Q2 2023 Alto Ingredients Inc Earnings Call

Good day, everyone and welcome to the Alto ingredients second quarter 'twenty to 'twenty three financial results Conference call.

All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on your Touchtone telephone.

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Please also note today's event is being recorded.

At this time I'd like to turn the floor over to Kirsten Chapman with L. J Investor Relations Ma'am. Please go ahead.

Thanks, Jamie and thank you all for joining us today for Alto ingredients second quarter 2023 results conference call on the call today with me are president and CEO , Bryon Mcgregor director and interim C. O L. My cancerous and CFO , Rob Aulander Ouch.

Altra ingredients issued a press release after the market closed today, providing details of 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 ingredients dotcom.

Telephone replay of today's call will be available through August 14th the details of which are included in today's press release, a webcast replay will also be available on algae ingredients website. Please note that the information on this call speaks as only yesterday August 7th.

You are advised that time sensitive information may no longer be accurate at the China's 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 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.

In management's prepared remarks, non-GAAP measures will be referenced management uses these non-GAAP measures to monitor the financial performance of operations and believes these measures will assist investors in assessing the company's performance for the periods being reported the.

The company defines adjusted EBITDA as unaudited net income or loss before <unk>.

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 non-GAAP information a reconciling table was included in today's press release.

On today's call Mike will start with an introduction Bryan will provide a review of our strategic plan and activities, Rob will comment on our financial results and then Brian will wrap up and open the call for Q&A is now my pleasure to introduce Mike Cancerous Mike. Please go ahead.

Thank you Kirsten and thank you everyone for joining us today I am pleased to announce as issued in a press release. This morning, Bryon Mcgregor has been appointed President and CEO , Rob Aulander has been appointed CFO .

I will continue on as a director and have agreed to support the company during the leadership transition for up to a year.

Chief operating officer.

We believe that succession planning is one of the most important things that we do and we take it very seriously.

To that end, Brian and I have been working closely together for many years and even more so the last three years on our strategic plan to diversify revenue streams optimize operations and expand EBITDA.

Brian is recognized for his strong leadership strategic vision and outstanding management capabilities.

Here to Alto, Brian developed and managed capital financing for over 40, global industrial and infrastructure projects valued in excess of $12 billion.

Dan as a critical player in Alto for over 15 years. He gained a deep understanding of our markets business needs. The board and I are confident he will lead the team to drive alto ingredients sustainable profitability Congratulations Brian .

Rob Aulander, our new CFO is an expert in public County company accounting of process improvement. He has been a valuable player in developing and implementing our financial strategy, Rob will be a strong contributor as our new CFO Congratulations Rob.

Now I will hand, the call to our president and CEO Bryon Mcgregor. Thanks.

Mike.

I look forward to working with you as we complete our leadership transition that's our transformative projects.

New York continue to work as a member of the board.

Turning to the quarter I'm delighted to speak to everyone today and will keep my comments brief.

Or can you take away is that we are successfully executing our plan to transform alto ingredients and to achieve our long term EBITDA targets.

We're pleased by the market's continued improvements in Q2 2023, specifically the ethanol crush margins complemented.

Complemented by a favorable economics from our specialty alcohol, an essential ingredient products, we delivered a solid quarter posting net income positive adjusted EBITDA and positive operating cash flow.

We continue to make significant capital expenditures to support our business transformation diversify our revenue streams and reduce exposure to commodity markets.

With the ultimate goal of expanding margins and increasing profitability.

<unk> 2019, we began modifying our operations.

Focusing on low cost high value initiatives, our efforts were fruitful.

2020, when demand for pharmaceutical grade alcohol rose sharply as a longstanding producer of high quality alcohols.

Prepared to serve the market.

We did so successfully increasing our market share as well as improving top and bottom line financial results.

Since then we've continued making significant progress on our strategy strengthening our balance sheet and liquidity as well as accelerating investment in longer term projects.

Our near term focus has been to increase production of high quality products, including grain neutral spirits, corn oil and high protein as well as to execute strategies to improve plant efficiency and reliability by adding corn storage and other upgrades.

Now we are preparing to install a natural gas pipeline.

Our biogas ways to renewable natural gas produced primary used expand our cogeneration capabilities and most importantly launch carbon capture and sequestration.

Each of our projects has a different timeline.

To be capital efficient, we are being prudent with our financing.

For our near term endeavors, we are using our working capital resources cash generated from operations in excess of the excess availability under our credit facilities for our longer term projects. We continue to hold productive discussions with strategic partners and we will fulfill those capital needs as appropriate.

