 'twenty, five and with our longer term initiatives, including Ccs and co generation, we expect to increase annualized EBITDA.

To approximately $125 billion by the end of 2026.

Look forward to sharing our progress with that I'd like to open the call for questions operator.

We will now begin the question and answer session to.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

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

The first question today comes from Amit Dayal with H C. Wainwright. Please go ahead.

Thank you. Good afternoon, everyone. Just quickly you guys on the <unk> outlook with respect to the positive margins you're seeing are you expecting a net profit for the quarter or you know close.

Adjusted EBITDA for the quarter.

It's a good question isn't it.

Now we're comfortable.

Positive EBITDA.

You know our hope is to also be able to generate a pause a minute but.

It's still very early still I know we used to get.

I mean, the longer guidance, but it's a it's a world with lots of <unk>.

Factors that continue to change so we're comfortable with the positive you've done number for right now at least.

Understood I appreciate that thank you and then a specialty alcohol. It seems that this plane, mostly in the spot market.

Iron ore is there any contracted volume that is also coming into play.

So as we mentioned last quarter, we entered the year with about $90 million of value or 90 million gallons of contracted volume.

The comments, Mike made with regards to gallons sold in the spot market represents the highest quality of the 190 approved for 102 hundred proof the dry product that's coming off of the improvements that were completed in the first quarter of this year.

I kind of put a lot more or a little more clear about that that was really referring to we miss the contracting cycle on gnl's coming out of 2022, and so now that the system is up and running and producing wonderful.

We are looking at the spot market for the remainder of this year.

And Ken to hit the contracting cycle for 2024.

When we get to the fall.

Understood and just one last one for me.

This EBITDA improvements youre expecting in the Green tea has any of that materialize in <unk> or are we expecting those to come through in the second half.

Oh, you mean up to 10 million that I mentioned previously.

Yes, yes, yes, I think I remember this being spread out over the year. So yes, we were experiencing some of that.

Some of that was not so you'll recall when you did the $10 million.

Earlier in the quarter.

We included.

Does it assume you restarted the magic Valley facility in Q1.

So.

We're still comfortable with those numbers.

And but it would expect the balance of those to show up in the second half of the year.

Okay. Thank you guys Thats all I have.

Thank you.

The next question comes from Eric Stine with Craig Hallum. Please go ahead.

Hi, Brian .

Eric Hi, Eric.

So can I just confirm just to follow up on the previous question. So you talked about the $10 million in incremental I guess second half of 'twenty, three and it might have been your phone or my phone, but it kind of cut out talking about them.

I'm not sure. If you were talking about potentially how you see this rolling out 24, and then into 'twenty five and I guess 65, approximately $65 million incremental at that point and taken the way it sounded to me and again I just wanted to confirm this that your typical three year average EBITDA has been about <unk> <unk>.

30 million.

Are you anticipating that you would.

Double that and that's kind of a soft outlook for 2024.

So.

B.

The way that we've been talking about this is.

That these projects are going to be adding incremental benefit right to whatever where you would be producing on a run rate basis.

So you know with $20 million to $30 million is a good base.

Right.

Which includes both a good and there's some really good quarters and some really bad first.

Yeah, then it would be incrementally on top of that so you'd be you know assuming that you were on run rate for $30 million this year.

<unk> four or $10 million on that so you did $40 million and then you'd have incremental additions in 'twenty 'twenty four on top of that which would include gallons sold.

<unk> products sold for full year, So you get some benefit to that.

We would expect as well to see full run rates for the for the Magic Valley facilities, and then incrementally over time you'd be adding additional corn oil.

Capacity.

Now as Mike mentioned is there kind of a staggered rollout of the protein in corn oil projects. In addition to that rolling out.

Renewable natural gas.

B pack gas pipeline benefits.

Sorry, it used and then of course in the bigger are getting cogeneration.

And carbon sequestration.

Included in that.

Included in that $10 million of courses that are there.

And if it's in the savings that we get from now having cornwell I'm, sorry from having corn storage additional course, Georgia facility.

Yeah, Okay got it.

Alright, so it sounds like that I guess I did.

Understand that correctly, so that's great.

Maybe just turning to Magic Valley I mean can you just talk about kind of the process. So you've completed it I mean, how do you anticipate that rolling out is it a is it a general ramp up in something where you got to bring it out bring it back down make sure it's running correctly or do you anticipate that it's more of a.

Smooth linear ramp up and then maybe just some thoughts on what type of yields you're expecting either early on or is it plays out a little longer term.

Yeah. So.

The plant is back up and this is a fully integrated system within the plant are it's not just a bolt on to the outside so what we're doing right now Eric is where we're fine tuning all the all the different controls and mechanisms to make sure that the operators are trained make sure everybody's.

Up to speed, we have harvest technology on site and we're dialing in the system, we expect to have that.

