Alto Ingredients, Inc. (ALTO) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Alto Ingredients, Incorporated Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct question-and-answer session [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Moriah Shilton of LHA Investor Relations. Please go ahead.

Thank you, Jerome and thank you all, for joining us today for the Alto Ingredients' second quarter 2021 results conference call. On the call today are Mike Kandris, CEO; and Bryon McGregor, CFO. Mike will begin with a review of business highlights, Bryon will provide a summary of the financial and operating results. And then Mike will return to discuss Alto Ingredients' outlook and open the call for questions. Alto Ingredients issued a press release after the market closed today, providing details of the company's quarterly results. The company also prepared a presentation for today's call that is available on the company's website at altoingredients.com. The telephone replay of today's call will be available through August 10, the details of which are included in today's earnings 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, August 3. 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 2 of the presentation available online, which states that some of the comments in this presentation constitute forward-looking statements and considerations that involve a number of 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 being reported. The company defines adjusted EBITDA as unaudited net income or loss attributed to Alto Ingredients before interest expense, interest income, provision of benefit for income taxes, asset impairments, loss and extinguishment of debt, purchase accounting adjustments, fair value adjustments and depreciation and amortization expense. To support the company's review of non-GAAP information later in this call, a reconciling table was included in today's press release. It is now my pleasure to introduce Mike Kandris, CEO. Mike?

Thank you, Moriah, and thank you, everyone, for joining us this afternoon. In the second quarter, we generated our fifth consecutive quarter of gross profit, producing net income of $8.1 million and adjusted EBITDA of $17 million. For the first half of the year, revenue was $517 million, net income was over $12 million, and EBITDA was over $30 million. This represents a year-over-year improvement in EBITDA of $14 million, a further testament to the benefits of our transformation efforts to specialty alcohol and essential ingredients. As part of these efforts, we continue to improve our balance sheet and align and invest in our infrastructure to meet today's demand, expand our product offering and pursue new long-term accretive growth opportunities. Looking ahead, we are expanding, deepening and strengthening our relationships with key customers as a certified leading producer of a growing variety of specialty alcohols that are used in common everyday consumer goods, including vinegars, spirits, mouthwash, cosmetics and cleaning products. Through the integration of operations and production at our Pekin campus, along with our enhanced certifications, we can provide surety of quality, supply and redundancy, all material differentiators among a growing supply base. These and other distinctions position us well as we contract specialty alcohol volumes for 2022 and beyond, thus improving over time, the utilization of our expanded specialty alcohol production capacity. As we announced on May 17, we sold our fuel-grade ethanol production facility in Madera, California to Seaboard Energy for a total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. We use the cash proceeds to retire company debt, which will save approximately $700,000 per quarter in interest expense and an additional $400,000 per quarter in negative EBITDA carrying cost for this facility. We have been working diligently on the sale of our fuel-grade ethanol facility in Stockton, California and have interested parties that will either restart or repurpose with those facility, and we will share more when appropriate. Our capital improvement projects this year are on track and expected to expand revenue and increase efficiencies and plant reliability. Our yeast expansion and Pekin facility upgrade projects alone are scheduled for completion in Q3 and will be fully operational before year end. We expect the projects to contribute approximately $5 million annually in EBITDA, representing a full payback in less than two years. Additionally, we are expanding our annual corn oil production capacity at our Pekin site by approximately 4,000 tons, which will contribute an estimated $4.5 million in EBITDA annually beginning in 2020. In preparation for these improvements and taking advantage of what we expect will be choppy market conditions in Q3, resulting from low pre-harvest corn inventories and tight fuel ethanol margins. We have scheduled in mid-August a repair and maintenance shutdown at our Pekin wet mill. We expect the impact to be limited to the third quarter in terms of reduced revenues and an increased repair and maintenance expenses. This, however, will not impact our ability to meet our contractual supply obligations for specialty alcohol or essential ingredients, but will instead improve our efficiency and reliability and better align our production with customer demand. Finally, looking to the future, there are opportunities for us to enhance our protein production at our dry mills that will grow and diversify our revenue sources and bolster our quality and quantity of earnings. We continue to make good progress and look forward to sharing more information soon. We also remain actively engaged in discussions with various parties to develop a carbon capture program at our Pekin site. We look forward to sharing more information over the next few quarters regarding this profitable opportunity. With that, I'd now like to turn the call over to Bryon for a discussion of the financials. Bryon?