Working diligently on our capital initiatives, we have made progress on each of them. It is important to note. However that we will have more information we can share publicly as our front end engineering design or feed studies are finalized, which we expect to complete in the next few quarters.

Now I'll provide updates on our capital projects.

Regarding revenue producing projects from near term to long term burst into high quality alcohol. We now produce the highest quality 192 proof and ultra low moisture 200 proof grain neutral spirits on the market.

As planned we are garnering qualifications positioning us to sell additional high value DNS to new and existing beverage customers for the annual contracting period for 2024. In addition, we will continue to supply gnl's, especially our unique and highly differentiated ultra low moisture product on a spot sale base.

<unk> for the remainder of 2023.

Regarding our expanded production of corn oil and high protein we continue to align the system at Magic Valley and are working to obtain the dryer permits to achieve full capacity, which is integral to optimizing production ethanol corn oil high protein another feed products on a low cost basis.

To provide the needed time to optimize production and properly place our expanded protein cornwell offerings at appropriate market prices. We now expect to achieve full value for these products in the fourth quarter of 2023.

Regarding an expansion into primary use production design work is progressing well and on schedule.

This sad inflationary pressures have impacted cost negatively and we expect the cost of installation to be higher than originally anticipated.

On the positive side.

Prices for primary use have also risen.

I mean, the returns remained justified we will continue to target commencing construction in early 2024, we will know more as work progresses.

Regarding carbon capture and sequestration, we have a unique and compelling opportunity occur.

Our current peak in campus operation.

Approximately 700000 metric tons of carbon a year, which we intend to monetize through carbon capture and sequestration.

And as frequently discuss discuss our campus is ideally located above the Mt. Simon sandstone formation, one of the most significant carbon storage resources in the U S.

And is proximate to the Illinois basin, one of the largest carbon sequestration locations.

As stated before with increased 45, Q tax incentives under the inflation reduction Act, we believe we can generate over $30 million annually and EBITDA.

This is based solely on a conservative assumption of annual carbon production sold of $85 per metric ton.

To be clear. This is after operating and sequestration cost and does not include any of the substantial economic benefits.

From 45 Z or of the environmental attributes associated with low carbon ethanol.

Including use in the production of ethanol the jet fuel blue ethanol synthetic natural gas and sustainable aviation fuel or S. Yeah.

To further this initiative, we contracted the feed study firm to determine capture compression and engineering design and we have selected our development partner to provide turnkey transportation sequestration and monitoring services.

Notably the Ccs project requires the upgrading of our natural gas pipeline and cogeneration projects.

Of which have excellent project returns on a standalone basis.

Our goal is to have Ccs operational by the end of 2026, we believe this represents an aggressive but achievable schedule.

While we are finalizing arrangements to fund the installation costs associated with the capturing compression the nature of these activities requires discretion.

Limiting what we can discuss publicly at this time as such we do not expect to reveal our strategic partners until mid 2024.

Regarding cost savings projects from near to long term first our new corn storage at the peak in campus as discussed on our last hall is fully operational and contributing to improved corn chairman costs greater plant reliability and reduce plant operating costs.

Regarding a new natural gas pipeline, having completed the feed study, we are finalizing easements and access as.

As well as targeting commencement of construction before year end.

Our goal is to improve procurement.

Pricing instability, which will lower our natural gas costs at the Beacon campus.

It will also support our future energy needs for our capital projects.

Additionally, the gas pipeline will create a new revenue stream lower our operating costs and reduce environmental footprint by converting our biogas waste into renewable natural gas.

Regarding expanding our co generation capabilities at the Beacon campus. We have completed the feed study furthered our design and prep work and initiated financing discussions. We expect these capabilities to also address energy needs for both our current operations as well as our capital projects.

Before I turn the call over to Rob for a financial remarks, I'd like to reiterate that our business is focused on renewable products, which underscores our daily commitment to sustainability as part of that pursuit. During Q2, we achieved equal about a silver medal status at both ICP antiguan, indicating sustainability ratings.

<unk> percentile amongst our peers.

We're proud of our team's efforts and continue to build and bolstered procedures and implement programs focused on our sustainability health and safety.

We plan to include greater details on this in our 2024 proxy statement.

Now I'll turn the call over to Rob <unk>, our new CFO .

Brian our gross profit increased significantly from Q1, 2023, and our production capacity utilization increased to 81% from 70% in Q1 2020. Looking ahead, we expect production capacity to increase further for two reasons.

First when Magic Valley systems are aligned we expect to achieve optimal capacity at that facility.

Washington State recently approved a new low carbon fuel standard that justifies the economics of shipping our Columbia ethanol production, nor basically opening a new low carbon fuel markets in the plant for.

