Alto Ingredients, Inc. (NASDAQ:ALTO) Q1 2024 Earnings Call Transcript

Alto Ingredients, Inc. (NASDAQ:ALTO) Q1 2024 Earnings Call Transcript May 6, 2024

Alto Ingredients, Inc. beats earnings expectations. Reported EPS is $-0.16113, expectations were $-0.18. ALTO 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 day, and welcome to the Alto Ingredients, Inc. First Quarter 2024 Financial Results Conference Call. All participants are in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman of LHA Investor. Please go ahead.

Kirsten Chapman: Thank you, Kaley, and thank you all for joining us today for the Alto Ingredients’ first quarter 2024 results conference call. On the call today are President and CEO, Bryon McGregor; and CFO, Rob Olander. Alto Ingredients issued a press release after 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. A telephone replay of today’s call will be made available through May 13, the details of which are included in today’s press release. A webcast replay will also be available at Alto Ingredients’ website. Please note that the information on this call speaks only as of today, May 6.

You are advised that any time-sensitive information may no longer be accurate at the time of any 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 in this presentation constitute forward-looking statements and considerations that involve 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 reported. The company defines adjusted EBITDA as unaudited consolidated net income or loss before interest expense, interest income, provision for income taxes, asset impairments, loss on extinguishment of debt, unrealized derivatives, gains and losses, acquisitions related expense and depreciation and amortization expense. To support the company’s review of non-GAAP financial information, a reconciling table is included in today’s press release. On today’s call, Bryon will provide a review of our strategic plan and activities, Rob will comment on our financial results.

Then Bryon will wrap up and open the call for questions. It’s now my pleasure to introduce Bryon McGregor. Please go ahead, sir.

Bryon McGregor: Thank you, Kirsten. Thank you everyone for joining us today. We began 2024 with a refined vision to produce a variety of essential ingredients and the highest grade beverage alcohol in the industry and prioritize our carbon capture and storage or CCS initiative. We are leveraging the unique capabilities of our Pekin campus and our other assets to moderate the impact of crush margin fluctuations. I’m encouraged by the strategic and operational progress we’ve made so far this year. However, relatively low but improving crush margins and various weather factors impacted our financial results in the first quarter. That said, high-quality alcohol sales from our Pekin campus increased year-over-year contributing toward an overall improved gross profit and adjusted EBITDA on a comparative basis.

Rob, will discuss our financial results in greater detail. I’ll begin by reviewing CCS and our ongoing strategic projects. With CCS, our goal is to create value for Alto, our customers, our surrounding communities and our shareholders by substantially reducing our carbon footprint. Our Pekin campus facilities, their CO2 production and their location provide Alto a unique CCS opportunity. We continue to negotiate the terms of our proposed agreements with potential financial partners and with Vault, a leading CCS developer focused on the development, capitalization and operation of carbon storage assets. Our plan is to work with Vault to safely transport the CO2 to a geological reservoir nearby and permanently store it securely deep underground.

As noted in March, together with Vault, we are driving ahead with our respective activities for system design, community outreach, vendor negotiations and schedule alignment requirements to procure equipment for compression and to support the installation of additional power. Vault completed the 2D seismic geologic survey and has begun data analysis. They’ve also advanced the work required to submit the EPA Class VI permit application. Our CCS project provides compelling economics that we believe we can enhance with more efficient, lower cost energy production. To this end, we are evaluating multiple capital line options. We are in discussions with a highly regarded independent energy company. This potential partner has been engaged to complete their Feed study for an energy cogeneration facility that they would build own, operate and maintain on-site.

This facility will lower Alto’s capital expenditures, improve operating efficiencies and reduce our forecasted long-term energy costs. We are also continuing conversations with our current utility provider to expand energy supply capabilities as an alternative to cogeneration. Our specialty alcohol products include highly differentiated 192 proof and low-moisture 200 proof grain neutral spirits that create customer opportunities higher up the value chain. In Q1 2024, we sold 26 million gallons of specialty alcohol, up from 21 million gallons in Q1 2023. As mentioned in March, for 2024, we contracted approximately 93 million gallons of fixed price specialty alcohol and average premium to renewable fuel of $0.31 per gallon. Our biennial Pekin campus wet mill outage was completed in April.

The plant was offline for 10 days, while we executed the scope of work with over 450 discrete tasks focused on corrective and preventative maintenance as well as upgrades to plant infrastructure. With the outage complete, the plant has safely returned to operation and is ramping up to target production rates. These efforts will result in more consistent and higher production rates, improving reliability as we approach the summer driving season. At Magic Valley, we have been diligently working on our corn oil and high-protein technology to return the facility to a more sustainable profitability by reducing the impact of periodic low-crush margins and higher destination corn basis. As outlined in March, we are working with our high-protein system vendor Harvest Technology to achieve the intended production rate, quality and consistency of our corn oil and high-protein output at the facility.