Thank you, Mike. I'll discuss a few financial highlights and metrics for the quarter and provide an update on our expectations on certain metrics for the year. For the second quarter of 2021, net sales were $298 million, up from $219 million in the first quarter due to an increase in specialty alcohols, fuel-grade ethanol and third-party gallons sold as well as an increase in the average price per gallon sold. Of the 65 million production gallons sold in the second quarter, 24 million gallons consisted of specialty alcohols, up 5 million gallons sequentially over last quarter. Most of the specialty alcohols sold during the quarter was under fixed-price contracts established last fall. While the average price of this contracted volume was lower than current prices, so was the price of corn, which we hedge concurrently, locking in positive margins. Now sales of specialty alcohol during Q2 were at higher prices, but at tighter margins to corn. The Q2 year-over-year decline in total specialty gallons sold reflects more the uniqueness of last year's transitory spike in sanitizer and disinfectant demand, obscuring our growth in other specialty alcohol products sold. To this point, the comparative Q2 year-over-year decline in sanitizer and disinfectant consumption was partially offset by our increased fixed-price contracted specialty alcohol sales last fall, and growing specialty alcohol exports. While we anticipate continued volatility in sanitizer and disinfectant demand over the foreseeable future, we expect a, more stable new demand supply equilibrium will ultimately be achieved as COVID impacts dissipate. The sequential increase in quarterly sales of fuel-grade ethanol is attributable to both the steadier production from our Pekin dry mill and the increase in third-party gallons - third-party gallon sales, the latter of which was driven by terminal constraints in California and our ability to service customers by using our Stockton facility as a terminal. The average price per gallon of fuel-grade ethanol largely reflects the current high correlation between ethanol and elevated corn prices. We should also note that while demand and prices for certain essential ingredient products have risen, industry-wide co-product prices, on average, have not kept pace with rise in corn prices, resulting in declining co-product returns, both sequentially and year-over-year. Gross profit was $15.2 million, up from $13.8 million last quarter due to additional specialty alcohol and fuel-grade ethanol sales. SG&A expense in the quarter was $7.2 million, generally in line sequentially, although was slightly inflated due to heightened costs related to our strategic initiatives. Accordingly, we are revising our guidance to account for this activity and now expect SG&A to range from $27 million to $30 million for the full year of 2021. We have $1.9 million asset impairment this quarter, reflecting results from our negotiations for the sale of our Canton, Illinois assets. Since our acquisition of Aventine in 2015, we've used this non-operating facility as a source for spare parts and supplies at our other operating facilities. Having largely used all productive and complementary equipment, we are now in negotiations to sell the remaining parts, along with the associated property and hope to complete the sale before year end. Our interest expense in the second quarter was $1 million, 45% lower than the $1.9 million we paid in Q1 and 78% reduction from the same quarter last year as we continue to pay down high interest rate debt. The outstanding balance of our senior notes currently is $700,000. We expect to fully repay the remaining term debt in 2021. During the second quarter, we recorded income from loan forgiveness of $3.9 million, which is related to one of our payroll protection program loans from last year. We've applied for forgiveness for the remaining $6 million loan and are awaiting SBA approval. Income available to common shareholders was $8.1 million or $0.11 per diluted share compared to income of $4.4 million or $0.06 per diluted share in the first quarter, turning to our balance sheet. On June 30, 2021, our cash and cash equivalents were $50.8 million compared to $44.1 million on March 31, 2021. With the cash proceeds of $19.5 million from the sale of our Madera plant, we reduced our high interest rate parent debt outstanding, bringing our remaining term and plant debt loan balances to less than $18 million. Proceeds from the future sale - or from future asset sales will be used to further retire debt, bolster liquidity and fund future capital projects. In closing, let me provide some additional detail around our anticipated 10-day wet mill outage, Mike mentioned earlier. We've budgeted approximately $4 million in one-time repair and maintenance expenses in Q3 related to the outage. To minimize the impact of lost revenues and higher cost of goods sold, we scheduled our repairs during what we believe will otherwise be a challenging operating environment due to low pre-harvest corn supplies and excess fuel-grade ethanol inventories and elevated production. We do not expect the impact of this outage to impact our $60 million gross profit on our contracted specialty alcohol guidance provided earlier this year. Mike, back to you.

Thank you, Bryon. To summarize, over the past year, we have rationalized our operating footprint to focus on our profitable and most strategic operations, and at the same time, we significantly improved our balance sheet. As such, we are now actively pursuing opportunities to expand through enhanced service and product offerings and accretive vertical integration. And while our transformation is ongoing, we have a solid profitable platform for long-term growth, which will create value for shareholders, partners and employees. Operator with that, we'll open up the call for Q&A.

[Operator Instructions] Your first question comes from Amit Dayal with H.C. Wainwright. Your line is open.

Thank you, good afternoon everyone. First question I guess is, on the gross margin guidance. The $60 million you are continuing to guide from specialty alcohol sales? How much impact, whether positive or negative, can we see to this from any ethanol sales for the year?

Hi there, it's Bryon. I would say that fuel ethanol has not been overly contributory to that year-to-date. Indeed, if you'll recall, in January and February of this year, ethanol margins were generally $0.30 to $0.40 negative. They started to recover, and we saw some pretty good recovery in Q2. They have been volatile as of late and have sometimes materially lagged increases in corn prices. But I would say, year-to-date that margins overall have been - have not yet recovered to breakeven or better. Now that does not mean that we haven't been operating at - above breakeven fuel margins, it just means that it's been a hole that we've had to fill if you're looking at it on a year-to-date basis.

