Aemetis, Inc. (NASDAQ:AMTX) Q3 2023 Earnings Call Transcript

Aemetis, Inc. (NASDAQ:AMTX) Q3 2023 Earnings Call Transcript November 9, 2023

Aemetis, Inc. beats earnings expectations. Reported EPS is $0.73, expectations were $-0.21.

Operator: Good afternoon and welcome to the Aemetis Third Quarter 2023 Earnings Review Conference Call. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis, Incorporated. Mr. Waltz, you may begin.

Todd Waltz: Thank you, Ali. Welcome to the Aemetis’s third quarter 2023 earnings review conference call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis. We suggest reading our website at aemetis.com to review today’s earnings press release, the Aemetis Corporate and Investor Presentations, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. The presentation for today’s call is available for review or download on the Investors section of aemetis.com website. Before we begin our discussion today, I’d like to read the following disclaimer statement. During today’s call, we will be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activities and the execution of our business plan.

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These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the Company’s Securities and Exchange Commission filings, which are posted on our website and are available from the Company without charge. Our discussion on the call today will include a review of non-GAAP measures as a supplement to financial results based on GAAP because we believe these non-GAAP measures serve as a proxy for the Company’s sources or uses of cash during the periods presented.

A reconciliation of non-GAAP measures to most directly comparable GAAP measures is included in our earnings release for the three and nine months ended September 30, 2023 which is available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating such net income, interest expense, loss on extinguishment, loss on lease termination, USDA cash grants, income tax expense, intangible and other amortization expense, accretion expense, depreciation expense, gain on litigation and share based compensation, plus income tax benefit. Let’s review the financial results for the third quarter of 2023. Revenue during the third quarter of 2023 decreased 4% to $68.7 million compared to $71.8 million for the third quarter of 2022.

Our India Biodiesel operation experienced increased an increase of 121% in production by delivering 15,500 metric tons of biodiesel during the quarter of 2023, compared to 7,000 metric tons during the third quarter of 2022. Our California ethanol operation the decrease in the volume of ethanol sold from 15.7 million gallons in the third quarter of 2022 to 13.8 gallons in the third quarter of 2023. Delivered corn price improved from an average price of $9.59 per bushel during the third quarter of 2022 to $7.48 per bushel during the third quarter of 2023. Gross profit for the third quarter of 2023 was $492,000 compared to $1.1 million gross loss during the third quarter of 2022. Our Indian Biodiesel segment provided $2.8 million of this gross income.

Selling, general and administrative expenses were $9 million during the third quarter of 2023 compared to $6.4 million during the third quarter of 2022 as a result of our continued investment in our ultra low carbon initiatives along with noncash charges for stock compensation. Operating loss was $8.5 million for the third quarter in 2023 compared to an operating loss of $7.6 million for the third quarter of 2022. Interest expense during the third quarter of 2023, was $10.2 million excluding accretion and other expenses in connection with Series A preferred units in our Aemetis Biogas LLC subsidiary compared to $7.1 million during the third quarter of 2022. Additionally, our Aemetis Biogas LLC subsidiary recognized $7.7 million accretion and other expenses in connection with preference payments on its Series A preferred units during the third quarter of 2023 compared to $2.8 million during the third quarter 2022, along with a loss on extinguishment on Series A preferred units of an estimated $49.9 million during the third quarter of 2022, as a result of a charge related to the redemption of Series A preferred units as a part of the amendment to the preferred unit purchase agreement.

Net income was $30.7 million for the third quarter of 2023 compared to a loss of $66.8 million for the third quarter 2022, driven primarily by tax credit sales of $55.2 million during the third quarter of 2023, along with the onetime unitholder redemption charge of $49.4 million during the third quarter of 2022. Cash at the end of the third quarter 2023 was $3.9 million, compared to $4.3 million at the close of the fourth quarter of 2022. Investments in capital projects of $8.8 million were made during the third quarter of 2023, further highlighting our commitment to build ultra low carbon projects. Now, I’d like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee for a business update. Eric?