While the plant is hot idled, we are using the downtime to accelerate routine maintenance activities to optimize plant efficiency upon restart. The equipment for the new system modifications has been ordered and based on current delivery and installation schedules, we expect to resume production in late June or early July. As a reminder, Harvest Technology is paying for the direct cost of equipment and design changes associated with the corn oil and high-protein systems. As noted previously, as always, we evaluate our path to increase margins, improve profitability and deliver the highest return to our shareholders. We continue to assess our current portfolio of assets. We will provide updates if and when appropriate. Before I turn the call over to Rob, I have a few corporate updates to review.

As part of our sustainability efforts, we finished our annual Scope 1 and 2 Greenhouse Gas verifications during the quarter. In April, as part of our succession planning, we announced our new COO, Todd Benton. I’d like to congratulate Todd on his promotion and Mike Kandris on his forthcoming retirement. Todd has over 25 years experience at the Pekin facility and 30 years in the industry. With his good relations, with the workforce, deep connection with the community and extensive record of achievement for operational excellence, the Board and I look forward to his contributions to our ongoing safety, operational efficiency, reliability and sustainability efforts. Now, I’ll turn the call over to our CFO, Rob Olander.

Rob Olander: Thanks, Bryon. I’ll now review the financial results for the first quarter of 2024 compared to the first quarter of 2023. We sold 99 million gallons during both Q1 of 2024 and 2023. Q1 2024 net sales were $241 million compared to $314 million in Q1 2023, reflecting lower market prices in 2024. Yet Q1 2024 gross loss improved by $800,000 and adjusted EBITDA improved by $3.4 million compared to Q1 of 2023. These improved results reflect better than ethanol crush margins, increased sales of specialty alcohol and the positive impact of our efforts to lower costs and expand operating efficiencies. However, the following factors impacted the results. First, as you know, we employ a variety of risk management strategies to mitigate the price volatility of different commodities throughout the year as the normal course of business.

In recent years, we have seen extreme volatility in the price of natural gas resulting from foreign wars, political events and extended periods of sub-zero weather conditions. To mitigate the risk of high-price volatility, we locked in a significant portion of our gas needs at fixed prices in advance of Q1 2024. Year-to-date, the market has experienced historically low prices due to higher production and supply coupled with lower consumer demand. While our positions benefited us during the cold spike in January, we recognized an incremental loss of $4.9 million related to natural gas hedging activities in Q1 of 2024. Also, and as covered on our last call, the extreme cold weather in January at our Pekin campus restricted barge deliveries and increased standby fees.

To manage inventory levels, we transported more product by rail, which is a higher cost motor transportation. Further, this extreme cold weather necessitated a shift to lower margin feed products and reduced production rates across the facility, decreasing specialty alcohol production. At our Columbia facility, our Q1 production was hindered by issues with our centrifuges. To address this, in mid-March, we installed two upgraded more reliable models that will reduce ongoing maintenance costs. We commissioned one unit and the other will begin operating in May. We also rebuilt the remaining units, enabling the plant to return to target run rates. To-date, the plant is running well. Given these events, Q1 2024 repairs and maintenance expense was $7.5 million $1 million higher compared to Q1 2023.

As this increase reflects the timing of the accelerated costs, we remain on-track for our estimate of $34 million in repairs and maintenance for 2024. As of March 31, our cash balance was $29 million and our total loan borrowing availability was $91 million to support our business operations and capital investment initiatives. Our borrowing availability includes $26 million under our operating line of credit and $65 million subject to certain conditions under our term loan facility. In Q1 2024, we generated $1.4 million in positive cash flow from operations. We invested $4.6 million in CapEx, in-line with our $25 million plan for 2024. With that, I’ll turn the call back to Bryon.

Bryon McGregor: Thank you, Rob. Looking ahead, ethanol crush margins have continued to improve in Q2 and the market outlook for the next three quarters remains favorable. While we are forecasting lower feed prices for the rest of the year, we have solid corn inventories and improved export demand for ethanol. In addition, the EPA summer waiver for the 15% blends will facilitate sustained use of higher blend renewable transportation fuel. Operationally, we expect that our recent work should result in more consistent and higher production rates, improving reliability and profitability. Longer term, the updated guidelines around tax credits for including ethanol in the production of sustainable aviation fuel further validates our CCS efforts. Finally, we are pleased with the progress we have made with our CCS initiative and the value we expect to deliver to stakeholders. Operator, we are ready to begin question-and-answer.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Eric Stine with Craig-Hallum Capital Group.

Eric Stine: Hi, Bryon. Hi, Rob.

Bryon McGregor: Hi, Eric.

