Alto Ingredients, Inc. (ALTO) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Alto Ingredients Fourth Quarter 2021 and Year-end Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Dusty Buell, you may begin.

Thank you, operator, and thank you all for joining us today for the Alto Ingredients Fourth Quarter and Year-end 2021 Results Conference Call. On the call today are Mike Kandris, CEO; and Bryon McGregor, CFO. 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. A telephone replay of today's call will be available through March 17, 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 information on this call speaks only as of today, March 10, 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 an 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 period being reported. The company defines adjusted EBITDA as unaudited net income or loss attributed to Alto Ingredients before interest expense, interest income, provision or benefit for income taxes, asset impairment, loss on extinguishment of debt, purchase accounting adjustments, fair value adjustments and depreciation expense. To support the company's review of non-GAAP information later on this call, a reconciling table was included in today's press release. On today's call, Mike will begin with some financial highlights and accomplishments for 2021, followed by key plans for the next few years. Bryon will then provide additional detail on our Q4 -- Q4 and 2021 financial results. Then Mike will wrap up with a summary before opening the call for Q&A. It is now my pleasure to introduce Mike Kandris, CEO. Mike?

Thank you, Dusty, and thank you, everyone, for joining us today to hear about the exciting progress we are making as we continue to execute on our strategic initiatives. We promised the market we would change the strategic vision and focus of the company, and I believe we have accomplished that goal. I'll begin with some financial highlights for full year 2021 over 2020. Our net sales reached $1.2 billion, an increase of 35%. Gross profit increased to $67.8 million, up 28%. Net income increased to $44.2 million compared to a loss of $16.4 million in 2020, and adjusted EBITDA grew to $76.8 million, up 15%. This outstanding performance is the result of numerous achievements. To highlight a few, beginning in 2021, we renamed the company to Alto Ingredients. This was important for us both internally and externally to reinforce our broadened outlook, brand and strategic direction. During the year, we invested in capacity, expanded our protein strategy, secured valuable certifications, optimized our asset base by selling noncore facilities and became net debt free. In November of 2021, we restarted our Magic Valley facility, which we idled in 2020 due to low renewable fuel margins. Magic Valley has the advantage of being located in a market that is experiencing significant growth in cattle, poultry, pork and aquaculture. Given these opportunities, we committed to resume operations at the facility and began upgrading this dry mill to produce concentrated protein feed and food ingredients by installing harvesting technologies patented CoPromax system. When completed, the system will produce over 33,000 tons annually of feed with the protein content greater than 50%. Increased corn oil yields by 50% or almost 9 million pounds annually and contributed over $9 million annually in adjusted EBITDA based on current market prices and the combination of additional sales of corn oil and high-value protein. We expect to be able to commence our expanded production of corn oil at the facility in mid-2022 as planned, and we expect to be fully operational in oil and protein feed before year-end. Next, we invested in certifications for specialty alcohol production, where high-quality stable stakes in the specialty alcohol market, reliability and surety of supply, as demonstrated through rigorous and robust certifications are sought after and valuable market differentiators for our customers. After securing ISO 9001 certification, the world's most widely recognized standard for quality management systems, in December of 2020, we turned our focus on the comprehensive processes and procedures required for pharmaceutical and medical markets. In February of 2021, at ICP, we earned ICH Q7, which is the internationally recognized active pharmaceutical ingredient certification and EXCiPACT Good Manufacturing Practices certification, which is the globally recognized standard for use of excipients, which are the inactive components of the drug or medication. Then, and most importantly, in February of 2022, we earned the same distinctions at our Alto Pekin facility, thus creating the advantage of having full redundancy of the certified product at our Pekin campus. These certifications appeal to customers using high-grade alcohols and health, home and beauty as well as distilled spirits. They can deepen existing customer relationships and open the door to new opportunities in domestic markets as well as the growing export market. On to a review of monetizing assets. As discussed, we have focused on our strengths, leaning towards more profitable and less commoditized markets. To that end, we chose to dispose of our noncore facilities in Nebraska and California. Upon exiting these businesses, we utilized the proceeds from the sales, combined with strong cash flow from our operations to retire restricted debt. Today, we have a stronger balance sheet and are net debt free. Bryon will elaborate more on this in a moment. On January 14, 2022, we completed the downstream acquisition of Eagle Alcohol, an established leader in premium alcohol distribution. Eagle expands our scope of offerings customer base and commercial opportunities, and we expect it to accelerate our penetration into new high-margin markets. Eagle specializes in small package products preferred by a