Alto Ingredients, Inc. (ALTO) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. And welcome to the Alto Ingredients, Inc Third Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. After the speakers presentation there'll be a question and answer session. [Operator Instructions] Please be advice that today's conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to your host today, Moriah Shilton. Please go ahead.

Thank you, Justin. And thank you all, for joining us today for the Alto Ingredients' third 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 November 16th, 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, November 9th. 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 today. In the third quarter we make progress advancing our strategic initiatives by expanding our essential ingredients business, investing in improvements to our infrastructure, and subsequent to the quarter end completing the realignment of our operations. In September, we launched our first dry mill enhanced protein project with the installation of harvesting technologies patented CoPromax system at our Magic Valley, Idaho facility. We decided to install the technology at this plant, because its advantaged and proximate location to serve the growing demand for high protein feed at nearby cattle, poultry, pork and aquaculture markets. Adding high protein production will enhance the profitability and sustainability of this operation. We plan to restart production by year-end and to commission the new protein system in the first half of 2022. Upon completion, the system will produce over 33,000 tons of feed annually with the protein content greater than 50%. It will also provide the added benefit of increasing corn oil yield by 50% are almost 9 million pounds annually. We expect the combination of additional corn oil sales and the sale of high value proteins at premium prices to generate over $9 billion annually in EBITDA based on current market prices. After the successful completion of the installation of Magic Valley, we expect to rollout the system at our other three dry mills. Conservatively, assuming similar economics of the technology across all four mills, we expect $40 million in additional EBITDA on an annual basis. This is one example of how we are enhancing protein production at our dry mills to grow and diversify our revenue sources and bolster the quality and quantity of our earnings. We completed our yeast expansion project in the third quarter, and the additional yeast production is now fully contracted through 2022. Further, we will complete our feed dryer upgrades and achieve full operation before year-end. Starting in 2022, we expect both projects will contribute approximately $5 million annually in EBITDA. We also finished the expansion of our annual corn oil production capacity at our Pekin site by approximately 4,000 tons contributing an additional estimated $4.5 million in EBITDA annually starting in 2022. As discussed in our second quarter earnings call and anticipating challenging market conditions in the third quarter, we scheduled a major repair and maintenance shutdown and infrastructure upgrade at our Pekin wet mill. While the facility was idled, we upgraded electrical infrastructure, improved redundancy and plant cooling supply and replace condensers and various pumps. In doing so, we significantly improve the efficiency and reliability of our production capabilities to further support customer demand long term and extend our planned outage schedule to now be at 24 months intervals. While the decision to schedule the shutdown in Q3 prove correct. The shutdown combined with volatile market conditions, negatively impacted revenues and increased operation expenses resulting in a net loss for the quarter. Still we generated approximately $3 million of positive EBITDA for the quarter. And I'm pleased to further report that the wet mill return to profitable operations in September. This places us in an improved position to operate more reliably and efficiently, which is integral to meeting the needs of our specialty alcohol and essential ingredient customers. We continue to work with existing and new customers to be their certified producer of a growing variety of specialty alcohols that are used in common everyday consumer goods including vinegars, spirits, mouthwash, cosmetics and cleaning supplies to name a few. To proactively address our growing customer needs, we been extending the certifications we obtained at the end of 2020 from our ICP distillery to our Pekin wet mill. We expect to complete this effort by the end of the year and by doing so provide unique redundancy across the entire Pekin Campus and further surety of quality supply to our customers. With regards to specialty alcohol sales in 2022, due to volatile commodity price activity, customers have taken a more major approach to contracting annual volumes in comparison to prior years, which are normally completed by now. As a result, we expect negotiations to extend through the remainder of Q4. So while we can not provide details at this time, we fully expect to contract for more gallons in 2022 than in 2021. Turning to our balance sheet. As announced on November 8, we completed the sale of our fuel-grade ethanol production facility and Stockton in California to Pelican acquisition LLC for $24 million in cash, while retaining the economic benefits of servicing regional customer need using the plants terminal capabilities and longer term as the exclusive marketer of gallons produced when the facility resumes operations. This sale removed $600,000 per quarter and negative EBITDA carrying costs adding to the $400,000 per quarter from our Madera facility sold in the second quarter. As previously noted this sale completes the realignment of our fuel-grade ethanol production we began over 21 months ago. The proceeds from our asset sales were integral to our strategy and contributed to the retirement of approximately $150 million in term debt over the same period. Thus achieving our stated goal to prepay this expensive and restrictive term debt by year-end 2021. In doing so, we not only eliminated over $16 million in annual interest expense, but also as importantly, we remove structural and financial impediments that contributed to our past financial challenges. Today, we will be reinvesting in sustainable and profitable business segments strengthening core operations and further diversifying our product offerings in specialty alcohols and essential ingredients. We remain actively engaged with discussions with various parties to develop a carbon capture and sequestration program at our Pekin Campus. We look forward to sharing our plans in the coming months as we'll review and this is really important to all of our options. This is even more important considering the recent enhancements made to the 45Q tax credits for carbon capture and sequestration in the federal infrastructure bill. In addition to improvements we made to our yeast production, we are pursuing opportunities would expand our yeast product offerings to include higher quality, more versatile products marketable to the food industry. Finally, we are actively pursuing opportunities to extend our specialty alcohol business through a pretty vertical integration. We look forward to providing additional information as appropriate. I'd now like to turn the call over to Bryon for a discussion of our financials. Bryon.

