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spk03: Good day, and welcome to the Alto Ingredients, Inc. First Quarter 2024 Financial Results Conference Call. All participants are in 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. You may press the star key, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to send the conference over to Kirsten Chapman of LHS Investors. Please go ahead.
spk00: Thank you, Kaylee, 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 Brian 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 13th, 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 from time to time disclosed in alto ingredients filings for 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 and 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 was included in today's press release. On today's call, Brian will provide a review of our strategic plan and activities. Rob will comment on our financial results. Then Brian will wrap up and open the call for questions. It's now my pleasure to introduce Brian McGregor. Please go ahead, sir.
spk07: 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 peak in 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 peak and 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 Vol to safely transport the CO2 to a geological reservoir nearby and permanently stored securely deep underground. As noted in March, together with Vol, 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 have also advanced the work required to submit the EPA Class 6 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 options. We are in discussions with the highly regarded independent energy companies. 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 our site. This facility would 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 at fixed price specialty alcohol at an average premium to renewal fuel of $0.31 per gallon. Our biennial peak and 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 bases. 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. 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.
spk06: Thanks, Brian. 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 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, especially 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 a 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 poll spell 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 mode of 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 31st, 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 Brian. Thank you, Robyn.
spk07: 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.
spk03: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, 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. Your first question comes from Eric Stein with Craig Hallam Capital Group.
spk05: Hi, Brian. Hi, Rob. Hi, Eric. Great.
spk04: 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.
spk07: Yeah, so Eric, 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 Classics 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 as well as reviewing siting. And there's probably a slew 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
spk05: call it end of summer before fourth quarter of this year.
spk04: And is that, you might have said in the past, or maybe indications that that's an 18-month-plus kind of review process, or am I not thinking about that right?
spk07: That's correct. Under the EPA's latest indications, they have upped the amount of time for review and expectations from 18 to 24 months. So our expectation is as conservatively as that we can keep that hopefully within the 24-month period of time.
spk04: Okay. And then just on the equipment side, you mentioned it 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?
spk07: Yeah, so Eric, the long-haul intent is clearly the EPA Class 6 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 power systems and the like to be up to speed. While those are also long lean items, they're not as long as what you would expect under the class six. So it's really about staging those and making sure that you're spending the money at the right time and not being kept. You don't want to be penny wise and pound foolish and spend it all up front, nor do you want to wait until you get your class six permit before you start that process. So it's really about just finding that But we have a pretty good idea, and our goal is to actually, to be able to, you know, if we can light up the planets, is to be able to, once you get your class 6 permit, to be able to have all of your other systems up and operational at or before the time that you can go operational with your well, your full sequestration system.
spk04: Yep. Okay, got it. maybe just last topic for me just on um the copromax or the high protein initiatives and you mentioned that they're they're paying for the 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.
spk07: Well, I'd love to say the next day, but I think that only time will tell. Our expectations are that 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 will be able to adequately address what we need and be able to achieve our goals and private technology's 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
spk05: move forward on other locations, both at ours and clearly ours technology is, you know, has interest in using their technology elsewhere. Got it. Thank you.
spk02: Our next question comes from Annette Dial with HCW.
spk01: Thank you. Good afternoon, everyone. So, Brian, you know, 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, you know, with the visibility you have right now, do you see improvements and are they already sort of showing up in, you know, your operations for 2Q so far?
spk07: 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 a full 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 across, we continue to see further improvements. Okay, understood.
spk01: Thank you for that. And then with respect to CCS, you know, are there any expenses that are outside of your, you know, CAPEX budget that, you know, need to go into your CCS development efforts, or is that part of your CAPEX for this year?
spk06: Yeah, I'll take this one. You know, the majority of the costs are going to be involved in the CAPEX plan, but there are some, you know, upfront more immaterial costs involved. you know, aspects of, you know, certain feed studies. Yeah, certain legal costs to review, you know, commercial terms, contracts, things like that.
spk05: But those are all fairly immaterial.
spk01: 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 timeframe, or...? any sense on when those needs will start coming up for you?