Understood, thank you for that. And then, you are indicating that there is maybe some softness in terms of capacity going towards sanitizer and disinfectant sales, is that gap being filled already with sales to other applications?

It's certainly a significant - it's made a significant - what's the word I'm looking for? The gain last year that we had in Q2 and Q3 was an anomaly, right? Those are unique. Those are black swan events. And so, we were able to take advantage of the opportunities. Those are not necessarily easily duplicatable. But we have, to a significant degree, been able to replace at least the volume sales through either the contracted volume we made last fall and as well spot and industrial sales this year. But they would not be at the same prices that you were able to get at peak - prices in Q2 or Q3 of last year.

Good that's understandable thank you for that. And just last question on asset sales that you are still pursuing, are you expecting to be potentially done with the asset sales by the end of this year or could this get pushed out to next year potentially?

No I think, definitely, our intention is to complete that in the near term. And again, as I mentioned in the remarks, we're - the Stockton, California facility that we are working with we would hope to be able to announce something on that definitely by year end. So that is definitely our intention, and we're working hard at it.

[Operator Instructions] Your next question comes from Eric Stein with Craig-Hallam. Your line is open.

So you said they are sticking on the asset side, I know that the Idaho, Oregon facilities are a bit unique. I mean, it sounds like those aren't necessarily in your plans as far as the sales. So maybe confirm that, if you can? And then maybe discuss how they're unique and what types of potential investments you might make to make those more, I guess more important to the platform?

Okay, so let's take Idaho first. Idaho, if you remember or recall, we sold the grain handling assets of that facility to the person that had been our marketer for many years, and had performed very well for us. We think we have unique opportunity in that market that that would be a place we would look at if we were, from a repurchasing standpoint, protein makes a lot of sense in that area. And that's one of the things when I mentioned that we are exploring different possibilities with increasing protein. That would be a place we would definitely look at that. It's a very unique market. There is not a lot of other players in the area, and we have an affiliation with a really good marketer in that area. So that's Idaho. As far as Oregon goes, right now, we are working with a - we have a CO2 plant adjacent to our facility in Oregon. And we're working with that group on evaluating longer-term prospects and possibilities. So right now, our focus mainly is on Stockton, and we have repurposing opportunities and thoughts around Idaho and Oregon more to come and yes.

Got it, so that’s helpful. And maybe then just turning to the upcoming contracting season, I know that with your volumes and the timing of you bringing them online - you miss the window with some of those volumes. I mean maybe steps you're taking in advance of the window I mean, if you have any early indications of what the demand might be? And I am curious, of the 140 million gallons, do you kind of have a number in mind that would be ideal to contracts and leave the rest at spot?

Well I think ideally, we would like to have a very large percentage of that contracted. We're realistic in the fact that it's a - it does take time to get to that point. We have been working very diligently our quality crew. One of the reasons we work very hard to get the enhanced certifications was to be able to qualify product with a larger variety of customers out there. We've been working with our existing customers to expand within their organization. That is a process, and it's something that is part of the transformation, when we say the transformation is ongoing, that's all a part of it. And you have to get qualified. We're feeling very good about Q4 going into Q4. We feel it will be an improvement. But again, it's a process that you have to go through and it takes time. So, we look at it as 2022, 2023 and again, we'd like to have a high percentage of that, but we would want to keep 10%, 15% for spot.

Okay, got it. Maybe then just last one for me on the co-products. You mentioned that the spot pricing hasn't necessarily kept up or mirrored what's happened with corn. I mean, is that kind of your expectation for the remainder of the year going forward or I mean, do you see any indications that could you know that gap could close a little bit?

It's Bryon, I would think that the gap would close. I mean it's actually near a fairly low point in kind of the averages where you see co-products trade in relation to the dry matter - on a dry matter basis to corn. If you look back a year ago, it was trading over 120% to corn. And today, you're looking at mid-70s I'm not just talking about if this is not Alto specific. This is an industry-wide phenomena and it largely is being driven by a couple of things. One is just a significant amount of supply or access supply, as you've seen growth and demand for soybean and other proteins. And so, we would expect that to be more normalized. On a - dry matter basis, these high-value proteins should be trading at, if not at a premium to corn values.

All right, I'm showing no further questions at this time. I would like to turn the conference back to CEO, Mike Kandris.

Thank you, and thank you again for joining us today and your ongoing support. As you can tell, we are very excited about the progress we have made and the bright future we have ahead of us. We will be attending virtually the upcoming H.C. Wainwright 23rd Annual Global Investment Conference in September, and we look forward to continuing our dialogue with you as we make further progress. Thank you all.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.