For Q2, 2023, we improved adjusted EBITDA to $16 million.

Looking ahead July crush margins were strong so we locked in some positive spreads from Q3, taking this into consideration as well is currently current positive crush margins and a positive forward curve, we expect to generate positive adjusted EBITDA for Q3 2023.

During Q2 2023, we spent $8 million in Capex, bringing investment year to date to $18 million. We also purchased 400000 shares of our common stock for $1 million since beginning since beginning the share repurchase campaign last September we have bought back.

One 6 million shares for a total of $4 million at an average overall price of approximately $2 50 per share.

Given alto significantly undervalue market price. We believe these repurchases are a beneficial return on investment and an effective use of capital resources.

As of June 32023, our cash balance was $23 million and our total loan borrowing availability was up to $114 million to support business operations and growth initiatives.

Borrowing availability includes $49 million under our operating line of credit $40 million under our term loan facility.

And an option to request up to an additional $25 million on that facility with that I will turn the call back to Brian .

Thanks, Rob.

Before I open the call to questions for our covering sell side analysts I would like to reiterate as shareholders ourselves. Our team is dedicated to driving sustainable long term value for all stakeholders, including customers employees and investors.

Part of that mission management together with our board continually pursue legitimate opportunities to maximize the value of our assets with Apple investment and partnerships with strategic third party industrial enterprises and share our vision.

We believe this approach provides the best option to liberate the inherent value of the company.

Where appropriate and as previously demonstrated we've also chosen to sell noncore facilities, including Aurora, Madera, and Stockton and invest those proceeds in more productive and profitable alternatives.

Our team is experienced and committed to leveraging our assets to deliver more diversified higher value and sustainable revenue streams from our specialty alcohol and essential ingredients are.

Strategic plan is coming to fruition as evidenced by our new high quality products and benefits from our cost improvements the aggregate some of our product of our parts carries far greater intrinsic value than the individual pieces will be an even higher value in carbon capture and sequestration is deployed.

As such we continue to be excited about our capital projects, which we expect to increase our annual EBITDA incrementally by over $65 million by the end of 2025 with the completion of our near term projects and by approximately $125 million by the end of 2026 on our Ccs cogeneration and other long term initiatives.

Fully realized.

Now I'd like to open up this call for questions.

Operator, ladies and gentlemen.

Ladies and gentlemen at this time well begin the question and answer session to ask a question you May press star and one on your Touchtone telephone.

You are using a speaker phone video Asti, please pick up the handset before pressing the keys.

Withdraw your question you May press Star and two what's.

Once again that is star and then one to join the question queue.

Momentarily to assemble the roster.

Our first question today comes from Eric Stine from Craig Hallum. Please go ahead with your question Hi.

Everyone.

Hi.

So you know you just came off 16 million and the adjusted EBITDA for Q2, and I know you're guiding to positive, but I mean as it stands here today just directionally. It would seem to me that that you are expecting sequentially. It to be directionally higher I mean, I know the ethanol markets can change very quickly but.

Given a positive crush in July given some of the operational things that you've got coming on is that a is that a fair way to think about it or are there other factors that should should drive our our thoughts.

It's a great question, Eric I think well, we you know from your mouth to God's ears, but I think that what I would say as well as we're also coming into a harvest that with corn prices rising basis, rising and there are still questions as to when the harvest will occur.

That being said, we're seeing positive as Rob said positive crush margins through through the quarter and through actually right now through year end, but we would think it would be a disservice to comment on the fourth quarter to be sure but.

Again, we've been able to lock in some spreads.

We're feeling good about the quarter.

And I expect positive EBITDA margins for Q3.

Okay.

I'll just leave it there maybe.

Maybe maybe just on carbon capture so the $30 million and I know that's definitely a longer term plan, but you know just to be clear that's $30 million, if if you're kind of going at it so low or if you get a high percentage of the economics I mean, just so maybe confirm that first and then some of the early.

The work you're doing I mean should we take that as you're leaning towards more of a partnered approach or is it still something where you've kind of got all options on the table.

Well, we're suddenly going down has a we have not made a final selection, but the intent is to.

Really bring to bear for the benefit of the company and the shareholders to optimize the value of its return for it.

Two the company, particularly since we're the one that's generating the C O two right.

The 30 million that we can't talk about and as I mentioned in our prepared remarks is that that's really just the.

Economics around the 45 Q. It doesn't include 45 Z and the benefits that are associated with that nor the environmental attributes are also all available today.

And part of that reason is is that we think it would be premature to be sharing some of that information because those numbers are all over the place.

But theres certainly.

