Aemetis, Inc. (NASDAQ:AMTX) Q4 2023 Earnings Call Transcript

Aemetis, Inc. (NASDAQ:AMTX) Q4 2023 Earnings Call Transcript March 7, 2024

Aemetis, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Aemetis Fourth Quarter and Year End 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 fourth quarter and year end 2023 earnings review conference call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis and Andy Foster, President of Aemetis North America. We suggest visiting 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.

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 year ended December 31, 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 fourth quarter and year end of 2023. Results for the three months ended December 31, 2023. Revenues were $70.8 million for the fourth quarter of 2023, an increase from $66.7 million for the fourth quarter of 2022.

The ethanol gallons sold increased from 13.4 million gallons during the fourth quarter 2022 to 15 million gallons during the fourth quarter of 2023. Biodiesel sales of 18,300 metric tons were recorded during the fourth quarter of 2023 at $1157 per metric ton. Our California ethanol segment accounted for $45 million of revenue, and our India Biodiesel segment accounted for $22 million of revenue during the period. Cost of goods sold increased from $67.9 million during the fourth quarter of 2022 to $69.9 million during the fourth quarter of 2023 due to an 18% increase in feedstock costs from the incremental sales in our India Biodiesel segment coupled with an increase in corn ground from 4.3 million bushels during the fourth quarter of 2022 to 5.2 million bushels during the fourth quarter of 2023, offset by a 33% decrease in the average delivered cost of corn.

Gross profit, selling, general and administrative expense, and operating loss were consistent between the fourth quarter of 2022 and 2023. Net loss was $25.4 million for the fourth quarter of 2023 compared to a net loss of $22.4 million for the fourth quarter of 2022. Cash at the end of the fourth quarter of 2023 was $2.7 million compared to $4.3 million at the end of the fourth quarter of 2022. The financial results for the 12 months ended December 31, 2023. Revenues were 187 million dollars for the 12 months ended December 31, 2023, compared to $257 million for 2022. During 2023, $77.2 million of revenues were generated by the India Biodiesel segment, $55.5 million of revenue were generated by the California renewable natural gas segment and $104.3 million of revenue were generated by the California ethanol segment.

We idled the plant during the first five months of 2023 due to historic and unexpected high energy costs and took advantage of this period to lead a variety of maintenance and plant efficiency projects. Gross profit for the 12 months ended December 31, 2023 was $2 million compared to a gross loss of $5.5 million during the same period in 2022. Our India Biodiesel segment accounted for $9 million of gross profit from sales of biodiesel for the year ended December 31, 2023. Selling, general and administrative expenses increased to $39.3 million during the 12 months ended December 31, 2023, compared to $28.7 million during the same period of 2022, attributable in part to the reclassification of expenses from cost of goods sold during the extended five-month maintenance and upgrade cycle for the Keyes plant in early 2023.

Net loss was $46.4 million for the 12 months ended December 31, 2023, compared to a net loss of $107.8 million during the same period in 2022. Investments in our low carbon initiatives increased property, plant and equipment by $33 million while debt repayment of $51.3 million were made to our senior lender during the 12 months ended December 31, 2023. Now, I’d like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?

Eric McAfee: Thanks, Todd. We released the updated Aemetis five-year plan about two weeks ago, and we encourage investors to closely review the extensive information provided in the presentation, which is available on the homepage of the Aemetis website. Before discussing the many milestones that we achieved in 2023, let’s talk about financing. Since the understanding of how Aemetis plans to continue to grow rapidly in the current market environment is a key part of our five-year plan. The first important point regarding the Aemetis funding plan is that the financing of our projects is being completed on a project finance basis for each subsidiary. So, the debt position of the Aemetis parent company does not impair our funding of new projects.

I make this point to clarify any suggestion that our well-established financing relationship with Third Eye Capital is somehow constraining our project financing or the growth of our company. In fact, the opposite is true. Third Eye Capital has been integral to our success in providing project development funding and then obtaining long-term project financing from our other lenders, enabling Aemetis to receive $50 million of 20-year financing in just the past year. We expect more than $100 million of 20-year financing for Aemetis Biogas capital expenditures to close in the current year in addition to other significant project financings that are in process now. Third Eye Capital is a primary beneficiary of the long-term lower interest rate project financings provided by other lenders as the excess cash flow from these new projects are expected to continue to reduce the amounts outstanding to Third Eye Capital.

Rather than being a hindrance to the growth of Aemetis, for the past 15 years, Third Eye Capital has been funding the growth of our initiatives and continues to support Aemetis in attracting 20-year financing from other lenders for new projects that create new revenues, new cash flow and new debt repayment capabilities. The second important point about financing at Aemetis is our long relationship with the U.S. Department of Agriculture, which is a major provider of loan guarantees that enable 20-year financing for projects. Over nearly two decades, Aemetis has built strong and productive relationships with number of top leaders at the USDA, as we share similar goals of strengthening the agricultural sector by creating new energy market for ag and ag waste products.