Eric McAfee: Thank you, Todd. Aemetis is focused on producing below zero carbon intensity products that reduce air pollution and carbon emissions to improve the environment while providing health and economic benefits to local communities. We are pleased to report that Aemetis has achieved the milestones enabling the transition to positive cash flow from our three operating businesses in California and in India. During the third quarter, we completed key milestones also in our two development businesses. In September, we received approval of the Use Permit and CEQA for the development of the Sustained Aviation Fuel Plant, and we made progress on project development after receiving the construction permit from the State of California for the CO2 sequestration characterization well.

And we generated a profit of $30.7 million in the third quarter, and we paid down $50.2 million of high interest rate debt in October. We are growing and diversifying our existing dairy, renewable natural gas and ethanol businesses in California and expanding our biodiesel and tallow feedstock businesses in India by adding facilities to convert our biofuels and byproducts into sustainable aviation fuel, renewable diesel and renewable hydrogen. To further reduce the carbon intensity of our products, an important business that we are developing is the sequestration of CO2 produced by our renewable fuel facilities. Each of these businesses reduce air pollution and carbon emissions, while generating valuable federal tax and renewable fuel standard credits, California low carbon fuel standard credits and carbon credits that are needed by the energy industry, corporations and companies seeking to decarbonize their operations or to offset their carbon emissions.

We are executing on a plan to grow to $2 billion of annual revenues and more than $600 million of annual positive cash flow. We invite investors to review the Company presentation on the homepage of the Aemetis website and our press releases to see the steady progress being made on delivering our plan. The Aemetis Biogas business has multiple revenue sources, the renewable natural gas fuel California low carbon fuel standard credits needed by oil companies to offset carbon emissions from the sale of petroleum fuels in California federal renewable fuel standard credits required by oil companies under federal law, Inflation Reduction Act investment tax credits and Inflation Reduction Act production tax credits that begin in January 2025. An example of the type of credits that we generate from our low carbon projects is the sale of $63 million of federal tax credits in late Q3 to a corporate purchaser for $55 million in cash.

These credits were generated from Aemetis investments and qualified biogas assets under Section 48 of the Inflation Reduction Act, which provides about $400 billion of federal tax credits to projects such as ours that achieved the goals of new jobs, new investment, and the decarbonization of energy. This IRA tax credit sale required extensive third-party review and oversight, including a cost segregation consulting firm that issued a verification document a national law firm that issued a tax memorandum setting forth the calculation of the IRA tax credits, a leading insurance brokerage firm, a group of insurance companies that provided a tax credit insurance policy and a highly profitable corporate buyer that purchase the federal tax credits at a discount.

We expect to continue to generate IRA investment tax credits in the Aemetis Biogas business at the rate of about 40% for eligible project costs, creating more than $100 million of future cash from the sale of IRA investment tax credits related to the investment and production of renewable natural gas. Beginning in about a year, in January 2025, we plan to generate IRA production tax credits from the production of renewable natural gas, the calculation of the valuation of IRA production tax credits for dairy renewable natural gas under Section 45Z is based upon our expected negative 370 carbon intensity of dairy renewable natural gas. After selling discount to a purchaser and tax credit insurance costs, the net proceeds to Aemetis are expected to be approximately $60 per MMBtu of renewable natural gas.

The Aemetis supplies about 80 dairies and approximately 100,000 dairy cows with wet distillers grain animal feed produced by our ethanol plant. Aemetis plants to generate 1.6 million MMBtus per year from only about 60 dairies. As a result, Aemetis plants to grow cash received from the sale of IRA production tax credits from our Aemetis Biogas business to more than $100 million per year, in addition to generating estimated $120 million of investment tax credits from the construction of the qualified biogas assets over the next few years. Let’s review our five businesses. In the India Biodiesel business, $20.1 million of biodiesel contracts were fulfilled by Aemetis, principally for the three India government oil marketing companies during the third quarter of 2023, generating $2.7 million of positive adjusted EBITDA during the third quarter.

