Alto Ingredients, Inc. (NASDAQ:ALTO) Q3 2023 Earnings Call Transcript
Alto Ingredients, Inc. (NASDAQ:ALTO) Q3 2023 Earnings Call Transcript November 6, 2023
Alto Ingredients, Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $0.11.
Operator: Good day and welcome to the Alto Ingredients' Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.
Kirsten Chapman: Thank you, Betsy and thank you all for joining us today for the Alto Ingredients third quarter 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 the 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 November 13th, the details of which are included in today's press release. A webcast will also be available at Alto Ingredients' website. Please note that the information on this call speaks only as of today, November 6th.
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 and conference call 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 financial performance of operations and believes these measures will assist investors in assessing the company's performance for the periods reported. The company defines adjusted EBITDA as unaudited net income or loss before interest expense, interest income, provision for income taxes, asset impairment, loss on extinguishment of debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense. To support the company's review of non-GAAP information, a reconciling table is included in today's press release. On today's call, Bryon will provide a strategic plan and activities review and 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, sir.
Bryon McGregor: Thank you, Kirsten. Thank you all for joining us today. As the new CEO, I've spent the last 90 days on the road meeting with customers, investors and the dedicated teams of our facilities. I've been listening, learning, and collaborating to reinforce our continued mission: to profitably provide ingredients that make everyday life better. I'm proud of our talented team and our overall accomplishments to-date. We continue to successfully transform our company from a supplier of low-margin commodities to a provider of high-margin differentiated specialty alcohols and essential ingredients in consumer, pharmaceutical, food, beverage, and industrial products. This strategic realignment has greatly improved our financial profile over the past three years.
We continue to make good progress, although we are subject to intermittent operational and commodity market challenges. Q3 2023 results reflected positive contribution from improved ethanol crush margins, particularly in September, as corn basis declined as the harvest commenced. However, unusually high unscheduled downtime lowered our anticipated production volumes and shifted our mix towards lower-margin products. Combined with higher repair and maintenance costs, we did not generate the results we anticipated. Despite these operational challenges, we delivered positive adjusted EBITDA in Q3 2023 and a significant improvement over Q3 2022. We expect the extensive repairs and maintenance work completed during the quarter to benefit future periods' uptime and reliability going forward.
Rob will provide greater detail in a few minutes. First, I'll review our various initiatives. In early 2023, we outlined our revenue-enhancing and cost-reducing capital initiatives. Each project has a different timeline, return on investment, and risk profile. As such, we've intentionally evaluated and prioritized funding needs and options for each project separately, with the overarching goal of remaining fiscally responsible. We have already completed several of our short-term projects. These include expanding our high-quality alcohol products, installing additional corn storage capacity, and replacing boiler equipment at our Pekin site, along with other various upgrades in our plant systems. For our more capital-intensive projects, we have engaged experts, third-party front-end engineering and design firms, or FEED firms, to conduct deeper analyses on scope, timing, and cost.
These projects include primary yeast; carbon capture and sequestration, or CCS; natural gas pipeline; cogeneration; and biogas conversion capabilities. Here are a few material updates. Beginning with our specialty alcohol sales, our 2024 contracting season is going well. We are on pace to exceed 2023 delivered gallons at premiums to fuel-grade ethanol. As mentioned previously, our goal is to move up the value chain and capture a larger share of the beverage-grade market, where our high-quality, low-moisture, and location differentiations create competitive advantages. Regarding Magic Valley, we continue to line out this facility to achieve the performance guarantees of the installed high-protein and corn oil technology. While this process has taken longer than we anticipated, we remain resolute in our efforts to improve the consistency of the facility's product output and optimize the plant's production.
We continue to evaluate the rollout of the high-protein and corn oil technology at our other locations. In the interim, we have achieved comparable improvements in corn oil yield at our Pekin dry mill through process optimization unique to its ICM design. Regarding primary yeast, we have just received preliminary results from our FEED study. While the findings are promising, inflationary pressures and supply chain constraints have materially impacted the installation cost with increases of over 70% from our original estimate and extended our construction period from 18 to 27 months. As a partial offset to this change, the anticipated operational costs have declined and the market price for primary yeast has improved. In short, we are evaluating this project and exploring funding alternatives to make this unique opportunity a reality.
