Q3 2024 Alto Ingredients Inc Earnings Call

Good day and welcome to the Auto Ingredients in third quarter 2020-24 financial results conference call. All participants will be in listen only mode. Should you name a 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 than one on your telephone keypad. To withdraw your question, please press star than two.

Please note this event is being recorded. I would now like to turn the comments over to Kirsten Chapman of Alliance Advisors and Vestor Relations. Please go ahead.

Kirsten Chapman: Thank you, Megan, and thank you all for joining us today for the Alto Ingredients third quarter 2024 results conference call. On the call today are President and CEO Brian McGregor and CFO Rob Olander.

Alto 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 today's call that is available on the company's website at altoingredients.com.

Kirsten Chapman: A telephone replay of today's call will be available through November 13th, the details of which are included in today's press release.

may no longer be accurate at the time of replay. Please refer to the company's safe harbor statement on slide 2 of the presentation available online, which states that some of the comments on today's call constitute forward-looking statements and considerations that involve risks and uncertainties.

Kirsten Chapman: 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 the Alto Ingredients filings with the SEC.

Acceptance required by applicable law, the company assumes no obligation to update any forward-looking statements.

Kirsten Chapman: 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 reported.

Kirsten Chapman: Expense or Income, Provisions for Income Taxes

Kirsten Chapman: asset impairments, unrealized derivatives gains and losses, acquisition-related expense, 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.

Kirsten Chapman: On today's call, Brian will provide a review of our strategic plan and activities. Rob will comment on our financial results. Then Brian will wrap up and open the call for Q&A. It's now my pleasure to introduce Brian McGregor. Please go ahead, sir.

Brian McGregor: Thank you, Kirsten. Thank you all for joining us today.

Speaker Change: and fluctuating market conditions. As a result, Q3 2024 consolidated gross profit improved to $6 million and adjusted EBITDA was $12.2 million.

Speaker Change: Rob will discuss our financial results in greater detail in a moment. First, I'd like to comment on today's TSA announcement. We've taken a significant step forward in our commitment to sustainability by finalizing a definitive CO2 transportation and sequestration agreement with Vault.

Brian McGregor: Under the terms of the agreement, VAWT will handle the transportation, injection, and sequestration of CO2 from our Pekin campus into the Mount Simon sandstone formation in Illinois.

Brian McGregor: This partnership marks a critical milestone on our journey toward a more sustainable and prosperous future.

Brian McGregor: while we await EPA submission and approval.

Brian McGregor: address financing and source equipment. This agreement brings us closer to achieving our goals of lowering our carbon footprint and monetizing the value of the biogenic CO2 we produce at our Pekin campus.

Brian McGregor: Regarding our operations in Q3, our Pekin Campus wet mill increased productivity by its highest level since 2020, reflecting in part the results of our successful biennial repairs and maintenance outage in Q2.

Brian McGregor: This translated into greater production of specialty alcohols, reaching 42% of total peak in sales volume, 7 percentage points higher than the same period last year.

Brian McGregor: remain on track to sell 90 million gallons of specialty alcohols in 2024 and expect to match this volume in 2025.

Brian McGregor: We continue to modernize our equipment and facilities to improve reliability, lower our operational costs, and reduce our carbon footprint.

Brian McGregor: In addition to assigning the TSA, we are currently building a second alcohol loading dock at our Pekin campus. Our goal with this project is to improve river logistics by expediting the shipping costs.

Brian McGregor: adding redundancy and expanding our capabilities to accommodate a wider array of barges.

Brian McGregor: We expect a synergistic effect and increased overall loading efficiencies.

Brian McGregor: The planned cost of this second dock is less than $3 million and is scheduled for completion in 2025.

Brian McGregor: And at Magic Valley, we completed upgrades to a harvesting technology system to capture high-protein and corn oil products, and restart the facility to prove out the system and to benefit from positive crush margins at the time.

Brian McGregor: In October, our facility consistently achieved average ethanol production rates at full capacity. Our protein content reached 50% or greater, and we've been able to expand our corn oil yields.

Brian McGregor: We commend the yeoman efforts of our operational team along with the technical support provided by SoilNet.

Brian McGregor: This restart has informed us of the technology system's capabilities as we consider deployment at our other dry mills in the future.

Brian McGregor: I'll have more to say on Magic Valley in a few minutes.

Brian McGregor: Turning to a market review, Q3 began with solid ethanol crush margins supported by strong exports.