Thank you, Mike. I'll provide some additional color around our results and metrics for the quarter and provide an update on our expectations on gross profit for the year. For the third quarter of 2021, net sales were $306 million, up from $298 million in the second quarter, due to an increase in third-party gallon sold as well as an increased in our average price per gallon sold. The sequential increase in quarterly sales of third-party gallons was driven by our ability to service customers using our Stockton facility as a terminal at a time when there is a shortage of available storage in the region. The average price per gallon of fuel-grade ethanol largely reflects a current high correlation between ethanol and elevated corn prices. We had alcohol sales of $253 million and $53 million in revenue from sales of our essential ingredients. Of the 58 million production gallon sold in the third quarter, 20 million gallons consisted of specialty alcohol, down 4 million gallons sequentially over last year. This sequential decline in the production and sale of our specialty alcohol, fuel-grade ethanol gallon and essential ingredient are primarily attributable to the shutdown of our wet mill. Both of the specialty alcohol sold during the quarter was under fixed price contract established last fall. While the average price of this contracted volume was lower than current prices, so was the price of corn which we hedged concurrently locking in positive margins. Spot sales of specialty alcohol during Q3 were at higher prices, but at tighter margins to corn. The Q3 year-over-year decline in total specialty alcohol gallon sold reflects more of the uniqueness of last year's transitory spike in sanitizer and disinfectant demand obscuring our growth in other specialty alcohol product sold. To this point, the comparative Q3 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-19 impacts dissipate. We should also note that while demand and prices for certain essential ingredient products have risen industry-wide co-product prices on average have lagged rising corn prices resulting in declining co-product returns both sequentially and year-over-year. We expect Q4 co-product returns to increase with the improvements made at our Pekin campus. Gross loss was $3.4 million, down from $15.2 million of gross profit last quarter due to the wet mill outage and high corn prices and bases. Expanding on this the one-time EBITDA impact of the wet mill outage considering both lost revenue and additional repair and maintenance expenses totaled over $7 million. Regarding the high cost of procuring corn in Q3 with the solid harvest largely complete, we've seen a decline in both corn prices and bases still at higher prices than historical average. SG&A expenses in the quarter was $5.5 million, down significantly from the prior quarter tracking within our SG&A range of between $27 million and $30 million for the full year of 2021. Our interest expense in the third quarter was $429,000, 60% lower than the $1 million we paid in Q2 and only approximately one-tenth of what we paid in the same quarter last year as we continued to pay down high interest rate debt. And with the proceeds from the sale of our Stockton facility we have now paid off the outstanding balance of our term debt. During the third quarter we recorded income from loan forgiveness of $6 million, which is related to our second and last payroll protection program loan from last year. Net loss available to common shareholders was $3.5 million or $0.05 per share compared to income of $8.1 million or $0.11 per diluted share in the second quarter. Turning to our balance sheet on September 30, 2021, our cash and cash equivalents were $36 million, compared to $50.8 million on June 30 2021. This $15 million decline in cash reflects our previously announced CapEx projects, on which we spent $8 million in the third quarter and our previously mentioned Pekin repair outage totaled $7 million. We expect CapEx to range between $7 million and $10 million in the fourth quarter. With future opportunities in CapEx projects anticipated, we expect to secure some rational level of debt to finance these projects. In addition, we plan to further optimize our asset based line of credit to eliminate restrictions from future enterprise level cash allocations. Having deleveraged our balance sheet of high cost debt, implemented operational improvements at our facilities and expanded our addressable markets with a diversified product portfolio. Today, we have access to the most attractive debt finance options to support our liquidity needs than any time in our history. Before I turn the call back to Mike, I'd like to provide an update on our financial guidance for the full year 2021. Now that we have sufficient visibility around our financial performance and expectations, we are comfortable providing full year 2021 gross profit guidance on a consolidated company basis. We conservatively expect Alto's gross profit to be at a minimum $40 million excluding any impact from derivatives in the fourth quarter. This increase from nine month consolidated gross profit of $25 million considers many variables and their impact on gross profit from our contracted specialty alcohols including high volatile -- assuming highly volatile commodity prices, abnormally high logistical costs including corn bases, the shutdown of the wet mill and the recent improvements in ethanol margins. Given the unusually positive short-term spreads in ethanol and corn, we've begun to -- we've begun locking in the margin on our fuel-grade production through year-end. And given the volatility we've experienced this year in commodity markets and our expectations that this will continue if not increase. We've secured our utility costs for the next 12 months and other variable input costs including corn through at least Q1 next year to mitigate these risks. Mike, back to you.