Considering these results, we are critically reviewing all our projects to better ensure that the construction costs reflect current market conditions. We remain fiscally-vigilant given the current challenging capital market environment and are giving priority to those projects with sustainable long-term profitability. As previously reported, we completed the installation of our new grain silo in the second quarter of 2023. We have seen the benefit of this expanded capacity and reduced costs for delivered corn and lower operating costs through more timely silo clean-outs. We expect the added capacity to further benefit operations this winter. Regarding the natural gas pipeline and cogeneration capabilities, we are now negotiating engineering, procurement and construction contracts.
We continue to make progress on our carbon capture and sequestration project. With our development partner, we are designing an Alto-dedicated pipeline and sequestration system located within a relatively short distance of our facility, materially reducing installation costs and decreasing external risks. Based on the current economic environment, the preliminary FEED study findings and changing capital requirements, we have extended our EBITDA expansion goals by six to 12 months. We are now targeting to increase annual adjusted EBITDA incrementally by over $65 million by the middle of 2026 with the completion of our near-term projects and by approximately $125 million by year end 2027 when our yeast, CCS, and other long-term initiatives are fully realized.
Before I turn the call to Rob, I'll mention that we remain steadfast in our sustainability efforts to be a good community steward while addressing our customers' current and future needs. This quarter, our Pekin facility earned Safe Food/Safe Feed, another third-party product safety certification, for our corn meal and germ products, further differentiating our products and services. We plan to publish our sustainability report publicly by year-end and look forward to providing key disclosures in this format on an annual basis. Now, I'll turn the call to our CFO, Rob Olander.
Rob Olander: Thanks, Bryon. Due to strong crush margins, our third quarter gross profit improved over the same period in 2022. However, there were several factors that substantially tempered results in the current period. Corn basis levels increased by $0.31 compared to Q2 2023, illustrating a sharp increase sequentially and by $0.03 compared to Q3 2022, demonstrating a similar supply and demand profile as last year. In addition, as Bryon noted, we incurred significant increases in unexpected repair and maintenance costs. The associated downtime reduced anticipated production volumes. This adversely impacted our hedging strategy to lock in favorable market crush spreads, which resulted in derivative losses of $3.7 million and shifted our product mix to more wet ingredients that carry lower margins.
Year-to-date, our specialty alcohol sales were impacted by lower consumer demand. We are working with our customers to roll a portion of the 2023 contracted volume commitments into 2024. As such, sales and profitability were lower than expected for the third quarter. Additionally, we incurred higher feasibility and legal costs associated with our strategic capital projects. On the positive side, during the third quarter, we received an additional $2.8 million cash grant as the USDA closed out the Biofuel Producer Program. Adjusted EBITDA was positive $4.7 million for the third quarter compared to negative $20.6 million for the same period in 2022. Looking ahead to the fourth quarter, although crush margins remain positive currently, we will refrain from providing projections for several reasons.
First, during Q4, customer commitments are not solely based on market demand, rather they are reflective of buyers managing their fuel-grade inventory balances with the goal of minimizing inventory levels by year-end. Second, winter buying patterns tend to start the day after Thanksgiving and typically demonstrate a deep decline in volumes from Q3. Third, with an intention to take advantage of higher crush margins in Q3, we postponed our planned winter facility outages until October. Fourth, as we fill our fixed priced specialty alcohol sales booked for the entirety of 2024, we are also building our hedge portfolio. The derivatives we used to preserve the margin on these sales don't qualify for hedge accounting treatment, and the quarterly results can be materially impacted by mark-to-market unrealized gains and/or losses depending on commodity price swings.
In summary, we faced unique factors in Q4 that cannot be forecasted with confidence. Therefore, it would be improperly speculative to guide investors towards a particular expectation in this regard. With the goal of improving our facilities for the long haul, in the second half of 2023, we have undertaken numerous repair and maintenance projects, which have bettered our position heading into 2024. Regarding liquidity, during the third quarter, cash flow from operations was $23 million. Our quarterly capital spend was $7 million, bringing our year-to-date investment in our plants to $25 million. As of September 30, 2023, our cash balance was $26 million, and our total loan borrowing availability was $118 million to support business operations and growth initiatives.
Our borrowing availability includes $53 million under our operating line of credit, $40 million under our term loan facility, and an option to request up to an additional $25 million under the facility. With that, I'll turn the call back to Bryon.
Bryon McGregor: Thank you, Rob. Throughout our strategic realignment, we have been committed to creating and pursuing opportunities that target long-term profitability and maximize shareholder value. While the path has been and will continue to be dynamic, we remain agile and financially prudent while continuing to capitalize on the most promising and profitable opportunities. We remain enthusiastic about our prospects and confident in our long-term growth strategy. Now, I'd like to open the call to questions from our sell-side analysts. Operator?
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