Brian McGregor: Domestic demand began to weaken with a decline in miles driven attributable in part to weather related events.

Brian McGregor: As ethanol production remained relatively high, it has outpaced demand, resulting in higher ethanol inventory levels and lower ethanol prices.

Brian McGregor: In Q3, carbon prices were approximately 80% lower in Oregon and Washington and 20% lower in California compared to the same period last year.

Brian McGregor: While carbon prices remained low in October, we've begun to see some recovery.

Brian McGregor: In Q4, we expect corn prices to remain low, reflecting a good harvest, resulting in a strong carryout into 2025, which is a good thing.

Brian McGregor: However, with corn prices lower in the U.S. compared to international prices, demand for U.S. corn exports will likely increase.

Brian McGregor: straining logistics and driving up transportation costs.

Brian McGregor: Also, when corn prices are low, corn suppliers typically require prices to at least cover their costs, driving up corn bases. This is one reason why we expanded our corn storage capacity at Pekin and are considering increasing storage even further.

Brian McGregor: while higher transportation costs impact all ethanol producers.

Brian McGregor: Higher transportation costs significantly increase the price for delivered corn at our two western plants compared to Midwest producers that have access to local corn supplies and cheaper bases.

Brian McGregor: Although the improvements we've made at our Magic Valley facility have delivered economic benefits as we mentioned in our press release on October 15th

Brian McGregor: The recent increases in regional corn basis and declining protein and corn oil market prices have resulted in overall margin compression, outweighing the economic benefits of our plant improvements.

Brian McGregor: To address these challenges, we continue to pursue opportunities to maximize the Western plant's strengths and advantages.

Brian McGregor: Unless there are notable improvements in economics at our Magic Valley facility, we plan to idle the plant before the end of Q4 and believe that will have a positive impact on the company's financial results.

Brian McGregor: Finally, while our Columbia facility is also experiencing margin compression, the combination of lower transportation costs

Brian McGregor: premiums earned on lower carbon ethanol and revenues generated from our CO2 cells make Columbia more economically resilient than Magic Valley.

Brian McGregor: Turning to our sustainability efforts, we completed our...

Brian McGregor: 2023 Sustainability Report and have increased our disclosure on topics such as environmental, health, safety, quality, and social metrics.

Brian McGregor: Our core values of responsibility, integrity, and quality drive our mission to produce the highest quality, sustainable ingredients that make everyday products better. We proudly offer the 100% bio-based renewable products from our specialty alcohol and essential ingredients to renewable fuels and plant-based proteins.

Brian McGregor: Our highly efficient dry grinding facilities are striving to meet the needs of our community.

Brian McGregor: for Carbon Intensity Scores Below 50.

Brian McGregor: by optimizing efficiency, upgrading energy infrastructure, and selecting sustainable feedstocks. Our dedication to sustainability and social responsibility extends to our customers, employees, investors, partners, suppliers, and consumers, and our focus on product quality and safety.

Brian McGregor: We conducted material assessments with internal and external stakeholders and identified multiple long-term market opportunities.

Brian McGregor: to viably expand biobased renewable offerings. The third-party certification we earned include areas of oversight on risk management, chemical storage, handling, transportation, and disposal.

Brian McGregor: multiple food safety initiatives, quality management, good manufacturing practices, and requirements for all active pharmaceutical ingredients and excipient products and supply chains for waste streams.

Speaker Change: Now I'll turn the collar up.

Speaker Change: Thanks, Brian. I'll review the financial results for the third quarter of 2024 compared to the third quarter of 2023.

Speaker Change: We sold 96.8 million gallons, consistent with 97.1 million gallons sold during Q3 2023. However, due to lower market prices in Q3 2024, net sales were $252 million compared to $318 million in Q3 2023.

Speaker Change: Total gross profit was $6 million compared to $4.2 million in Q3 2023. I'll review the various contributing factors.

Speaker Change: The peak in campus contributed 6.2 million dollars to gross profit, improving tenfold year over year, in part due to improvements resulting from our scheduled repairs and maintenance in Q2, as well as a positive shift in sales mix.

Speaker Change: Specialty alcohol gallons sold increased by 4 million compared to the same period last year. However, this was partially offset by a 24% decrease in our average price for essential ingredients as compared to Q3 2023.

Speaker Change: Our Western facilities had a gross loss of $2.3 million compared to a gross profit of $1.5 million in Q3 of 2023.