Thank you, Bryon. To close out my prepared remarks I'd like to summarize the projects we are on track to complete this year that will increase our EBITDA starting in 2022. First our yeast facility and Pekin dryer upgrade should both contribute approximately $5 million in EBITDA annually. Second, our expanded annual corn oil production capacity at the Pekin site will contribute an estimated $4.5 million. Third, we removed over $4 million in negative EBITDA carrying costs from our sold facilities. And fourth, our CoPromax project should contribute approximately $9 million of EBITDA annually as we are bringing the project online we would expect $5 million of EBITDA in 2022 and $9 million annually in 2023 and beyond. In aggregate these improvements alone in 2022 total $18.5 million in additional EBITDA compared to 2021. Building on completion of the CoPromax system in Idaho and an accelerated rollout to the remaining three mills, we could see an additional $34 million in EBITDA growth in 2023-2024. Add to this the other opportunities such as vertical integration, carbon sequestration and other high-value projects under development, you can see why we're excited and energized about the transformation we've made to date and the future for the company. Operator, we are now ready for Q&A.

Thank you. [Operator Instructions] And our first question comes from Eric Stein from Craig-Hallam. Your line is now open.

Yes. Good afternoon. It's Aaron Spychalla on for Eric. Thanks for taking the questions Mike and Bryon.

Hi Aaron.

Hello. Maybe first on our end. Can you just you talked a little bit about it, but can you elaborate on just how you're seeing the supply demand imbalance at the current time? And how you see that normalizing over the next few quarters?

Sure. I think it's largely driven, Aaron at this point first and foremost by the export markets and the export demand. And then logistical constraints are certainly having an impact on the ability to distribute product. You're talking particularly about fuel ethanol margins?

No. Actually I'm sorry Bryon. I was talking about more on the high-grade alcohols. I mean, you talked a little bit about exports there too. But just coming out of a COVID we've seen demand spike, supply increase, but is that starting to abate. It seems like the industry's still in over supply. So just -- you talked about that normalizing. But can you just elaborate a little further on that please?

Sure. So as mike pointed out, we're still in deep in negotiations in contractual volume and we expect that to carry through to year end given the late harvest and a lot of the volatility around commodities. So it's a little difficult to provide any additional color at this point. But what we would say generally is again we expect to be able to place more of our product. That's our goal. And -- but we also view this as a long ball or a long strategy in the sense of being able to place more product and being able to place it at higher values and into higher value products. That being said, we do expect to see there is additional supply, I mean, we're certainly contributing to that. We went from effectively a year and a half ago something like 60, 70 million gallons, now 140 million gallons in potential production capacity. So the market's got to be able to absorb that and I think it's the goal of not only ourselves but everyone else to make sure that we're not cannibalizing our existing services and products

All right. And then, you mentioned a little bit on carbon capture. Can you just provide an update on the opportunity there? Obviously, seeing increasing activity. What are the next steps? And can you kind of frame at a high level just the opportunity and potential contribution there? And then, maybe just discuss a little bit of the impact from the recent and proposed legislation?

Yes. Let me -- I'll give you a little bit of color and then Mike fill in if I missed anything.

Absolutely.

So, as you think about for -- a couple things. One is that with the latest infrastructure bill we're seeing a lot of -- we've seen some significant benefits or expect to see significant benefits from that. Really, it manifests itself in a couple of forms. One is that the 45Q program would boost or the increase per pay. The tax credit available on a per metric ton basis of Co2 would increase from $50 per gallon to -- or $50 per metric ton to $85 per metric ton. That would be eligible and available beginning at the time of completion for 12 years from the time that they begin to claim the credit. And also they've introduced direct pay so rather than having to go through and find and potentially have to pay for significant -- pay a significant fee to parties that would be able to monetize that tax credit. That means more of the economic share is retained within the structure. The positive thing for us is that we're in development or we're in discussion with multiple parties and really just exploring kind of the full array of options, everything from handling and doing it on our own and internalizing as much as that value is possible to effectively selling it at the fence line. And really it's just about being efficient and allocating risk amongst those parties who can best absorb those risk efficiently and effectively at a low cost. So, more to come on that. Mike, anything you want to add?