Eric Stine: Hey. So, just starting with carbon capture, you gave a lot of detail there, but I guess I was unclear about things that had been done versus things that were to come. And, so just curious if you could just run over that maybe with a little more detail and then just talk about you gave some additional steps that are needed and maybe a timeframe for some of those steps?

Bryon McGregor: Yes. So, Eric there’s, I mean clearly coming to a final agreement with Vault is important as well as advancing discussions with financial partners and the like given the amount of work that still needs to be completed. That said, we’ve made good progress with regards to Vault has made great progress with regards to a lot of the work that goes into the Class VI permit. In addition to that, we’re doing a lot of work with Vault around the community, and making sure that we’re responding to questions and comments and as well as reviewing citing. And, there’s probably a sort of other things that I’m missing. That said, our goal is to have if we stay on-track as we are to have our application in call it end of summer before fourth quarter of this year.

Eric Stine: And is that, you might have said in the past or maybe indications that that’s an 18 months plus kind of review process, or am I not thinking about that right?

Bryon McGregor: That’s correct. Under the EPA’s latest indications, they have upped the amount of time for review and expectations from 18 months to 24 months. So, our expectation is conservatively that we can keep that hopefully within the 24 month period of time.

Eric Stine: Okay. And, then just on the equipment side, you mentioned, I was unclear if you’ve ordered some of that equipment or are going to order that equipment. And, I know that evaluating vendors that was something that you were very focused on or talked about last quarter. So, maybe where does that stand?

Bryon McGregor: Yes. So Eric, the long haul that tends to clear the EPA Class VI permit, right? And, really the work that we do around that is clearly you have to purchase your compression equipment. And, then on top of that, we’re layering in energy, right? So, we need our energy, our power systems and the like to be up to speed. While those are also one of the items that are not as long as what you would expect under the Class VI. So, it’s really about staging those and making sure that you’re spending the money at the right time and not being, you don’t want to be penny wise and pound foolish and spend it all upfront nor do you want to wait until you get your last experiment before you start that process. So, it’s really about just fighting that timing correctly and we’re still working on that.

But we have a pretty good idea and our goal is to actually to be able to, if we can light up the plan, it says to be able to once you get your Class VI permit to be able to have all of your other systems up and operational at or before the time you can go operational with your well, your full sequestration system.

Eric Stine: Yes. Okay, got it. Maybe just last topic for me, just on the CoPromax or the high-protein initiatives and you mentioned that they’re paying for the design and the upgrade and all that. I mean, when do you think or anticipate maybe having the confidence that this is operating the way you originally envisioned? I mean, is this something where you think you need to see it run for three months, six months? How do you expect that to play out? Because I would assume that’s a big part of whether you take it to other plants or not.

Bryon McGregor: Well, I’d love to say the next day. But, I think that only time will tell. Our expectations are the changes that we’re making, the upgrades that are being made to the facility and the additional tolerances and capacity that’s being built into the system, we’ll be able to adequately address what we need and be able to achieve our goals and Harvest Technologies goals around being able to improve not only meet the targets and the performance that we expect at Magic Valley, but then for us and them to be able to move forward on other locations, both at ours and clearly Harvest Technology is has interest in using their technology elsewhere.

Eric Stine: Got it. Thank you.

Operator: Your next question comes from Amit Dayal with H.C.W.

Amit Dayal: Thank you. Good afternoon, everyone. So Bryon, with respect to sort of margin recovery for the rest of the year, I know you had indicated previously that 1Q margins may be pressured. But, with visibility you have right now, do you see improvements and are they already sort of showing up in your operations for 2Q so far?

Bryon McGregor: So, the only thing I would comment on is beyond what I’ve said which is we’re seeing margins continue to improve. They’re in positive areas today. And, we would expect them to continue to improve particularly as we move into the summer driving season. We did bring down the wet mill in April of this year and it was down for 10 days. And, if you give yourself some additional time on top of that call it a week to be able to ramp up and meet your goals, it won’t be the same as if we were running in at a full out capacity for the quarter. That’s a little too preliminary at this point to be able to provide exact ideas around Q2 results. But, based on current operating rates, we’re pleased with what we’re seeing as results and figures crossed, we continue to see further improvement.

Amit Dayal: Okay, understood. Thank you for that. And, then with respect to CCS, are there any expenses that are outside of your CapEx budget that need to go into CCS development efforts? Or is that part of your CapEx for this year?

Rob Olander: Yes, I’ll take this one. The majority of the costs are going to be involved in the CapEx plan, but there are some upfront more immaterial costs, aspects of certain feed studies, certain legal costs to review, commercial terms, contracts, things like that. But, those are all fairly immaterial.

Amit Dayal: Okay, okay. Understood. When do you expect to start incurring like larger portion of these costs for CCS? Is that like ‘25 second half of ‘25 time-frame or any sense of when those needs will start cutting off for you?