Alto Ingredients, Inc. (NASDAQ:ALTO) Q4 2023 Earnings Call Transcript
Alto Ingredients, Inc. (NASDAQ:ALTO) Q4 2023 Earnings Call Transcript March 11, 2024
Alto Ingredients, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Alto Ingredients Fourth Quarter and Year-End 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman, LHA Investor Relations, a division of Alliance Advisors. Please go ahead.
Kirsten Chapman : Thank you, Gary, and thank you all for joining us today for the Alto Ingredients fourth quarter and year-end 2023 results conference call. On the call today are President and CEO, Bryon McGregor; and CFO, Rob Olander. Alto Ingredients issued a press release after the 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 available through March 18, the details 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, March 11.
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 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 final 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 on extinguishment of debt, unrealized derivative gains and losses acquisition-related expenses and depreciation and amortization. To support the company's review of non-GAAP information a reconciling table was included in today's press release. On today's call, Bryon will provide a review of our strategic plan and activities.
Rob will comment on our financial results, then Bryon will wrap up and open the call for Q&A. It is now my pleasure to introduce Bryon McGregor. Please go ahead, Bryon.
Bryon McGregor : Thank you, Kirsten. Thank you, everyone, for joining us today. During 2023, we continued our transformation to produce a variety of essential ingredients and the highest-grade beverage alcohol in the industry. We made significant investments in our facilities to improve our capacity utilization rates and expand margins long term. These strategies are beginning to mitigate the impact of negative commodity price fluctuations. Although ethanol crush margins exhibited greater volatility in the second half of the year, both our fourth quarter and full year 2023 results significantly outperformed those same periods in 2022. We generated $16 million in gross profit for 2023, an improvement of $43 million over 2022.
We also reported positive adjusted EBITDA of approximately $21 million for 2023, an improvement of $27 million over the prior year. In Q4 2023, we continue to evaluate our strategic initiatives based on current market dynamics, recent findings from our updated front-end engineering and design or feed studies, interest from potential strategic partners and project return profiles, our carbon capture and storage, or CCS project is our top priority. Under Section 45Q of the Inflation Reduction Act, we have a unique and compelling opportunity to capture and store the biogenic CO2 we generated in our Pekin campus, coupled with associated energy upgrades, our CCS project provides exciting economics. Given this significant amount of time, personnel and financial resources necessary to complete our CCS project, we have decided to pause further development of our primary yeast and biogas conversion projects.
These continue to be opportunities for potential future development as resources permit. We are encouraged by recent progress on many aspects of CCS. These include overall system design, community outreach, financing, vendor negotiations, EPA application preparation and schedule alignment requirements to procure equipment and install power and compression. In fact, today, we announced that we have signed an exclusive nonbinding letter of intent with Vault, and we are nearing the execution of definitive agreements to develop our CCS project. The project involves Alto installing equipment to capture the CO2 generated at our Pekin facilities and Vault safely transporting and permanently storing the emissions deep underground in a secure geologic reservoir located in close proximity to our campus.
The intent is to substantially reduce CO2 emissions from the ethanol production process and provide direct value to the surrounding communities. In addition to CCS, we are pursuing two attractive options to increase energy capacity at our Pekin campus, with either our current utility provider or a highly regarded independent energy company that would build, own and operate on-site energy facilities. Both options would greatly reduce our capital requirements and long-term energy costs while lowering our carbon footprint. These capital light energy options may result in our CCS project being more accretive than originally estimated. Beyond our control, the EPA has extended its CCS application approval process from 18 to 24 months, and the equipment manufacturing and installation times have grown longer than originally anticipated.
Accordingly, we intend to make positive use of this additional time to better align our various project schedules and reduce our overall financial risk. Finally, as 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, especially in our Western facilities. We intend to leverage the distinctive strengths and opportunities at these locations by investing in new equipment and applications. While doing so, we may also consider the possible disposition of one or both of these facilities. As we have effectively demonstrated over the past three years with the sale of our California and Nebraska facilities. We remain steadfast in our commitment to make value-enhanced decisions as appropriate to optimize long-term stakeholder value.
Over the past two years, we have completed numerous upgrades. I'll review some of our larger initiatives that are in progress or that we completed over the past 12 months. In February 2024, we completed the installation of a new high-efficiency boiler at our Pekin campus. We expect to reach full utilization by the end of Q1. This boiler replaces two inefficient high-pressure boilers, and will significantly reduce our energy needs and operating costs. We estimate this will increase our annualized incremental EBITDA by $2 million. Additionally, in the second quarter of 2023, Pekin's new grain silo became fully operational, doubling our days of corn storage capacity. We achieved our goal of increasing flexibility and lowering costs related to a quick or last-minute shipments and to reduce corn premiums during extended weekends and harsh weather conditions.
