Alto Ingredients, Inc.

Good day, and welcome to the Aalto Ingredients Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need 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 then one on a touch-tone phone. To withdraw your questions, please press star, then two. Please note, this event is being recorded. I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.

Thank you, Betsy, and thank you all for joining us today for the Alto Ingredients third quarter 2023 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 the 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 available through November 13th, the details of which are included in today's press release. A webcast will also be available at Alto Ingredients' website. Please note that the information on this call speaks only as of today, November 6th. You are advised that 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 two of the presentation available online, which states that some of the comments in this presentation and conference call 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 net income or loss before interest expense, interest income, provision for income taxes, assets impairments, loss on extinguishment of debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense. To support the company's review of non-GAAP information, a reconciling table was included in today's press release. On today's call, Brian will provide a strategic plan and activities review, and Rob will comment on our financial results. Then Brian will wrap up and open the call for Q&A. It is now my pleasure to introduce Brian McGregor. Please go ahead, sir.

Thank you, Kirsten. Thank you all for joining us today. As a new CEO, I've spent the last 90 days on the road meeting with customers, investors, and the dedicated teams of our facilities. I've been listening, learning, and collaborating to reinforce our continued mission to profitably provide ingredients that make everyday life better. I'm proud of our talented team and our overall accomplishments to date. We continue to successfully transform our company from a supplier of low-margin commodities to a provider of high-margin differentiated specialty alcohols and essential ingredients in consumer, pharmaceutical, food, beverage, and industrial products. This strategic realignment has greatly improved our financial profile over the past three years. We continue to make good progress, although we are subject to intermittent operational and commodity market challenges. Q3 2023 results. reflected positive contribution from improved ethanol crush margins, particularly in September, as corn bases declined as the harvest commenced. However, unusually high unscheduled downtime lowered our anticipated production volumes and shifted our mix towards lower margin products. Combined with higher repair and maintenance costs, we did not generate the results we anticipated. Despite these operational challenges, we delivered positively adjusted EBITDA in Q3 2023 and a significant improvement over Q3 2022. We expect the extensive repairs and maintenance work completed during the quarter to benefit future periods of time and reliability going forward. Rob will provide greater detail in a few minutes. First, I'll review our various initiatives. In early 2023, we outlined our revenue enhancing and cost-reducing capital initiatives. Each project has a different timeline, return on investment, and risk profile. As such, we've intentionally evaluated and prioritized funding needs and options for each project separately with the overarching goal of remaining fiscally responsible. We have already completed several of our short-term projects. These include expanding our high-quality alcohol products, installing additional corn storage capacity and replacing boiler equipment at our peak and site, along with other various upgrades in our plant systems. For our more capital-intensive projects, we have engaged experts, third-party front-end engineering and design firms, or feed firms, to conduct deeper analysis on scope, timing, and cost. These projects include primary yeast, carbon capture and sequestration, or CCS, natural gas pipeline, cogeneration, and biogas conversion capabilities. Here are a few material updates. Beginning with our specialty alcohol sales, our 2024 contracting season is going well. We are on pace to exceed 2023 delivered gallons at premiums to fuel grade ethanol. As mentioned previously, our goal is to move up the value chain and capture a larger share of the beverage grade market, where our high quality, low moisture, and location differentiations create competitive advantages. Regarding Magic Valley, we continue to line out this facility to achieve the performance guarantees of the installed high protein and corn oil technology. While this process has taken longer than we anticipated, we remain resolute in our efforts to improve the consistency of the facility's product output and optimize the plant's production. We continue to evaluate the rollout of the high protein and corn oil technology at our other locations. In the interim, We have achieved comparable improvements in corn oil yield at our peak in dry mill through process optimization unique to its ICM design. Regarding primary yeast, we have just received preliminary results from our feed study. While the findings are promising, inflationary pressures and supply chain constraints have materially impacted the installation costs with increases of over 70% from our original estimate. and extended our construction period from 18 to 27 months. As a partial offset to this change, the anticipated operational costs have declined and the market price for primary use has improved. In short, we are evaluating this project and exploring funding alternatives to make this unique opportunity a reality. Considering these results, we are critically reviewing all our projects to better ensure that the construction costs reflect current market conditions. We remain fiscally vigilant given the current challenging capital market environment and are giving priority to those projects with sustainable long-term profitability. As previously reported, we completed the installation of our new grain silo in the second quarter of 2023. We have seen the benefit of this expanded capacity and reduced costs for delivered corn and lower operating costs through more timely silo cleanouts. We expect the added capacity to further benefit operations this winter. Regarding the natural gas pipeline and cogeneration capabilities, we are now negotiating engineering, procurement, and construction contracts. We continue to make progress on our carbon capture and sequestration project. With our development partner, we are designing an Alto dedicated pipeline and sequestration system located within a relatively short distance of our facility, materially reducing installation costs and decreasing external risks. Based on the current economic environment, the preliminary feed study findings, and changing capital requirements, we have extended our EBITDA expansion goals by 6 to 12 months. We are now targeting to increase annual adjusted EBITDA incrementally by over $65 million by the middle of 2026, with the completion of our near-term projects, and by approximately $125 million by year-end 2027, when our CCS, and other long-term initiatives are fully realized. Before I turn the call to Rob, I'll mention that we remain steadfast in our sustainability efforts to be a good community steward while addressing our customers' current and future needs. This quarter, our PECAN facility earned Safe Food, Safe Feed, another third-party product safety certification for our corn meal and germ products, further differentiating our products and services. We plan to publish We plan to publish our sustainability report publicly by year end and look forward to providing key disclosures in this format on an annual basis. Now I'll turn the call to our CFO, Rob Olander.