Contributory and beneficial to the bottom line right as you drop those in.

And whether we are taking that all by ourselves and going it alone or whether we're sharing that will make sure that we optimize that.

So that we can make sure that we get execution and get the best execution available.

Okay got it maybe last one for me just on on high protein I know the you know early.

Early on and then you did a lot of diligence about it but co pro Max It was a newer technology.

Just curious if you could talk about how that's played out again I know, it's still early at Magic Valley, but how that's played out.

You know versus your maybe your original expectations.

Yeah.

We had hoped to be able to accelerate through that through.

Through the if you will to startup.

Clearly the implementation of the of the.

<unk> technology.

There is significant with regards to the profile of this facility and so as you would have with any project where you were.

Moving and changing a lot of parts that you need time to be able to lay out all of those.

All of the different assets and the operations of that facility we've seen good results.

Individually in all of these.

Bolton corn oil and protein.

On par with what Youre hearing.

The open market, but the real challenge is to be able to do it on an ongoing sustainable basis and be able to do it.

Capacity for all for the full operations of the facilities. So we're working hard at that we're making good progress.

But it has taken longer than we expected, but we remain optimistic and we expect to be able to do that have that.

Hum.

At full capacity by honor before year end.

And did you enter Q4.

Okay. Thanks.

And our next question comes from Sameer Joshi from H C. Wainwright. Please go ahead with your question.

Thanks for taking my questions, Brian Congratulations and Rob too.

And Mike Oh, nice to see you.

I'm on a I'm trying to enjoy life.

So.

My first question is just following up on the Ccs, Brian that he used and not get a feed studies.

Do you have any estimate on the front end engineering.

For each of these is it going to be completed within the next few months or how is it progressing.

Yeah. So we expect to have first off thanks Amir appreciate your.

Your comments.

We expect to have the feedstock we have the feed study done on the on the co generation and now it's just about mining that out.

And getting bids for for equipment and materials.

With regards to natural gas pipeline. We also have that feed studies done we've actually have obtained as we mentioned in the prepared remarks, we've obtained all of our easements and at this point, it's just finishing up again on some of the bid work and then we would expect to be able to start that that facility.

<unk> before the end of the year.

And those are of course important and integral to.

Making the kinds of improvements that we would like to make at the facilities. So that we're building.

Carbon sequestration on the.

And a good firm foundation.

Got it.

So those we need to continue to progress and then we will we're working.

Yeah.

Concurrently on the carbon sequestration and making good progress there as well.

Got it thanks for that color.

On the specialty alcohol ongoing sales.

How how long how long is the certification process going for the customers for the next a buying cycle do you have any insight on that.

I actually think it's going to actually pretty well, we're actually seeing some early interest.

And not only that product, but also just in the fourth and in what would be the otherwise the fourth quarter exercise I think that's partially because we've seen corn prices come off.

Materially from where they were earlier in the in Q2.

So that's all positive and we're getting good feedback and again, we're really excited about the product I would say, though that its a especially in the general specialty market. It's a crowded space and so we look forward to sharing with you more information as we move along here.

Understood.

And on.

On the <unk>.

All of this is we understand the crush spreads.

Beneficial unexpected.

At least in the near term.

Is there any positive benefit from the <unk> 15, a requirement or have you already seen any increase in demand.

With all of that.

I think it's hard to measure, but yes, I think that it's been contributory to the solid margins this year.

We've seen gas demand up slightly but I think it's still down from 2019 a bit.

But yeah I think that it's all integral I think we've also seen generally some discipline in the market space with regards to just production values.

Duction volumes and that's also been helpful and contributory to that.

Okay, and then just last one.

I know you'll have access.

Access to borrowing capacity of 110 215 million.

Do we know.

What is the cost of this capital.

Is it really is it tied to LIBOR and any other hum such a parameter.

So it's consists of yeah, I think we do I mean, you'd have to figure out or we'd have to do the math, but I think as Rob laid out you've got three sources.

Ongoing cash from operations and retain cash and earnings.

But then on top of that we have our borrowing base under our line of credit, which is really inexpensive I don't know whats, Rob something five 6%.

Right.

So for us whatever the small spread is and that's all public and then on top of that then we have the fixed rate.

At 10% from the terminal Orion term loan.

Got it.

Thanks for that congrats on the progress and good luck.

All of these things.

Thank you. Thank you.

And ladies and gentlemen, with that we'll be ending today's question and answer session I'd like to turn the floor over to management for any closing remarks.

Thank you Jamie and thank you all again for joining us today.

We'll be in New York City at the H C. Wainwright conference in September 11 to 12.

Have a great day.

Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.