This project has already exceeded our target of delivering annualized incremental EBITDA of $2 million. We continue to expand into higher-quality alcohol and our ability to differentiate our offerings has been very important considering market trends. In 2021 and for part of 2022, the higher margin for specialty alcohol attracted many new producers, increasing product availability and supply. This, combined with having consumer demand growth and fluctuations in supply chain dynamics has resulted in margin compression over the past 18 months. In anticipation of these changing market conditions in 2022, we began strategic investments to produce more beverage grade alcohols that leverage the unique capabilities of our Pekin campus. We developed our highly differentiated 192 proof at a low moisture 200 proof grain neutral spirits, which became available in early 2023.
These new products were well received by our customers and actively sold in the spot market, generating significant sales and bolstering our gross margin for the year. To date, for 2024, we have contracted approximately 93 million gallons of fixed price, high-quality alcohol and average price premium to renewable fuel of $0.31 per gallon, with additional capacity to take advantage of spot sales. In our pursuit to expand higher-margin corn oil and high-protein products at our Magic Valley plant, working with our high-protein system vendor, harvest technology, we engaged the equipment manufacturers and independent third-party engineers in Q4 to conduct an in-depth analysis of our challenges. They formulated a plan, including extensive design modifications to achieve the intended production rate, quality and consistency.
We decided mid-January to temporarily hot idle the facility to minimize the losses related to negative regional crush margins and expedite the installation of the additional equipment. Harvest technology is more than the direct costs associated with their design and equipment. We intend to restart production in Q2 once the upgrades are complete, and crush margins have improved. The operation of the upgraded high-protein system at the Magic Valley facility will influence our decision and timing to roll out the system at our other dry mills. In the interim, we are operating the Magic Valley facility as a terminal to service our renewable fuel customers. We're also working with the local feed distributor and feed customers to meet supply requirements.
Before I turn the call over to Rob, I'll review our sustainability efforts. As a renewable company, we are dedicated to implementing sustainable best practices that are good for our business, our stakeholders and our planet. In December, we published our first sustainability summary. It reviews our strategy and vision for advancements in sustainability, responsible sourcing and risk management. We are focused on continuous improvements in environmental, health and safety, product quality and diversification by integrating innovative practices at our facilities to ensure optimal efficiency contribute to a lower carbon footprint. We are also focusing on giving back to the community through food drives and supporting charitable organizations. Our efforts improved our sustainability scores across the board with all three rating agencies, which is important to our customers.
Looking ahead, we are working to obtain third-party greenhouse gas verifications, improved transportation safety and earning additional EcoVadis awards. Now I'll turn the call to our CFO, Rob Olander.
Rob Olander : Thanks, Bryon. I'll review the financial results for the fourth quarter and full year of 2023 in greater detail. We enjoyed stronger gross margins and our efficiency initiatives contributed to improved bottom line results for the fourth quarter and full year 2023 despite volatile commodity price fluctuations and lower plant utilization rates. Looking back over 2023, in Q2 and Q3, renewable fuel margins were strong. So we shifted a portion of our production back to renewable fuel to take advantage of the higher margins. As Bryon noted, ethanol crush margins exhibited extreme volatility in the second half 2023, peaking in the mid-60s in September and dropping to slightly negative in December. These fluctuations impacted the gallons we were willing to sell, the price at which we did sell and the volume of third-party sales with contracting.
In 2023, we sold 382 million gallons compared to 419 million gallons in 2022, primarily reflecting the aforementioned weaker crush margins in Q4 2023, the item of our Magic Valley facility in Q1 2023 and the opportunity costs associated with navigating the challenges with the Magic Valley installation. Net sales were $274 million in Q4 2023 and $1.2 billion for the full year compared to $328 million and $1.3 billion for the same periods in 2022. In Q4 2023, we reported a gross loss of $3 million, improving $19 million compared to Q4 2022. For the full year of 2023, we generated gross profit of $16 million, increasing $43 million compared to 2022. During Q4, repairs and maintenance expense was $7.7 million compared to $7.1 million for Q4 2022.
This brought 2023 total repairs and maintenance to $29.5 million compared to $30 million for 2022. Our wet mill use facility and distillery capabilities at our Pekin campus provides significant differentiation and greater production capabilities than the typical driving. That said, the nature and age of these facilities require consistent ongoing repairs and maintenance and capital upgrades integral to the longevity, sustainable performance and modernization of our assets. To maintain reliable and efficient operations, we normally address smaller concerns as needed and conduct larger scheduled outages approximately every two years. As noted on our last call, we originally scheduled our large peak in campus wet mill outage for August 2023. However, favorable crush margins and sufficient corn supply motivated us to postpone the downtime until April 2024.