Thanks, Brian. Due to strong crush margins, our third quarter gross profit improved over the same period in 2022. However, there were several factors that substantially tempered results in the current period. Corn basis level increased by 31 cents compared to Q2 2023, illustrating a sharp increase sequentially and by 3 cents compared to Q3 2022, demonstrating a similar supply and demand profile as last year. In addition, as Brian noted, we incurred significant increases in unexpected repair and maintenance costs. The associated downtime reduced anticipated production volumes. This adversely impacted our hedging strategy to lock in favorable market crush spreads, which resulted in derivative losses of $3.7 million and shifted our product mix to more wet ingredients that carry lower margins. Year-to-date, our specialty alcohol sales were impacted by lower consumer demand. We are working with our customers to roll a portion of the 2023 contracted volume commitments into 2024. As such, sales and profitability were lower than expected for the third quarter. Additionally, we incurred higher feasibility and legal costs associated with our strategic capital projects. On the positive side, during the third quarter, we received an additional $2.8 million cash grant as the USDA closed out the biofuel producer program. adjusted EBITDA was positive $4.7 million for the third quarter compared to negative $20.6 million for the same period in 2022. Looking ahead to the fourth quarter, although crush margins remain positive currently, we will refrain from providing projections for several reasons. First, during Q4, Customer commitments are not solely based on market demand, rather they are reflective of buyers managing their fuel grade inventory balances with the goal of minimizing inventory levels by year end. Second, winter buying patterns tend to start the day after Thanksgiving and typically demonstrate a deep decline in volumes from Q3. Third, with an intention to take advantage of higher crush margins in Q3, we postponed our planned winter facility outages until October. Fourth, as we fill our fixed price price, especially alcohol sales book for the entirety of 2024, we are also building our hedge portfolio. The derivatives we use to preserve the margin on these sales don't qualify for hedge accounting treatment and the quarterly results can be materially impacted by mark to market unrealized gains and or losses depending on commodity price swings. In summary, We face unique factors in Q4 that cannot be forecasted with confidence. Therefore, it would be improperly speculative to guide investors towards a particular expectation in this regard. With the goal of improving our facilities for the long haul, in the second half of 2023, we have undertaken numerous repair and maintenance projects which have bettered our position heading into 2024. Regarding liquidity, during the third quarter, Cash flow from operations was $23 million. Our quarterly capital spend was $7 million, bringing our year-to-date investment in our plants to $25 million. As of September 30, 2023, our cash balance was $26 million, and our total loan borrowing availability was $118 million to support business operations and growth initiatives. Our borrowing availability includes $53 million under our operating line of credit, $40 million under our term loan facility, and an option to request up to an additional $25 million under the facility. With that, I'll turn the call back to Brian.

Thank you, Rob. Throughout our strategic realignment, we have been committed to creating and pursuing opportunities that target long-term profitability and maximize shareholder value. While the path has been and will continue to be dynamic, we remain agile and financially prudent. We'll continue to capitalize on the most promising and profitable opportunities. We remain enthusiastic about our prospects and confident in our long-term growth strategy. Now I'd like to open the call to questions from our sell-side analysts.

Operator?

We will now begin. We will now begin the question and answer session. To ask a question. you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Eric Stein with Craig Howell. Please go ahead.

Yeah, good afternoon, Brian and Rob. It's Aaron Spahala for Eric. Thanks for taking the questions. Hi, Aaron. Hello. So maybe first for me, you know, just on the six to 12-month, you know, kind of timeline, you called out yeast. I mean, are there other certain areas you can point to that are kind of driving that? And then just maybe speak to some of the confidence you have that, you know, we don't see extensions further than that. And then just on Hypro at Magic Valley, did that reach full capacity in the quarter? And just kind of some updated thoughts on the rollout to other plants there too, please.

Sure. So that extension from six to 12 months, that's reflecting clearly the yeast project, but it also does include extending out of the implementation of the high-pro installations, we want to make sure that we see that through to a successful completion before we roll it out. There's lots of things that we're learning in the process. It has taken longer than we anticipated, but as we mentioned in a pair of remarks, that we have seen success. The challenge is lining out that success at full capacity. So we see good protein levels. We see good corn oil production. levels, but being able to have those align with the full capacity all at the same time on a sustainable basis has been a bit of a challenge. But we continue to chip away at it and make good progress. And so we remain optimistic about that. That said, we want to make sure that it's fully achieved what it needs to achieve before we roll that out to other facilities. Did I cover your questions, Erin?