We recently announced a $150 million one year allocation for biodiesel from the three oil marketing companies under a cost plus contract structure. We started deliveries under this contract in October. The positive impact of cost plus pricing that is now being used by the OMC’s to purchase biodiesel is expected to continue for the next year. The India Biodiesel is debt free and now generally funds its own operations without outside working capital financing. Our India plant was expanded to 60 million gallons per year of capacity during the third quarter. We continue to expand the production capacity of biodiesel using an enzymatic process, a technology developed by Aemetis at our India plant that allows lower cost lower grade feedstocks to be used to produce high quality biodiesel.

Aemetis believes it is the largest capacity producer in the world using Novozymes enzymes to convert low cost feedstocks into biodiesel. Due to our process technology advantage, the total capital cost of our expansion to 60 million gallons per year was less than $1 million and was funded entirely by our operating profits in India. To meet rapidly expanding demand from biodiesel by the government owned oil marketing companies, we are continuing to expand production capacity in India with a plan of 100 million gallons per year of capacity in 2025. The India market is about 25 billion gallons of Petroleum Diesel and the government has set a goal of a 5% blend of biodiesel. We expect the cost flights contracts from India government oil refineries will support the addition of a significant amount of new biodiesel production capacity in India over the next five years.

With Aemetis continuing to expand capacity beyond 100 million gallons to supply the increasing demand for renewable fuels. The plant export of refined tallow from the India facility to renewable diesel producers in the U.S. is making steady progress, with feedstock sales to several biorefinery customers in active discussions. In Aemetis Biogas business, this summer we closed the second $25 million USDA guaranteed loan to build dairy biogas digesters for an additional eight dairies. This closing brought our total to $50 million of committed USDA REAP based project financing known as Renewable Energy for America Program to build 15 fully funded dairies that are designed to produce a combined 400,000 MMBtus of renewable natural gas each year. The third $25 million USDA guaranteed loan should be closed by the end of the year, subject to potential delays from a government shutdown.

The fourth through eighth loan are in various steps of the process. When closed, these five additional rounds of financing, under the Renewable Energy for America Program, are scheduled to provide an additional $125 million a 20-year project financing for the construction of Aemetis Biogas assets. We now have seven fully operating dairy digesters and are currently constructing additional digesters for 10 dairies. These dairy digesters are expected to generate approximately 400,000 MMBtus per year of renewable natural to gas. We expect to have nine digesters operational by the end of 2023 and plan to speed up the rate of digester development in 2024 as we closed financing from Aemetis Biogas 3, 4 and 5 for $75 million of new financing. A few months ago, we received our default negative 150 carbon intensity pathway approval for six dairies to generate low carbon fuel standard credits.

And we expect more approvals in the next few weeks. While we await the approvals of our provisional LCFS pathways for credit generation in California, we store the Renewable Natural Gas underground and carry the RNG as inventory until required to deliver to customers. Aemetis and other RNG producers have experienced significant delays in the California Air Resources Board halfway approval process, with some at 24 months and counting. We expect CARB to address this delay and the upcoming reauthorization of the LCFS program in 2024. We noted earlier this year that the dairy digesters were performing above expectations. Our updated plan that we expect to release in Q1 2024 will include updated volumes based upon the successful production rates of the biogas digesters during 2023.

We are pleased to have passed the operational start up phase and are now positive cash flow from operations at Aemetis Biogas. We are selling Federal D3 Renewable Identification Numbers at a price that is about 75% higher than a few months ago, as the price of D3 RIN has increased to $3.50 per RIN compared to $2 per RIN in June of this year. The EPA mandate for D3 RINs for the next two years significantly exceeds the expected production from biogas projects, so oil companies are competing to purchase D3 RINs, driving up the price. Though we plan to continue to utilize long term USDA guaranteed REAP loans for the construction and operation of Aemetis Biogas projects. We recently paid $30 million to Third Eye Capital pursuant to their financing of the biogas project.