And our board member for the past 15 years, Jack Block, a former secretary of the USDA, has been extremely helpful in this shared vision and collaboration. Our positive relationships at the USDA are key to our confidence in USDA programs, such as the Renewable Energy for America program known as REAP that support renewable fuels projects. These USDA programs have already guaranteed funding of 20-year financing for the Aemetis renewable natural gas business, but also can provide government guarantees and 20-year financing for sustainable aviation fuel, the conversion of our ethanol plant to use electricity instead of petroleum natural gas for power, and our carbon sequestration projects. A third important point about financing at Aemetis is that we have already fully repaid our long-term debt at our India plant and have been generating strong positive cash flow from India biodiesel production operations over the past two years under cost plus pricing with oil refineries owned by the India government.

This strong financial position has allowed the India business to internally fund expansion to 60 million gallons per year from ongoing positive operating cash flow and now has positioned our India subsidiary for a planned initial public offering onto the India Stock Exchanges. Our India business is highly attractive as an IPO company onto the fast-growing India Stock Exchanges since we are one of the largest biodiesel suppliers in the booming India economy. We have no long-term debt. We sell biodiesel on a cost-plus pricing formula to government owned oil marketing companies and we are in a rapidly growing market that has more than $5 billion per year of growth to meet the biodiesel blending targets set forth in the 2022 India National Biofuels Policy.

It only took 15 years for Aemetis to become an overnight success in India by building and operating a production plant, paying off all of our long-term debt, and then expanding production capacity. Our strong financial foundation in India and $150 million of current biodiesel supply contract allocations is only the beginning of our planned growth. We plan to expand our biodiesel production capacity in India using cash flow from operations, but a primary use of funds from a potential IPO onto the India stock markets would include the production of sustainable aviation fuel to meet growing global airline demand for SAF. The India plant can be expanded to supply SAF for airlines in India as well as international markets, such as the existing 10 airlines that have signed $3.8 billion of agreements with Aemetis for delivery of SAF in California.

The fourth important point about financing growth at Aemetis is the attractiveness of our projects to lenders and preferred investors. The sophisticated investors and lenders in our projects understand that our risks are mitigated by using bonded contractors, technology guarantees and even cost plus pricing to provide confidence that debt obligations will be paid. The markets for our new projects in dairy, renewable natural gas, sustainable aviation fuel and carbon sequestration are rapidly growing, supported by regulatory policy and uniquely positioned to generate positive margins. The final point I’d like to make about financing related to Aemetis projects is the design of our business model in which our existing cash flow from operations supports future capital expenditures to reduce the need for debt as we grow.

In 2023, we generated positive cash of $32.7 million from adjusted EBITDA plus tax credit sales. This positive cash generation from operating the business is expected to continue to expand allowing us to fund future interest and principal reductions on debt as well as fund a meaningful amount of our capital expenditures from our growing operational positive cash flow. Let’s review our five businesses. In the India bio fuels business, in late 2023, we 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 2023 and have achieved excellent production performance during the four months of winter fuel specifications that require higher cost feedstocks.

Beginning this month, the summer fuel specification allows lower cost feedstock to be used. The positive impact of cost-plus pricing that is now being used by the India oil marketing companies to purchase biodiesel is expected to continue for the foreseeable future. The India business is debt free and now funds its own operations without outside long-term financing. Our India plant expanded to 60 million gallons per year of capacity during the third quarter, entirely funded by the positive cash flow from operations. We continue to expand the production and capacity of biodiesel using an enzymatic process, a technology developed by Aemetis at our India plant that allows lower cost, lower grade feedstock to be used to produce high quality biodiesel.

Aemetis believes that our India biodiesel plant is the largest capacity producer in the world, using Novozymes enzymes to convert low-cost feedstocks into biodiesel. To meet rapidly expanding demand for 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 and diesel, and the government has set a goal of a 5% blend of biodiesel. We expect the cost-plus 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 the capacity beyond 100 million gallons to supply the increasing demand for renewable fuels.

The planned 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. Andy Foster, President of Aemetis North America will now review the Aemetis Biogas and ethanol businesses. Andy?

Andy Foster: Thanks, Eric. In the 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 to build digesters receiving waste from 15 dairies that are designed to produce a combined 400,000 MMBtus of renewable natural gas each year. This month, we will have nine fully operating dairy digesters supplied with waste from 10 dairies. We plan to accelerate the rate of biogas digester development in 2024 as we close USDA guaranteed financing for the next projects for $75 million of new financing as well as other financing to accelerate project construction.