Yeah, yeah, no, that was helpful. Thanks. And then maybe just on carbon capture, can you just provide a little more detail there on, you know, kind of just give us an update? You know, are you still thinking kind of similar contribution and, you know, any changes to how you're kind of thinking about going to market and just any changes given, you know, legislation or kind of anything on the regulatory front?

Well, clearly it's dynamic, right? We're seeing lots of activity in the space or changes in activity. We feel excited about the options that are still ahead of us. And we're still in the... We are working through and in negotiations for finalized documentation on the sequestration front, continuing to line out the funding for the installation of the compression.

But

All of our analysis so far continues to drive us towards this project. We think it's incredibly transformative for us. It aligns with all the things that we do, and the site is just a natural. So we're excited about that. We continue to move significantly forward. There is some work. We look forward to sharing more information on this, but they're it would be prudent or imprudent at this time to share too much. But as we, you know, make significant progress that, you know, would be of the public nature, we'll gladly share that.

Understood. Thanks. And then, you know, maybe last for me, just on specialty alcohols, you kind of talked a little bit about some of the success you've had for contracting to date. You also kind of talked about some, you know, maybe rolling over into 2024. How much You know, as we look at kind of spot versus contracted, you know, any ideas on what that rough split, you know, kind of looks like as we move forward for next year?

So I think for Q3 of this year, I think we're running at, we've shown about 58 or 70. What's the number?

We're tracking close to that. I have for 2023 with the fall off in demand, but we're a good portion of the way of contracting for 2024, and we are on track to achieve the 90 million gallons for 2024. And some of the volume and consumer demand that's fallen off for 2023, we are in the process of working with several customers to roll a portion of that volume forward into 2024.

Understood. Thanks for taking the questions. I'll turn it over. Thanks, Aaron. Thanks, Aaron.

The next question comes from Amit Dayal with HC Wainwright. Please go ahead.

Thank you, guys. Brian, any additional color on what caused some of the extended downtime? Was it work that was going on at the Pekin facility or some other locations?

So you may recall that we normally schedule the wet mill outage somewhere between 18 and 24 months. And because it is such a significant shutdown, it's not a shut it down for two days, do, you know, bear, you know, beer well cleanouts, things like that. It's significant. It constitutes somewhere between a week and two weeks. And so while we're down, we will usually spend a significant amount of capital to make repairs and improvements to the facility while it's down. We chose, as we started, when we had our last earnings call, we talked about our expectations. We were seeing... We normally scheduled it in August because we have seen over the last couple of years that corn supply has dwindled and we've seen such high bases and overall corn prices in relation to ethanol prices that it made sense to bring it down during that time to minimize losses and to take advantage of that opportunity. with margins where they were this year particularly on crush and some additional supply of corn that was available in the local markets we chose to instead postpone the wet mill into q2 q1 of next year or you know april of next year um that being said there was still some work that needed to be done and there was some capital or capital expenditures for equipment and materials that needed to be spent prior to the shutdown that will carry into, that was incurred and expensed in Q3 that carry into the early next year that will be used in that, during that shutdown. So you take that plus then we ended up experiencing some water balance issues, some dryer issues, And as Rob said, the combination of those three things, the extent, you know, the increased repair and maintenance, reduced production, and reduced sales, and then the quality of sales were significantly impacted, resulting in, you know, a significant impact to what would otherwise have been a much better quarter. That said, as I mentioned, you know, these repairs were, were timely, and we would expect that to significantly benefit the plants going forward, or the wet milk particularly going forward. But we saw impacts elsewhere in other plants, probably not as notable, but I wouldn't call it a perfect storm, but we seem to have experienced a number of operational challenges across all three plants during the quarter with temperatures and other types of normal events that occur in the summer period. Got it, understood. Thank you for that, Brian.

And then in the press release and in your commentary, you highlight potential funding needs. Just to clarify, are these for projects that you walked us through in your commentary, or do we potentially also have working capital type funding needs that need to be addressed?

I mean, I'll comment generally. in but the expectation is no I mean we have more than sufficient working capital needs for our for the company and for its operations it we will need additional capital to bring some of these projects to fruition particularly as an example the East project that is significantly more than what we had originally anticipated but we also have a number of interested parties and you know vendors and the like that we're working with to be able to bring that to fruition Okay.

I agree. Got it. Thank you for that.

Just one last one, I guess, for me. On the third-party renewable fuel gallons, you know, it looks like year-over-year decline on that front. Is that just a market situation, or is that something a bit more, I guess, permanent in terms of, you know, how you are focused on, you know, bringing sort of other products and improvements to the overall business?

Yeah, I'll take that. Third-party volumes declined year over year. If you recall, we did sell our California plants, and we also no longer provide marketing services for the two other non-owned ethanol plants. And I will also comment that in Q3, we also had a bit of a timing issue on some of the third-party volumes that were lower due to product and transit that didn't qualify to be recognized as sales in Q3 but will be recognized in Q4. Okay. Understood. All right.

I'll take my other questions offline, guys.

Thank you so much. That's all I have. Thanks.

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

Thank you, Betsy. Thank you all again for joining us today. We hope to see you in New York in November. Have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.