In addition, the original financing was extended to the end of December for $3 million after which any remaining balance is converted into a simplified promissory note at about a 8% lower interest rate than the prior conversion promissory note. In the Aemetis sustainable aviation fuel and renewable diesel business, we received approval for the primary permit for the construction of the 90 million gallon per year SAF and RD plant at the Riverbank site. The Use Permit and California Environmental Quality Act approval, allowing the use of the 24 acre site for a sustainable aviation fuel and renewable diesel plant was approved on September 12th. The authority to construct air permit is expected to be approved in early Q1, 2024. We have signed $3.8 billion of supply contracts with 10 airlines, and a $3.2 billion renewable diesel supply contract with the National Travel Stop Company.

We are now obtaining the final permits for the development of the plant, and due to market conditions, we expect to revise these agreements to reflect updated project timing and terms in 2024. The HEPA process or SAF production is currently less expensive than the Ethanol to Jet process when considering the current price of Ethanol and the yields of current production technologies. Aemetis is deploying the Topsoe HydroFlex process that enables the production of sustainable aviation fuel and renewable diesel at any output ratio, thereby allowing the maximization of pricing by the production and sale of the higher value fuel. The need for sustainable aviation fuel continues to increase, but the overall market supply of SAFs continues to be delayed, resulting in significant supply shortages that are expected to continue for the foreseeable future as the 90 billion gallon per year aviation fuel industry seeks to reduce air pollution and carbon emissions using renewable fuel to replace petroleum jet fuel.

Truck engines are primarily powered by petroleum diesel, so renewable diesel is a drop in replacement fuel that does not require any capital expenditure by the truck operator, unlike hydrogen or battery electric trucks. However, renewable natural gas engines allow trucks to generate significantly lower emissions and enjoy approximately 50% or more savings on fuel cost due to the number of credits generated by carbon negative dairy renewable natural gas. The California Air Resources Board has stated renewable natural gas is an important source of renewable hydrogen for future truck engines, allowing the trucks to be zero emission using a carbon negative fuel. We believe that Aemetis is very well positioned to supply renewable natural gas, hydrogen and below zero carbon electricity to future for trucks and cars in California, enabling the transition to zero emission and below zero carbon intensity heavy duty and light duty vehicles.

For the Aemetis ethanol business, during Q1 and most of Q2 of this year, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant, which helped us avoid significant losses during the quarter due to extraordinarily high natural gas prices early this year. Equally important, this pause in production helped us avoid future plant shutdowns that would have been required to install key components of our energy efficiency upgrades. The result was an acceleration of our planned projects to reduce our biofuels carbon intensity through a number of plant efficiency and electrification projects. We also accelerated the installation of an entirely new Allen Bradley Distributed Control System with artificial intelligence capabilities, along with several other important process upgrades.

We restarted the Keyes ethanol plant in late May and ramped up production during June and July. The plant generated revenues of $47.4 million during the third quarter and has been running well with the new systems installed and long-term maintenance projects completed. The goal of our Keyes ethanol plant upgrades is to significantly reduce the use of fossil based natural gas at the plant. When these projects are completed in 2024, we expect that natural gas usage at the Keyes ethanol plant production facility will be reduced by more than 80%. This transformation from fossil fuel natural gas to renewable electricity will put Aemetis at the forefront of decarbonized manufacturing facilities in California and is expected to reduce the carbon intensity of fuel ethanol produced at the Keyes plant by double-digits.

In the next few months, we will be completing the installation of a $10 million solar microgrid with battery backup that will increase the use of renewable electricity at the plant. Our mechanical vapor recompression known as MVR unit and has now completed Process Engineering Design and has begun equipment fabrication for installation late next year. These upgrades as well as the replacement or upgrading of various heat exchangers and process equipment, and the installation of the new AI enabled decision control system is designed to allow Aemetis to achieve meaningful energy cost savings and increase our revenue through the sale of lower carbon intensity fuel ethanol. In summary despite facing some temporary and highly unusual external headwinds in the first and second quarter of this year in our ethanol business, operational performance and project milestones for the Aemetis Biogas and ethanol plant businesses continue to be on track with the Company plant.