Speaker Change: The majority of this $3.8 million year-over-year decline in gross profit was driven by downtime and greater costs associated with upgrading and restarting our Magic Valley facility.

Speaker Change: Additionally, the Columbia facility generated 1.6 million dollars less in revenue due to an 80% drop in carbon prices.

Speaker Change: Also, our consolidated realized derivative gains were $3.6 million compared to $6.2 million for the same quarter in 2023. I will review our hedging in greater detail in a moment.

Speaker Change: This quarter, we recorded $830,000 gain on sale of certain idled assets related to our purchase of Aventine.

Speaker Change: Our consolidated net loss was $2.4 million compared to a net loss of $3.5 million in Q3 2023.

Speaker Change: Adjusted EBITDA was $12.2 million including the $3.6 million in realized gains on derivatives for Q3 2024.

Speaker Change: This compares to $13.6 million, including $6.2 million in realized gains on derivatives and a $2.8 million USDA grant related to the Biofuel Producer Program in Q3 2023.

Speaker Change: As of September 30th, our cash balance was $34 million, and our total loan borrowing availability was $92 million, including $27 million under our operating line of credit and $65 million, subject to certain conditions, under our term loan facility.

Speaker Change: We generated $18.6 million in cash flow from operations in Q3, bringing our year-to-date total to $6.3 million of cash provided by our operations.

Speaker Change: We invested $500,000 in CapEx after accounting for various energy rebates, bringing our year-to-date CapEx total to $9.8 million.

Speaker Change: Turning back to the derivatives, we are frequently asked about our hedging strategies and how they impact our financial results.

Speaker Change: While this is a complex area, I will provide a few highlights on how we use derivatives.

Speaker Change: We employ a variety of risk management strategies to mitigate the price volatility of different commodities throughout the year as a normal course of business.

Speaker Change: These strategies may include managing the spread between corn and ethanol prices, otherwise known as the crush margin.

Speaker Change: We may also take positions on corn and natural gas.

Speaker Change: Currently, our core strategy is to hedge the premium over fuel-grade ethanol of our specially alcohol contracts that have fixed sales prices of up to one year or longer.

Speaker Change: Through the use of derivatives, we are able to lock in premiums for the duration of the contract over production that otherwise would be sold as ethanol.

Speaker Change: For the positions that settle, we record the cumulative, unrealized gains or losses on these positions since inception to realize.

Speaker Change: On the remaining unsettled positions, the change in market values at the end of each reporting period is reflected as unrealized.

Speaker Change: Unrealized activity is not an indication of what will be realized in future periods. The best way to determine the value or obligation to be realized in the future, measured as of a specific date, is to note the amounts on our balance sheet.

Speaker Change: The net derivative asset, or liability, reflects what ALFSA would realize if we liquidated all of our positions as of that specific period and date.

Speaker Change: With that, I'll turn the call back to Brian.

Brian McGregor: Thanks, Rob.

Brian McGregor: Executing on our vision, we deliver the highest quality ingredients to our customers every day.

Brian McGregor: Our scheduled repairs and maintenance, as well as our CAPEX initiatives, are delivering improved productivity. We've advanced our CCS initiative and furthered our strategy to reduce carbon emissions by entering in...

Brian McGregor: an agreement to facilitate the safe capture and storage of carbon emissions from our Pekin campus.

Brian McGregor: We are positioned to manage

Brian McGregor: changing market dynamics and to capitalize on the unique opportunities presented by our facilities. Our team is committed to improving profitability on a sustainable, consistent basis, and we are optimistic about the future.

Brian McGregor: Operator, we're ready to begin question and answer.

Speaker Change: 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.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Speaker Change: The first question comes from Eric Stein with Gregg Hallam Capital Group. Please go ahead.

Speaker Change: Hey, this is Luke Persons on for Eric Stein today. So we have a couple questions here. First, how should we be thinking about Magic Valley's targeted annual EBITDA uplift of around 9 million that was originally outlined? Does that outlook still stand given what's been demonstrated so far?

Speaker Change: So, Luke, the original expectations were based on a fundamental contribution. The challenge is that the market conditions have changed dramatically since when we originally built those forecasts, particularly around corn oil values, protein values, and they were based on a corn price that was significantly higher than what we're seeing today.

Brian McGregor: So, um...