Within weeks dialed in and operating and then you go through the process on the high protein we've already worked with.

Several of the people in the in the surrounding area in terms of acceptance of the protein product, which you know it was weak.

We indicated was over 50%.

And we expect to continue that sampling and working with the various.

Folks in the area to get that product place, so it'll be a little bit of a ramp up as we go forward, but we fully expect by the end of this.

This quarter.

We'll be.

This system will be up and running producing the product quarterly oh by the way should come up right away.

Strong demand for corn oil.

That as soon as soon as the system is fully up and running.

We don't anticipate having to do.

We do a lot of work to grow that market. So it's mainly on the protein side again, it'll be a ramp up through Q3, and then we expect it to be fully integrated for Q4 and beyond.

Got it.

Okay, maybe maybe last one for me just on the carbon capture I know that when you look out to 2026.

You're targeting $30 million plus in it.

Incremental.

And I know that's after obviously a lot of the cost does that contemplate having a partner where you're potentially splitting the economics or would that be a number.

That's the that's kind of a.

All in number for you.

That's great question Eric.

It could but it may not require as well we're exploring all of the various options. We're certainly in discussions with with key relationships talking about that sitting in best way to optimize the value for shareholders and for the company right.

Right.

So that's that's part of the negotiations discussions both with the downstream parties right as well as you know independent parties and then talking with other other than Theres crossover as well if you start thinking about the environmental attributes associated with that so there's a lot of demand for that product.

And so part of the discussion through the quarters is lining that out and making sure that you have a good <unk>.

Source of longtime support.

Customers want that product.

So, it's a fairly complex and fully nuanced opt.

Opportunity, but clearly a significant one and there's a lot of a temporary lotteries.

A lot of resources committed to this at this point.

Yeah.

Yes, and I guess, that's why it would be 2026.

Okay. So I think that's it for me thank you.

Thanks, Eric.

As a reminder, if you have a question. Please press Star then one they joined into the question queue.

The next question comes from David Bastian Kingdon capital.

Please go ahead.

Hey, guys. Thanks for.

My question.

First I was wondering about the essential ingredient margins this quarter. It seemed like you guys got really good realizations there.

Curious what the key drivers were that number being up.

Yeah actually I think part of that was David is that we.

We've.

Clearly the big driver for us in that essential ingredients market is how well the west Midlands operating so.

So we saw really good results, we've been able to get up to get yields up.

If you go back.

Over the last couple of years, we've had we've changed our flag winter term our cocktail.

The enzymes and the requirements to meet certain requirements, whether it's at the wet mill or at at the ICP distillery.

Able to accommodate certain customers and the like but that has not allowed us to get the yield that we otherwise would like so we've made some changes to that we're seeing a lot better yield out of that so we've also had better alignment of our drivers to be able to maximize the value of our various co products are various essentially ingredients almost had to put a dollar in the square during their.

But getting a lot of a lot better value for those various.

Corn.

I'll use that you get out of the wet mill as well Mike anything else that you think I mean, David that's our absolute critical path for us to take the with the wet mill.

You have to get the value out of the essential ingredients and as Brian mentioned, we've made great progress in that.

Regard.

Got it thanks that's helpful.

Question on the liquidity you mentioned the remaining draws on your term loan I didn't see the energy line of credit listed with your.

Liquidity levers is there a reason for that.

No I think we tried to capture that in the in the prepared remarks, so that would be assumption as well first off on the balance sheet, but the synergy line shows up under the long term debt.

Okay.

We did mention was that we had in excess of $40 million in availability as of the month until the end of the quarter.

We're into Q1.

Yeah, and so that was a $40 million plus the 40 that's available for.

Hum 40 or 61.

40% 40, plus the additional 40, that's available that's committed under the Orion facility plus an additional 25 thats uncommitted been available.

And then any improvements in operating.

Hum.

Income and.

And improvements in working capital.

Billy.

Yeah.

Okay.

Got you.

Yes, you get that that gets you another $180 million.

Okay, and then on the working capital side, you listed that as a source of liquidity how much do you think reasonable you'd be able to draw down on working capital if needed.

Yeah. So another way to think about it is the working capital reflects it it's another way to put it it's a different.

Our perspective on the same question that you had before which is how much excess availability right, but for the fact that you only get certain advance rates under the risk under the line of credit from Wells Fargo. So you may that that difference is really just the amount of additional collateral they want on top of their you know their existing borrowing base in excess available.

<unk>.

That makes sense.

Okay. Okay. Thank you.

That's all for me thanks.

Thanks, David.

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

Thank you again for joining us today and for your continued support will be in New York City conducting a non deal roadshow with H C. Wainwright late later this month, please let shirt investor relations team know if you would like to arrange a meeting.

With that I'd like everyone to have a good day. Thank you.

Yeah.

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

[music].

Yeah.