In the Aemetis carbon capture and sequestration business, we were awarded the first CO2 sequestration characterization well permit issued by the state of California to a non-governmental project in May. The CO2 characterization well is designed to provide geologic data for the EPA Class 6 ejection well planned for the Riverbank site. The recent $5 billion acquisition of Denbury by Exxon is an example of the timeliness and relevance of CO2 sequestration to oil refiners and other CO2 emitters. In California, Senate Bill 905 established a public engagement process to resolve specific issues related to CO2 sequestration projects, including royalty rates and the unitization of pore space rights. We continue to focus on the development of the project, but we are supported by the legislative and political process in California that is implementing the regulations for the capture of CO2 to achieve carbon emission reduction targets set by Governor Newsom in a letter to the California Air Resources Board last year.

The California Air Resources Board has held several low carbon fuel standard public events where staff stated the CARB plans to significantly increase the number of credits required under the program by significantly expanding LCFS mandates. CARB own model estimates that the increased mandates will raise the price of LCFS credits to more than $2.20 per credit in the next two years. We expect that LCFS credit prices will begin to increase after the January 2024 CARB Board approval of the revised regulations that are expected to implement an automatic ratchet mechanism and a onetime increase in number of LCFS credits in order to reduce the inventory of credits. LCFS credits generate revenues for Aemetis in all of our U.S. businesses and indirectly benefit our India business that can produce feedstock for U.S. renewable diesel and sustainable aviation fueled biorefineries.

Currently, Aemetis captures the 150,000 metric tons per year of CO2 emissions from our Keyes Ethanol plant and reuses the CO2 for local customers. This reuse of CO2 can generate 45Q transferable tax credits under the Inflation Reduction Act. In Phase 1 of the Aemetis Carbon Capture project, we plan to inject up to 400,000 metric tons per year of CO2 emissions from our biogas, ethanol and jet diesel plants into two sequestration wells that we plan to drill near our two biofuels plant sites in California. We expect to construct two CO2 injection wells that each have a minimum of 1 million metric tons per year of injection capacity, with an additional CO2 supplied by other emission sources to sequester a planned total of 2 million metric tons per year of CO2.

The planned 2 million metric tons of CO2 per year sequester by the Aemetis Carbon Capture project are expected to generate an expected $170 million per year from Federal Direct Pay Tax Credits or about $85 per metric ton of CO2, as well as an estimated $400 million per year at a projected $200 per ton of sequestered CO2 from the low carbon fuel standards. We believe the fixed amount of $850 million provided by the direct pay funding over the first 5; years of project operation should support funding the estimated $250 million capital cost of the two injection wells and related equipment. In summary, all of the five Aemetis businesses are synergistic and create what we refer to as a circular bioeconomy within Aemetis. We use the biofuels, byproducts and waste products from our facilities and local areas as feedstock to produce low and negative carbon intensity renewable fuels to meet government mandates for air quality improvement and carbon emissions reductions The strong demand for dairy renewable natural gas and the rapidly growing sustainable aviation fuel market are key areas of investment and project development at Aemetis.

Our existing facilities are focused on projects that improve energy efficiency, reduce carbon intensity to increase revenues at lower cost and technologies enabling the use of lower cost feedstocks at our existing production facilities. Our company’s values include a long-term commitment to building value for shareholders, the empowerment of and respect for our employees and business partners, and making significant and positive contributions to the communities we serve. Now, let’s take a few questions from our call participants. Ali?

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from Manav Gupta with UBS.