large segment of the specialty alcohol market, including beverage alcohol companies, concentrating in break bulk distribution, Eagle purchases both alcohol from suppliers, including Alto, then stores, denatures, packages and resells alcohol products in smaller sizes, including tank trucks, totes and drones, that garner a premium to bulk alcohols. Eagle also delivers products to customers in the beverage, food, pharma and related process industries via its own dedicated trucking fleet and common carrier. Between Alto's bulk production and Eagle's differentiated distribution capabilities and established customer relationships, we look forward to lowering our exposure to bulk alcohol price volatility, increasing our margins and creating new opportunities for organic growth. We are excited to welcome former Eagle President, Dan Croghan, to our team as Vice President of Alto and General Manager of Eagle. He and his team bring over 60 years of combined experience and expertise in the chemical and alcohol distribution industry. As we have worked with Eagle for some time, the integration efforts are minimal and progressing smoothly. Eagle fits perfectly into our strategic road map as we continue to raise the quality of our production to the highest grades of grain neutral spirits by further enhancing our distillation process, optimizing our production capabilities and integrating Eagle's strong distribution and sales services. In summary today, we operate 3 biorefinery campuses with 1 wet and 4 dry mills located in Pekin, Illinois; Burley, Idaho and Boardman, Oregon and are able to produce 350 million gallons of alcohol annually. In addition, we now also operate Eagle's distribution center located in St. Louis, Missouri. Our numerous blue-chip customers incorporate our various high-quality products into a range of vital finished goods that touch people's lives every day from pharmaceuticals to pet foods. For example, in the Health, Home & Beauty markets, our products include API Grade Ethyl Alcohol used in mouthwashes, cosmetics and pharmaceuticals. USP Grade Ethyl Alcohol used enhanced sanitizer disinfectant cleaning products and industrial-grade ethyl alcohol. In the Food & Beverage market, our products include grain neutral spirits or GNS used in alcohol beverages and Vinegar, and CO2 used in industrial applications and dry ice. In the Essential Ingredients markets, our products include Alto yeast, corn gluten, corn condensed distillers, corn oil and germ and distillers grains, all used in pet food, food production and animal feed. And in the Renewable Fuels markets, our products are used in transportation fuels. In 2022, we intend to reinvest further. Regarding Eagle, we plan to invest $5 million in 2022 to further optimize specialty alcohol distribution. We expect Eagle to contribute $4 million of EBITDA in 2022 and an additional $4 million to $5 million annually beginning in 2023 for a total of $8 million to $9 million annually. Also, we will expand corn storage at our Pekin campus. This will increase the company's corn buying flexibility, enabling Alto to reduce the need to purchase product at premium prices when farmers and elevators are not shipping corn during holidays or unfavorable weather conditions. We will spend approximately $6 million and expect this project to provide over $2 million of EBITDA annually with a payback in less than 3 years beginning in Q4 of 2022. Naturally, we will continue to reinvest in our facilities, upgrading and improving systems to increase efficiency and plant uptime. These capital expenditures will be more ongoing in nature and we will provide color on these projects periodically as the year progresses. As previously discussed also in 2022, we are focused on completing the CoPromax system at Magic Valley. Then in 2023 and beyond, we plan to roll out these upgrades to our other 3 dry mills with the goal to have them fully operational by no later than year-end 2024. The total investment plan is approximately $70 million for all 4 facilities. The benefit is expected to exceed $34 million in EBITDA annually based on current market values. There are other opportunities in development. For example, we are evaluating investing in a natural gas bypass at our Pekin campus, reducing the price we pay for natural gas by approximately 11% based on 2021 values and bypassing the local utility. This would create the opportunity to sell renewable natural gas produced by the plant directly into the pipeline in the future. We would expect to invest approximately $9 million in 2023 for a return of approximately $5 million in EBITDA annually beginning in 2024. Regarding carbon capture and sequestration, the various options include developing the project as a stand-alone system sized to our facility or interconnecting with other viable gathering and sequestration systems under development in close proximity to our Pekin campus. Prior to signing commitments, we want to ensure that we fully evaluate risks and benefits to affect the highest and best probable outcome for investors, the company and the communities in which we live and operate. At the same time, we also believe that this is a high priority for us, and we look forward to providing more information at a later date. We began our transformation 18 months ago and have turned Alto into a consistently profitable company. We are committed to continue to transform the company by pursuing additional profitable opportunities with a focus on 2024 and beyond. Before I turn the call over to Bryon, I would like to welcome Alastair Graham, our new Vice President and General Counsel. Alastair has over 15 years of legal experience in multiple industries, including specialty chemicals, components, and industrial coatings, and she will be a valuable addition to our executive team. I would now turn the call over to Bryon to review the financials.