With slightly negative crush margins heading into year-end and continuing thus far in Q1 2024, in Q4, we recognized a $2.2 million lower of cost or market charge on our any [ph] renewable fuel inventories and related fixed foreign purchase commitments. This compares to a gain of $700,000 for Q4 2022. During Q4, we recorded an asset impairment charge of $6 million to the goodwill associated with our acquisition of Eagle Alcohol in 2022. This charge reflects revisions to current market premiums and adjustments to projections in our required annual goodwill valuation. Incorporating additional synergies, we intend to leverage Eagle Alcohol's transportation expertise across our entire platform replacing a portion of our third-party trucking services, reducing our logistical costs and improving margins.
We are also in the process of expanding our distribution territory into new geographies such as Southern California. For Q4 of 2023, adjusted EBITDA was positive $3 million, improving $19 million compared to Q4 2022. For the full year 2023, adjusted EBITDA was positive $21 million, up $27 million compared to 2022. This is a significant year-over-year improvement particularly considering that in 2022, the company received $20 million more in USDA cash grants. As of December 31, 2023, our cash balance was $30 million our total loan borrowing availability was $98 million to support our business operations and capital investment initiatives. Our borrowing availability includes $33 million under our operating line of credit and $65 million, subject to certain conditions under our term loan facility.
We appreciate the confidence and continued support from our lenders. Cash flow from operations was $12 million for Q4 bringing the annual total to $22 million. In Q4, we repurchased 436,000 shares of common stock to $1 million, bringing our total planned repurchases to $5 million since the plan's inception. We invested $5 million on CapEx for Q4, bringing the year-end total to $30 million compared to $13 million and $38 million for the same period in 2022. We are committed to continual improvement in our reporting as well as our performance. First, to increase transparency to our operating physical margins and conform reporting to how management is evaluating Alto's performance, we will exclude the impact of unrealized non-cash derivative gains and losses when calculating adjusted EBITDA.
Unrealized derivative gains and losses are non-cash mark-to-market adjustments of derivative instruments on open positions related to future period purchases and sales that are recorded as part of cost of goods sold. Updated historical reconciliations have been added to our website. Next, we have updated the quarterly metrics as seen in today's press release and in the Interactive Financial Data section of our website. The new metrics included unaudited segmented data for sales, production in corn farms. Going forward, we will consider both additional metrics and the frequency of providing that. Finally, as we discuss our capital projects individually, not in aggregate, we will place them into three categories. First, in operation includes completed projects.
Second, under development includes high priority strategic opportunities that have the greatest expected return as well as initiatives that support our near-term operational goals. And third, for future evaluation includes potential opportunities with attractive returns to be assessed as resources permit. Now looking at 2024. The crush margin trends per typical seasonality are beginning to improve over the end of 2023. Further, margins are approximately $0.20 better for January and February of this year compared to the same time last year. This said, in January, the Polar Vertex in the Midwest negatively impacted both operations and logistics at our Pekin Campus. Despite significant preparations ahead of the freeze and timely recovery response efforts, we experienced a shift to lower-margin feed products and reduced alcohol production by approximately 1 million gallons as a result of frozen river conditions.
As Bryon discussed, due to our hot idle the Magic Valley facility, households total ethanol production for Q1 will be lower, but third-party gallons sold should be higher in comparison to Q4. We have confidence in the extensive design modifications underway and achieving our corn well and high protein targets in 2024. It is also important to note that our biannual wet mill repairs and maintenance outage is scheduled for April. We expect it to take approximately 10 days which will lower Pekin campus production in Q2 and cost of approximately $4 million. For the full year 2024, we expect to track to our typical repairs and maintenance run rate of approximately $30 million, bringing the total, including the biannual outage expense to $34 million.
Regarding CapEx, we plan to invest approximately $25 million on equipment upgrades, process improvements and projects as short-term paybacks. These ongoing maintenance efforts and capital improvements position Alto for a much stronger future. The biannual outages historically increased reliability and production run rates. We expect these positive effects will benefit 2024, in particular as we head into more robust summer months. With that, I'll turn the call back to Bryon.
Bryon McGregor : Thank you, Rob. Currently, the overall outlook for 2024 is favorable. We have good corn inventories, low natural gas and form prices, higher sugar prices, domestic regulatory support for summer blending and expected demand growth for U.S. ethanol globally. These factors should create an environment that results in crush margin improvements over the next few months and produced positive spreads through the most -- through the most of the year. Although markets are dynamic, we remain agile and financially prudent and seek to capitalize on the most promising and profitable opportunities. We are enthusiastic about our prospects and confident in our long-term growth strategy. Before I open the call to questions, please note that we will be at the Annual ROTH Conference next week, and I hope to see you there. Operator, we're ready to begin.
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