Manav Gupta: So the first question would be on the CARB staff proposal. We believe you also played a very key role in getting across the line, looks like it is a very positive program, 50% increase in compliance by 2030 and then obviously the ratchet mechanism, which pulls the program forward. What the bears are saying here is that given where the levels are currently and given that we would continue to build probably until 2024 end. That carbon prices may or may not move even into late 2024 or early 2025. And you obviously on the call said, you expect an earlier movement. So, first of all, can you comment a little bit more on the program, what you liked and then why do you believe that the carbon prices would actually start moving in 2024 versus 2025?

Eric McAfee: I think that the traders that work for major oil companies are very smart people. And what they’re looking for is certainty, not just for a month or for a quarter. They’re actually, like we are, investing in long-term capital projects that have an impact on carbon intensity, and they know that if they can’t cover their obligations related to those projects, that there are significant compliance costs that frankly have to be considered in their operations over a long period of time. And so having spent a lot of time with those traders, unfortunately, what they see right now with CARB is a lot of political confusion between environmental groups and other voices and what the CARB staff is proposing, and so they’ve taken a wait and see attitude.

The CARB staff is expected to present to the board in January 2024, and the board has stated that they intend to approve the implementation to be effective in the second quarter. And I think that kind of certainty is going to immediately, allow people to calculate what they each entity will require in future LCFS credit mandates, and if the automatic ratchet mechanism is written the way that they’ve proposed, it’s going to be very clear the more LCFS credits generated, the more rapidly the automatic ratchet mechanism will move you to for additional compliance, it will move forward one year. And for example, in year 2030, it drops very significantly between 2030 and 2031. And so though the ratchet mechanism doesn’t have to wait until 2030, I think that the calculations could easily be that the 1st ratchet might be as early as 2026.

So as people game out, okay, how many LCFS credits we’re going to need are we going to need? They’re going to conclude exactly what CARB put on Slide 51 of their February 2023 webinar, which was under any scenario, the ratchets mechanism plus the one time step down. There will not be enough LCFS credits presented by renewable diesel and SAF, et cetera, coming to the market. And once you conclude that, then you need to conclude that you’re going to go buy as much as you can to minimize your future compliance liability, because the price is going to be triple what it is today. So what I just said took me a lot longer than it will take for a trader to conclude this and say, just buy what you can, and let’s see how fast the price moves. And once you get that momentum, I don’t think it’s going to take 1.5 years for the market to say we just need to get to the cap, and we need to be there as fast as possible because we need to cover our future liabilities.

As the price moves up, you’re going to get this kind of a panic among the folks that are late to the party as they see their compliance costs dramatically increase. And of course, that panic will drive for further buying. The good news is there’s already a built in cap, there’s a built in mechanism to make sure the market doesn’t get overheated in terms of price. It will not go to $300 or $400. It will stop at a cap. And, we saw we were very close to the cap in August 2020. The reality is we probably will be there again in 2024. I wouldn’t be surprised at all if these traders, very quickly move the price once certainty is in place.

Manav Gupta: Thank you, guys. Let’s hope that plays out exactly as you said. My quick second follow-up is moving from California to federal level. We still haven’t got the full guidance on 45z, but for a company like you where the RNG carbon intensity can drop closer to, like, 375, 400 like if they don’t cap it, does that mean you could, like, make $7 or $8 a gallon in 45Z credits on top of what you make on LCFS for your RNG projects and even you’re looking to target sap of zero carbon intensity, that’s like a $1 a gallon? Does that math sound right, sir?

Eric McAfee: It does, each one of our businesses have different carbon intensity. Renewable natural gas it’s going to be the big winner, not just us, but any dairy, renewable natural gas producer, under the Placement Reduction Act 45z section is going to be able to, in our case, be about a $68 per MMBtu. Each MMBtu is 7.2 diesel gallon equivalents. So, if you take 68 divided by 7.2, obviously, that’s a very attractive amount per diesel gallon equivalent, but it’s based upon having a negative 370 carbon intensity, which you’re not going to achieve with renewable diesel or other fuels anytime soon. So the big winner in the 45z is dairy, renewable natural gas landfill, renewable natural gas. The numbers I’ve seen is positive 30, we’re negative 370, they’re positive 30.