Thank you, Mike. I'll provide some additional color around our results and metrics for the quarter and full year. For the fourth quarter of 2021, net sales were $385 million, up from $306 million in the third quarter due to an increase in our average sales price per gallon. The average sales price per gallon of renewable fuel largely reflects supply constraints translating into strong ethanol prices. We had alcohol sales of $325 million and $60 million in revenue from this -- from sales of our essential ingredients. Of the 69 million production gallons sold in the fourth quarter, 26 million gallons consisted of specialty alcohols, up 10 million gallons over fourth quarter 2020, reflecting expanded capacity and increased export and industrial demand. Gross profit improved significantly to $42.1 million, up from a gross loss of $3.4 million last quarter. This reflects not only the profitable operations of our Pekin campus, but also over $7 million in gross profit at our Idaho and Oregon facilities, over a $10 million improvement quarter-over-quarter and an $11 million swing year-over-year for the same period. SG&A expenses in the quarter were $9.4 million, bringing our annual SG&A of $29.2 million in line with our previous guidance. This quarter, we had a gain of $4.6 million for selling our production facility in Stockton, California. Provision for income taxes was $1.5 million. While we have a considerable amount of federal NOLs, some states in which we operate suspended their use in 2021, resulting in a modest tax expense. Taking into account profits for 2021, NOLs available to offset taxable income in 2022 and beyond, totaled $169 million. Net income available to common shareholders was $35.4 million or $0.49 per diluted share. This compares to a net loss of $3.5 million or $0.05 per share in the third quarter. Adjusted EBITDA was $43.4 million compared to $3 million in the third quarter. For the full year of 2021 compared to 2020, a few items to note. Net sales were $1.2 billion compared to $897 million. Gross profit reached $67.8 million compared to the gross profit of $52.9 million. The significant year-over-year improvement in results was largely void of specialty alcohol sales for use in sanitizers and disinfectants, which were primary contributors to our financial recovery in 2020 driven by the spike in demand early in the pandemic. In short, 2021 results are a testament to our focus on improved quality of sales and earnings and the rationalization and optimization efforts of our renewable fuel production. Capital expenditures for the year totaled $16.4 million. Adjusted EBITDA was $76.8 million, this compared to $66.6 million versus prior year, which is previously -- which as previously discussed, benefited from hand sanitizer surge. Turning to our balance sheet. On December 31, 2021, our cash and cash equivalents were $51 million compared to $36 million on September 30, 2021. During the quarter, with proceeds of $24 million from the sale of the Stockton facility and our cash flows from operations, we paid down $38 million in debt and spent $4 million in CapEx. As of December 31, 2021, we are both term debt free and net debt free. Having retired the remaining term debt balances in Q4 and leaving us with only $50 million outstanding in the inexpensive working capital line of credit, more than offset by cash and cash equivalents. Before I turn the call back to Mike, I'll provide some color on our expectations for 2022 and beyond. Consistent with our goal to place more specialty alcohol in 2022 and excluding Eagle's volume, we've already contracted over 90 million gallons in specialty alcohol sales. This represents a 28% increase in volume contracted at the same time last year for sale in 2021 similar to the prior year. These gallons, while still priced at a premium to renewable fuel reflect tighter spreads than we experienced last year due to higher commodity prices as well as unusual swings in demand related to the pandemic. Looking forward, as demand and supply rebalance, we expect specialty alcohol margins to return to more stable and normalized levels. While our contracted volumes provide much greater visibility into our expected results for the year, the extreme volatility in commodity prices, ongoing logistical constraints and the potential impact the war in Ukraine may have on corn supplies and related commodities makes it difficult to provide 2022 revenue or gross profit guidance at this time. Nonetheless, we expect to produce positive results for the year and generate over $18 million in additional EBITDA in 2022 related to the improvements, initiatives and the acquisition completed over the past 12 months over our base business, excluding our renewable fuel business. Looking further into the future, we expect just the projects Mike outlined to be completed over the next few years to result in over $45 million in additional EBITDA contribution annually by the end of 2024. This does not include the additional benefits of carbon capture or other projects that are under evaluation and development. In short, we've built a profitable, resilient base of business on which investors can rely today, and we intend to continue to build on this foundation through strategic investment in our specialty alcohol and essential ingredient lines of business. In addition, we expect SG&A for 2022 to be in line with our results for 2021 or under $30 million. Finally, as we pursue new high-value growth opportunities, we are evaluating long-term funding options in the debt market to further bolster the balance sheet, accelerate investment and further improve our bottom line. We believe a balance sheet should have the right kind of debt that reflects lower cost of capital with high rate of return projects to properly leverage our equity base. As we do so, we also continue to consider share repurchase opportunities. Although we believe investing in our current capital projects provides a better long-term return profile, we will continue to weigh our options to optimize the value return to shareholders. With that, I'll turn the time back to Mike.