We are very pleased to have passed the operational startup phase and are now positive cash flow from operations at Aemetis Biogas. Aemetis and other RNG producers have experienced significant delays in the CARB pathway approval process for LCFS credits, with some at 24 months and counting. We recently met with top staff at CARB, and they expect to address this issue in the rulemaking process in the upcoming reauthorization of the LCFS program in this year. We generated revenue from the sale of LCFS credits from our Aemetis Biogas operations for the first time in Q1 of 2024. In addition to the sale of renewable natural gas as a fuel and the sale of Federal D3 RINs, this new LCFS credit revenue stream will only increase as we build new digesters and as CARB approves the lower carbon intensity values that we have already demonstrated in actual operations.

In October 2023, we repaid $30 million of the original Aemetis Biogas startup funding, and the balance of that financing was recently extended at an effective interest rate of less than 8.5%. The California Air Resources Board has stated that renewable natural gas is an important source of renewable hydrogen for the future of truck engines, allowing the trucks to be zero emission using a carbon negative fuel. We believe that Aemetis is very well positioned to supply RNG, hydrogen and below zero carbon intensity electricity to future trucks and cars in California, enabling the transition to zero emission and below zero CI heavy and light duty vehicles. For the Aemetis ethanol business, during Q1 and most of Q2 of 2023, we experienced extraordinarily high natural gas prices in California, which made ongoing operations economically unviable during that time period.

As a result, we chose to idle the Keyes ethanol plant and took advantage of this time to complete an extended maintenance cycle and to begin the implementation of energy efficiency projects. 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 progress project upgrades. We restarted the Keyes ethanol plant in late May and ramped up production during June and July.

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 next year, we expect that natural gas usage at the Keyes ethanol production facility will be reduced by more than 80%. This transformation from fossil natural gas to renewable electricity will put Aemetis at the forefront of decarbonized manufacturing facilities in the State of California and is expected to reduce the carbon intensity of our fuel ethanol produced at the Keyes plant by double digits, which will increase the value of our ethanol while reducing energy cost. In fact, this transition has already begun. By the end of this month, we will have tested, commissioned and brought into service a 1.9-megawatt solar microgrid system that will generate zero carbon intensity electricity for plant operations and load shedding during peak hours in order to save on energy cost.

This low carbon electricity from solar energy reduces the carbon intensity of our ethanol, thereby increasing revenues by generating more LCFS credits. In summary, despite facing some temporary and highly unusual external headwinds in the first and second quarters of this year in our ethanol business, operational performance and project milestones for the Aemetis Biogas and Aemetis ethanol plant businesses continue to be on track with the company plan. Eric?

Eric McAfee: Thanks, Andy. In the Amedis sustainable aviation fuel and renewable diesel business, earlier this week, we announced that we received the authority to construct air permits for the construction of the 90 million gallon per year SAF and RD plant at the Riverbank site. Last September, the use permit and California Environmental Quality Act approval allowing the use of this 24-acre site for a sustainable aviation fuel and renewable diesel plant was were approved. We have signed $3.8 billion of final binding supply agreements with 10 airlines and a $3.2 billion renewable diesel supply contract with the National Travel Stop Company. These agreements are final contracts, not Letters of Intent or Memorandum of Understanding.

So, we expect to update this agreements to reflect project timing as well as project timing as well as pricing terms to reflect current market conditions. Currently, the hydrotreated esters and fatty acids known as HEFA process for SAF production is significantly less expensive than the ethanol-to-jet process to produce SAF. Aemetis is deploying the Topsoe HydroFlex HEFA process that enables the production of SAF and renewable diesel at any output ratio, thereby allowing the maximization of pricing by the production sale of the higher value fuel. When operating at a fifty-fifty production allocation of SAF and RD, the plant is designed to produce 90 million gallons per year, comprised of 45 million gallons of SAF and 45 million gallons of renewable diesel.

At a 100% allocation of production to SAF and no RD production, the plant is designed to produce 78 million gallons per year of SAF. The need for sustainable aviation fuel continues to increase, but the overall market supply of SAF 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. As one of the very few companies fully permitted to construct a large scale SAF production facility in the United States, Aemetis has a meaningful position as a leading supplier to the airline market that cannot currently meet their goal of transitioning to lower carbon fuel.

In the Aemetis carbon capture and sequestration business, we were issued the first CO2 sequestration characterization well permit by the State of California to a nongovernmental project in 2023. The CO2 characterization well is designed to provide geologic data for the EPA Class VI injection well planned for the Riverbank site. In California, the passage of Senate Bill 905 last year established a public engagement process to resolve specific issues related to CO2 sequestration projects, including royalty rates and the unitization of poor space rights. We are supported by this legislative process in California that is implementing regulations for CO2 capture to achieve the ambitious carbon emission reduction targets set by Governor Newsom. The California Air Resources Board has held several low carbon fuel standard public events where staff stated that CARB plans to significantly increase the number of credits required under the program by significantly expanding LCFS mandates.