Yes. The only thing I would add Aaron is, we've said before that we sit right on top of some great geology for carbon sequestration. And because of that we do have a lot of options, a lot of folks we've talked to. We understanding with the infrastructure bill how things have changed as Bryon described. We want to be very thoughtful in the way we approach this. And we want to be able to maximize value for the shareholders and profitability for the company when we do this. And again, it runs the gamut. It runs a gamut from contracting with somebody to do it on your own or to hand it off at the fence line. And again, good news is, we are talking to folks. And as soon as we have reached conclusion on what is the best opportunity for us, we'll certainly inform everyone.

All right. Sounds good. I'll hop back in queue. Thanks for taking the questions.

And thank. [Operator Instructions] And our next question comes from Amit Dayal from H.C. Wainwright. Your line is now open.

Thank you. Good afternoon everyone. Bryon, you mentioned the revised gross profit guidance for the year, $40 million as a minimum. How much higher could this be if things move forward for you in the quarter?

Yes. That's a great question. It's a bit difficult to peg, because there's -- clearly this is a -- you're seeing some of the best fuel margins at the moment that we've seen in a very long time, probably since 2014 as an industry. And those are significant and we remain optimistic. At the same time there are things that to some degree those margins have a long way to go to make up for what has been largely a pretty abysmal margin structure in the fuel ethanol business for the last six to eight months particularly as bad as they were in the beginning of the first quarter. The other challenges that clearly you saw and could see in our results for the for Q3 was that not only do we have the wet mill, the cost associated with that impacted both revenue and additional cost of goods sold. But additionally just the corn basis alone, I mean, normally we would see in a normalized market the basis that we pay in Pekin is basically at par and sometimes negative in relation to Chicago. So minus $0.03, minus $0.05 and you were looking at it well over a $1.00, $1.50 at some point in that market, so you can see that kind of impact. So while you saw some moderation in corn prices and they kind of came off a little bit in the Q3, what you weren't seeing was that the basis was doing all the work and you couldn't lock it in. It just wasn't available. So you're really paying having to pay spot prices on the basis. So not to beat around the bush too much, but we are optimistic about the number, the $40 million the minimum, but I'm low to peg the upside on this. But it's a significant step up even to the 40 from what was -- what we've been able to generate today this $25 million.

Understood. Thank you for that. And Mike, you mentioned potential $40 million EBITDA improvements from protein production in the four dry mills. Is this on top of the $18.5 million that you might see from the improvements you've already made?

It would be in addition, yes, it would be in addition to what we've reported in the 18.5 [ph] was just $5 million in 2022, because we will be installing the system during the first half of 2022. So the $9 million benefit at Magic Valley, we in the 18.5 we counted $5 million in there. We think that's what the EBITDA contribution will be in 2022. When all four dry mills are up and running, it will be a total of $40 million. So an incremental 35 from the 2022 number and what's included in the 18 5.

Okay. Understood. Thank you for that. And now with sort of the balance sheet in a much stronger position, no debt. You've indicated potential acquisitions or interesting acquisitions previously. Is that something that could come into play for you as you look to continue to diversify your end markets and create a more wider product portfolio.

Yes, absolutely. And I think we indicated even in prior calls that vertical integration, we ship primarily in bulk and the ability to go to smaller packaging, containerization, totes drums could be -- is something that we're looking at. We think that's a value-added part of what we need to be doing longer term. So you can either do that through acquisition or you can do that through building it yourself. And so, we're looking at all those possibilities, but there are other things to enhance, the specialty alcohol space that we're looking at. I mentioned the having the redundancy at our at our location, because we have multiple plants on the same site that can produce high quality alcohol. It was important that we had certifications across the entire spectrum of the Pekin campus. And we'll have that complete by year end. That's another way to enhance our specialty alcohol portfolio.

Okay. Thank you. That's all I have for now. I'll take my other questions offline. Thank you so much.

Thank you.

And thank you. And I'm showing no further questions. I would now like to turn the call back to Mike Kandris for closing remarks.

Thank you, Justin. Thank you again for joining us today and for your ongoing support. As you can tell, we are excited about the progress we've made and the bright future we have ahead of us. We will be attending virtually the upcoming Craig Hallam. Alpha Select conference on November 16th and look forward to continuing our dialogue with you as we make further progress. Thank you and have a good afternoon.

This concludes today's conference call. Thank you for participating and you may now disconnect.