Thank you, Bryon. I appreciate that. In summary, we are pleased with our successes, having turned the company into a profitable business with significant unique opportunities for top and bottom line growth, and we feel we are in a great position as we continue to execute on key initiatives in 2022 and beyond. Finally, I'd be remiss if I didn't acknowledge the efforts of our tremendous employees that have contributed significantly to our success. With that, I'd like to open the call for questions. Operator?

[Operator Instructions] First question comes from the line of Eric Stine with Craig-Hallum.

So I would love to just try to dig in on the guide a little bit, and I can certainly appreciate there are so many moving parts right now, very difficult to kind of think about that. But maybe putting the fuel ethanol aside and with your contracted volumes, are you able to look at that judging where pricing is today and maybe your expectations and think about maybe what your nonfuel grade EBITDA would be even if it's directionally versus 2021 when you think about 2022?

I normally would, Eric, with the challenges is that there's so much volatility that's occurring across the board. It's not just about ethanol and corn, it's about logistical costs. It's about interruptions in that -- in supply and everything. So it would -- while if we were looking at a more steady position, we’d probably feel comfortable in providing that information. I think the best we could do is, what we feel comfortable with is, if you look -- and you kind of look at our base business, we provide segmented information, you can see that and you can build off of that and make a determination as to what that looks like going forward.

Okay. Well, maybe then as we think about the difference between the 2 years, you mentioned the $18 million as a result of some of the operational things that you've done. So you called out -- I just want to make sure I'm thinking about this right. We've certainly got Eagle, which in 2022, I believe you said that'd be another $4 million incremental in EBITDA and then the corn storage potentially is another 2, now tell me, I could have the numbers wrong.

Yes, the corn storage would be in Q4. That would be completed. So what we did is we took the projects that we had identified in the Q3 earnings call, and we've just layered them in based on completion of those projects. While, they're all pretty much on track, we had a few disruptions from supply chain, not unlike the rest of the world. But pretty much all of those projects are on track and in net, if you add in the Eagle contribution, that's the $18 million bracket.

Okay. That's my fault. Yes, you are referring to what you had previously discussed. Those would be for 2022. And then what you laid out, the $8 million to $9 million for Eagle plus the $2 million for storage, think about an incremental 11-plus, somewhere in that range, at least at this point for 2023. Is that kind of the way to think about it?

Yes. Correct.