CARB’s own model estimates that the increased mandates will raise the price of LCF credits to more than $220 per credit in the next two years. Though the updated regulations strengthened in the LCFS have been delayed, we expect that the recent increase in LCFS credit prices reflects the market expectation of strong LCFS credit mandates will be adopted at a mid-2024 CARB Board meeting. LCFS credits generate revenues for Aemetis and all of our U.S. businesses and indirectly benefit our India business, which can produce feedstock for U.S. renewable diesel and sustainable aviation fuel biorefineries. 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.

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Q&A Session

Operator: Thank you, Mr. Eric McAfee [Operator Instructions]. Our first question comes from Manav Gupta with UBS. You may proceed.

Manav Gupta: Good morning, Eric and Andy. So, my first question relates to the CARB timing here. There was a meeting somewhere in March. Looks like it’s moved. There are two schools of thought again, they’re having second considerations. The other school of thought is they looked at the program and thought it was not aggressive enough to reduce the rate at which the carbon credit bank was building and they’re now looking at ways to bring it down at a faster pace. You talk to those guys, you’re close to those guys. What’s the thought process over there?

Andy Foster: Hey Manav, it’s Andy. So, thanks for your question. I think it’s a combination of those things that you just mentioned. I think there were frankly some incorrect estimates in terms of what the credit market looked like as this year would evolve and where it would end up at the end of this year and I think it became readily apparent to CARB, especially when you saw the sharp decline in the LCFS price in the earlier part of this year that those estimates were not on target. And so, I think that was one contributing factor. I think they received a lot of feedback, a lot of public comment, which I think has also kind of slowed down their process a little bit. But I would suggest that a combination of the LCFS credit situation, which is a huge overhang in the market and sort of an unanticipated, but not by us, but I think by CARB in some respects.

It was pretty apparent as we were exiting last year that this was going to be a problem. So, I think they’re addressing that and I do expect certainly it’s our hope that they will come back in April with at the next meeting with some more aggressive goals when it comes to the overall program. So, I think it is combination of the things but there clearly was a realization, Manav, that the LCFS credit overhang in the market was causing a serious deterioration the ability for companies like us to make return on investment and further invest in programs, but also to encourage new investment in the entire renewable sector. I mean, this was clearly something that they were getting a lot of feedback on. So, I would expect — I’m hoping certainly that they will come back in April with some more aggressive numbers as a result of this delay.

Manav Gupta: Perfect. A quick follow-up is you indicated you have nine diaries on. So first, how many do you expect to be online by year end? And then when do you — I mean, there’s a delay period here, so you do have nine dairies, but how long will it take do you think to start seeing the revenues from these nine dairies to flow in, whether it’s through the RFS credits or through the LCFS credits? And I’ll turn it over after that. Thank you so much.

Eric McAfee: So, I think by the end of this year, we’re expecting to have 18 dairies online. And the second part of your question, would you repeat that? I’m sorry.

Manav Gupta: Like by when do you expect to start monetizing these credits from these nine dairies? Because there is a lag period before the dairy actually comes on and then you’re storing the gas. So, when do you expect to start monetizing these credits?

Eric McAfee: We actually started monetizing these credits this year, of course, at the lower the temporary pathway, the negative 150, but we actually started that process in in Q1, Manav. So, as we go through the application process, there’s specific milestones you have to you get to from a timing perspective. But we’ve already begun that process and we expected that process to continue on. And then hopefully, our applications have been in for it will be almost a year in early May, I think is when we submitted. So, we are encouraging CARB to accelerate that process because obviously, once we get the full pathway, then the number of credits and goes up significantly. But we actually have already started that process.

Operator: Our next question is coming from John Annis with Stifel. Your line is live.

John Annis: Hey, good afternoon and thanks for taking my questions. For my first one, Eric, if I heard you right in your prepared remarks, you mentioned the potential for SAF production in India. Can you frame how you see SAF economics in India stacking up against the U.S. markets? Are there any regulatory incentives in India that would support building out SAF capacity there?

Eric McAfee: Our initial opportunity is simply to tap into the less expensive waste feedstock in India and then export these SAF to the San Francisco airport where we have $3.8 billion of existing contracts with 10 airlines. And so, it’s a direct feedstock arbitrage from a country that has a tremendous amount of underutilized feedstock. And we already have a 50 million gallon per year tallow refinery in place, direct relationships, we used to export biodiesel to Europe using tallow as a feedstock. So, we are well positioned to be a leading player in just doing that business model. The cost-plus structure with oil marketing companies is an opportunity for SAF adoption in India. So that would be what I would call a secondary market opportunity would be to arbitrage the California price against the India price and the cost-plus structure that they are using for biofuels in India.