spk07: Yeah, so we would probably expect to see those somewhere around beginning first quarter, second quarter of next year. Still a lot of the lift that's going to occur would be, you know, down payments on compression technology, right, making sure that you're in your queue and you've got, you know, the system starting to be built. And there won't be a lot On a relative basis, the cost associated with developing the pipeline and the injection system really doesn't occur until after you've got your Class 6 permit in place. So it's a combination of things. And again, that would be largely for the account of Walt, where ours would be more of a growing spend over that same period of time, call it 36 months of... of expense beginning mostly in next year. And that's why it's important as well to bring the financial resources to the table to be able to connect the dots pretty well and so you know what's on balance sheet, what's being addressed elsewhere, and how we're going to make those ends meet.
spk01: Understood. Okay, thank you, Brian. This last one for me, in the presentation you highlight you know, pursuing other opportunities like SAF, et cetera. Like, how should we read into that? I mean, is this sort of a serious effort already underway, or are you just sort of exploring at a high level? Just trying to get a sense of, you know, how some of those developments might take place.
spk07: Well, there's clearly a lot of interest around SAF. There's a lot of resources that are going into it, not necessarily at Alto. Our focus is really around being able to make the product that would be eligible for SAF. That said, I think there's a lot of work and a lot of lifting that still needs to be done between now and... and when our product is available, a lot of things can change, but I think there's really a growing interest, and particularly with the latest Treasury announcements, there is now a pathway, and there's an opportunity to be able to really make where you have the ability to be able to capture the CO2 and sequester to really make a difference and be able to produce product that is eligible for and available to support the SAF industry.
spk05: Got it.
spk01: Yeah, that's all I have, James.
spk05: Thank you so much.
spk03: Again, if you have a question, please press star, then one. Your next question comes from David Bastion with Kingdom Capital Advisors.
spk08: Hey, thanks, guys. A couple quick ones. You mentioned you expected the co-product revenues to be down for the remainder of the year, at least as a percentage of sales. Is that expected to be roughly rateable the last year in terms of percentages, or are there any major puts and takes we should be thinking about?
spk07: Yeah, it's tough to say at the moment. I think we're down, I don't know, 20% as an industry if you look across, you know, the various different products, 20%, 30% from the peaks of last year. It's difficult to know whether, you know, there'll still continue to be some progression. I mean, there's still clearly a... spread a significant benefit in that. And it's still a compelling argument as to why you should be able, you should be differentiating your product as much as possible and taking advantage of that. And that goes from everything from corn oil to the high protein value products. That said, you're just not seeing the peaks that you would otherwise would have seen a year ago. And I don't You know, our expectation is that that's going to be a bit of a cycle, right? You need to be able to produce product that then makes its way, and there are times where you'll have excess product, and it'll soften prices, and then demand will grow and find a place for it, and you'll start to see prices start to increase. It's difficult to know exactly the length of that cycle, but we do know over the long run that there is significant demand for the products. And so our expectation is to see over the long run that those are the kind of investments that we should be making as well. And there's an opportunity to get to further differentiate the kinds of products that we make.
spk05: And people will be willing to pay for that.
spk08: Okay. Thanks, Brian. Thanks for the color on the CapEx with carbon as well. I was curious if outside of the carbon capture opportunity, there's You guys expect CapEx to be at a similar level to last year as well on a quarterly basis, or if there's any major changes there that we should be thinking about?
spk06: Yeah. I believe last year we had about $30 million in CapEx for 2023, and I believe $40 million the year before. This year we lowered the target to not exceed $25 million. And with about 4.5, 4.7 million in CapEx and Q1, we feel that we're coming in at that plan.
spk07: So, David, is your question, is that going to be ratable, or are you asking if there's going to be a lull and a big spend in other periods?
spk08: I just wanted to confirm what you guys are thinking. So it sounds like 25 is about target year, and we're on track for that. Thanks.
spk05: Right. And I would assume that would be pretty rateable throughout the year. Got it. Thank you. That's all for me.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Brian McGregor, CEO, for any closing remarks.
spk05: Thank you, Kaylee.
spk07: Thanks again for joining us today, everyone.
spk05: We appreciate your ongoing feedback and support. Have a good day.
spk03: The conference has now concluded. Thank you for attending today's presentation.
spk02: You may now disconnect.
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