I also don't want to cause any kind of real -- real panic around thinking about fuel ethanol. Indeed, if you look at the crush margin today, ethanol is actually tracked relatively well with the other commodity prices, even though we're seeing the highest prices -- historical prices in corn. So it's actually tracked well and actually that crush margin is better than it was a year ago at the same time. So again, there's a lot of things moving around. And I just -- we think it's not -- it would be prudent to not put a stake in the ground yet and with regard to 2022 at least.

No, understood. I can certainly appreciate that. So thinking about the 90 million gallons contracted. Curious, I know that you got the key certification. So now all of Pekin is covered by the pharmaceutical and the medical grade certifications. Did those limit you in any way in terms of contracting for 2022, given that those were recently received or is it just that given what's going on in the overall market in the world today that you weren't able to lock in a higher number of your overall 140.

No. Yes, I think the way to look at that is you go back to 2019, we were at 50, that ramped up to 70, and then we're now sitting at 90. And what we've said all along is we have 140 capable, but we want to be really careful by the way we layer that in. It's more of a longer term. We want to be very diligent. We want to be very sensitive to the market, we don't want to just go out and try to place that entire 140 and do damage to the market. We want to be very thoughtful. And what we've been able to do is grow about 28% a year in contracted volume. I think Bryon mentioned that number. And we'll continue on that path. We're never going to contract the entire 140 because we want to maintain a certain level of ability to play in the spot market or to make sure we have adequate supply for our customers that we do contract with. The redundancy that we gained by having the Pekin inside of the campus certified is that surety of supply to our customers and being able to have redundant certified product that gives us a lot of comfort that -- and our customers a lot of comfort that we're going to be able to honor the contractual amounts.

It also allows us to be able to move product back and forth between the facilities, so you're no longer constrained by one or the other.

Got it. And that 90 -- just sticking with the 90. So I mean, obviously, that's not a number that you'd ever give given your outlook, I mean, is it fair to say that 90 is kind of in line with what your expectations were.

Yes. Yes. And I think it's also like if you look, we guided and provided indications early on last year that we were at 70 million gallons and we ended up on the year at about 90 million gallons sold. So we’d expect to be able to sell product this year.

[Operator Instructions] Our next question comes from the line of Amit Dayal with H.C. Wainwright.

I mean just sticking to that 90 million specialty alcohol number, is there any concentration on that? Or is that spread across multiple customers, any concentration there is?

Actually, not necessarily -- I mean, and indeed, if you look at the spread of that across the board, kind of business segments that we talked about, we actually were able to grow it across those all 4 segments. So we continue to make as we had -- as a goal we were able to actually execute on that goal and move product up the value chain and expand those year-over-year. So -- and that's not and just to know, that does not include Eagle.

Okay. Okay. Got it. With respect to sort of the inflationary environment we’re in right now, have you shifted towards this ingredients opportunity or market. How should we think about potential impact on margins, et cetera? Are you able to pass on increases in their own costs to customers? Or is there a lag between when you can do some of those types of things relative to how 2021 played out for you guys and what 2022 is shaping up on that front? How should we think about margins and costs for you guys?

Yes. Amit, you kind of broke up on the first part. Were you asking with regards to our essential ingredients or are you asking across the board across all our different product lines?

Primarily, on the ingredient side, Bryon. But I mean, any color you can provide across for --just generally as well would be helpful.

It's a great question. Clearly, depending on where you are and what products you're selling, you have the ability to pass on or they get built into the price, particularly if you're selling under index for some of the more fixed-price contracts that becomes more of a challenge. So we try to offset those -- or to fix our input costs as much as we can for those products to be able to lock in that spread. But yes, it's certainly a challenge and something that we're keeping an eye on and making sure that we can offset those pressures as much as possible.

Okay. All right. I had a question on the trials, but Mike has already provided color on that. I'll take the other questions off-line, guys.

Thank you. Ladies and gentlemen, I would now like to turn the call over to Mike for closing remarks.

Thank you, and thank you, everyone, for joining us today and your continued support. We're excited about the progress we have made, and as we continue to execute on our strategic plan, we feel extremely optimistic about the future of Alto. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.