Brian McGregor: those that's difficult to actually ascertain at the moment

Speaker Change: As we said in our prepared remarks, we see significant benefit from this improvement, but given the material deterioration, particularly in the Western market,

Brian McGregor: that any of the material benefits that we experience are currently more than offset by the

Brian McGregor: deterioration and crush margin for those facilities.

Speaker Change: Alright, that's helpful. Thank you. And just a quick follow-up question here. Touching on the carbon capture side and the Safe CCS Act, do you envision any change to the moratorium timeline for new permits given the recent ADM leaks?

Speaker Change: It's a good question. I mean, we certainly haven't seen any, you know, outward response from the EPA. What I would say generally, though, is that

Speaker Change: even from the time that...

Speaker Change: that ADM originally completed, well, not only submitted and had the approval, but then completed the well work. There's been significant changes in the way that the work is done, the quality of the casings, the depth, the strength.

Speaker Change: and the like, so I don't know that it would be particularly applicable to whether it's ours or anyone else's going into the ground today. That said, time will tell.

Speaker Change: Perfect. That's helpful. Thank you. I'll pass it on.

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

Speaker Change: The next question comes from Justin.

Speaker Change: Justin D'Operarella with Zillow Capital Management, LLC.

Speaker Change: LLC. Please go ahead.

Speaker Change: Yeah, hi. Thank you.

Speaker Change: It sounds like, as far as CoProMax, Magic Valley, it is operating as thought.

Speaker Change: But, I mean, in the implementation of that, I mean, you guys must have lost tens of millions of dollars. So, I guess my question is, you know, have you considered seeking recourse against harvesting technologies in some way to be compensated for the losses that they were likely responsible for?

Speaker Change: Justin, we clearly have explored and are exploring all options both productive and probably less productive if you were to do it that way and you know there is also opportunities

Speaker Change: I guess what I would also say is is that in response to not only your comments but the question that was posed earlier was

Speaker Change: You know, we don't expect this to be a permanent state.

Speaker Change: It certainly is a reflection of what's happening in the current market, but that's not permanent. And so we would still expect to see significant benefit from this improvement, and we see opportunities to be able to do it elsewhere. So we take those all into account. We understand.

Speaker Change: and probably experiencing more than most the pain and the struggle that we've had over the last couple of years to try and bring this to the fore. That said, the fundamentals behind the technology and the fundamentals of doing it at Magic Valley are all still sound.

Speaker Change: Okay, so I mean based on your response it does sound like you are actually potentially seeking recourse of you know what could potentially be tens of millions of dollars, would that be fair to say?

Speaker Change: Yeah, I mean I wouldn't clarify any more than what I've already mentioned.

Speaker Change: Okay and could you comment or provide a little bit more color on the Guggenheim hire and what precisely they're looking at and what the thought process is there?

Speaker Change: Yeah, it's considering all the options and it's not as if, you know,

Speaker Change: As we've said, historically, we have evaluated from time to time and

Speaker Change: I have engaged in this process multiple times with

Speaker Change: with Guggenheim and with other investment banks to see and to make sure that we're maximizing and optimizing the

Speaker Change: the return on investment for the company and for shareholders. So it would include any and all aspects of that, whether it's to bring in partners, whether it's to sell the asset, whether it's to keep the asset on and to make further improvements to those facilities, you know, what's the best way to liberate the...

Speaker Change: the real material benefits of those locations. I mean, yes, there are certain challenges that they face, as you can see at the moment, but they also can contribute significantly to the benefit of the company and the shareholders. And there's still a lot of untapped.

Speaker Change: opportunities and qualities about those sites that are unique.

Speaker Change: That you can't duplicate elsewhere. So we'll want to make sure that we evaluate all of that

Speaker Change: and that's part of the story. Yeah, absolutely. I mean, each one of your sites clearly have much greater value than the stock is currently worth. You know, given that and given, you know, the lack of profitability and been in somewhat favorable or quite favorable operating environments, would this review also consider the sale of the entire company?

Speaker Change: You know, as we've always said that, you know,

Speaker Change: We owe it, and our responsibilities are to shareholders, and we include all of those options.

Speaker Change: all the time.

Speaker Change: Excellent. I think you you need to expedite the process. Thank you. Thanks, Justin.

Kirsten Chapman: This concludes our question and answer session. I would like to turn the conference back over to Brian McGregor for any closing remarks.

Brian McGregor: Thanks, Megan. Thank you all for joining us today. We appreciate your ongoing feedback and support. Have a good day.

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