Alto Ingredients Inc (ALTO) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Alto Ingredients, Inc. First Quarter 2021 Financial Results. (Operator Instructions) I would now like to hand the conference over to your speaker today, Moriah Shilton. Please go ahead.

Thank you, Elaine, and thank you all for joining us today for the Alto Ingredients first 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 operational 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. A telephone replay of today's call will be available through May 19. 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 in this call speaks only as of today, May 12. 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, or provision or benefit for income taxes, asset impairments, loss on 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. We had a solid first quarter to start the year as we sold 19 million gallons of specialty alcohol through a combination of contracted volumes, spot sales and exports. It also was our fourth consecutive quarter of gross profit and positive adjusted EBITDA, reflecting the benefits of focusing on our strengths, selling specialty alcohols and essential ingredients. This is a more sustainable and profitable business model than fuel grade ethanol alone.

We generated net income of $4.4 million and adjusted EBITDA of $13.6 million. These results represent an approximate $30 million improvement in net income year-over-year, a further testament to the benefit of our transformation efforts. We remain on track for our specialty alcohol contracted sales to contribute a minimum $60 million in gross profit for 2021, and we remain optimistic for adding additional contracted specialty alcohol volumes in 2022 and beyond, thereby improving utilization over time from our expanded production capacity and enhanced certifications.

As we announced on April 28, we have signed a definitive agreement with Seaboard Energy, California to sell our fuel grade ethanol production facility in Madera for a total consideration of $28.3 million. We expect the sale of this 40 million gallon per year facility to close in the second quarter of 2021, and most of the cash proceeds will be used to retire company debt. This will save approximately $700,000 per quarter in interest expense and an additional $400,000 per quarter in negative EBITDA carrying cost for this idle facility.

We are on track on our $18 million in announced capital improvement projects in 2021 that are expected to expand revenue, and increase efficiencies and plant reliability. One example is a project underway that will increase the annual production capacity of our yeast facility by approximately 15%. And another example is a project to upgrade the feed dryers at our Pekin facility to produce even higher value feed in addition to improving overall plant efficiency and reliability.

These 2 projects alone are scheduled to be completed and fully operational on or before the end of Q3 and are expected to contribute approximately $5 million annually in EBITDA, a payback in less than 2 years.

Turning to a topic that is top of mind for many of our investors. The role carbon capture and sequestration can have on the decarbonization of our environment. As we discussed on our last call, Alto will be an active player in the carbon capture space as our Pekin campus sits on top, the Mount Simon Sandstone formation, considered to be one of the most significant potential carbon storage resources in the United States. We are actively engaged in discussions to develop a carbon capture and sequestration program at the Pekin site, which generates over 600,000 tons of CO2 annually. We look forward to sharing more information over the next few quarters regarding this uniquely profitable opportunity for the company.

Finally, worth noting, among many other projects under development, it is our plan to expand protein production at our dry mill facilities. Representing 250 million gallons of annual alcohol production. While it is too early to provide specific details, we believe the economics are compelling. We will provide greater details on these projects over the coming months once contractual arrangements are finalized.

With that, I'd now like to turn the call over to Bryon for a discussion of our financials. Bryon?

Thank you, Mike. I'll discuss a few financial highlights and metrics for the first quarter 2021 and provide an update on our expectations on certain metrics for the year.

For the first quarter of 2021, net sales were $219 million compared to $169 million in the fourth quarter due to increased gallons sold and increased sales price per gallon. This is also attributable to having a full quarter of production at our Pekin dry mill, with the price per gallon sold, up 13% compared to last quarter, in line with rising commodity prices.

We sold 58 million production gallons in the first quarter, of which 19 million gallons were specialty alcohols, up 3 million gallons sequentially over last quarter's results.

Gross profit was $13.8 million, relatively flat compared to the $13.6 million last quarter. The improvement in sales of specialty alcohols was in part negatively impacted by the seasonally poor fuel grade ethanol crush margin early in the first quarter and the extreme weather conditions adversely impacting natural gas prices.

As noted on our prior earnings call, we have seen improvement in fuel ethanol margins as industry inventories have declined and fuel demand has increased, and our dry mills are operating at positive margins. As a reminder, the $60 million in gross profit contribution from the sale of specialty alcohols, Mike referred to earlier, is based in part on the 70 million gallons that were contracted in the fall of 2020. These gallons were contracted for the entire calendar year of 2021 at fixed volumes and prices.

Concurrently, we hedged the major input costs like corn at the then prevailing market prices to preserve the associated margins and minimize the impact of future commodity price volatility. Similarly, as we negotiate new fixed-price contracts, the terms will reflect concurrent market conditions and commodity prices that we will hedge at the time of signing.

SG&A expenses in the quarter was $7 million, generally in line with last quarter but slightly inflated due to normal seasonally high expenses. We remain on track with our guidance of $20 million to $25 million for the full year of 2021.

Our initial -- excuse me, our interest expense in the first quarter was $1.9 million, 50% lower than the $3.8 million we paid in the fourth quarter of 2020 and a 64% reduction from the same quarter last year as we continue to pay down high interest rate debt. In the first quarter, we repaid $5.5 million in principal on our senior notes and $3 million on our CoBank credit facilities. In the past 12 months, we have paid off $120 million of high interest debt, successfully removing 72% of the total debt we had entered -- we had, entering that time period. We are on track to be net debt-free in 2021.

Income available to common shareholders was $4.4 million or $0.06 per diluted share compared to a loss of $20.5 million or $0.30 per share in the fourth quarter. The fourth and first quarters included impairment charges of $24.4 million and $1.2 million, respectively, associated with our western assets and their transition to assets held for sale on the balance sheet.

Turning to our balance sheet. On March 31, 2021, our cash and cash equivalents were $44.1 million compared to $47.7 million December 31, 2020. After quarter end, we announced the pending sale of our Madera plant for a total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. Upon closing the sale, we anticipate reducing our debt outstanding by approximately $18.5 million, bringing our remaining term and plan debt loan balances to under $30 million. Proceeds from future asset sales will be used to further retire debt, bolster liquidity and fund needed capital projects.

In summary, we are building a balance sheet to support not only current liquidity needs through various commodity cycles, but also to address future capital improvement and growth opportunity funding needs.

Mike, back to you.

Thank you, Bryon. Over the past 12 months, we have improved operations, optimized our production footprint and reduced controllable expenses and our overall cost of capital, thus building a strong platform for the future. This platform provides us the ability to aggressively pursue opportunities; organically, to reinvest in quality, proven, high-value projects; as well as, pursue accretive, strategic M&A opportunities.

We are grateful to all our employees for the efforts they have undertaken to put us in a position of strength as we look to the future.

With this, operator, I'd like to open the lines for questions.

(Operator Instructions) And your first question comes from Eric Stine from Craig-Hallum.

It's Aaron Spychalla on for Eric. Maybe first, I know you said you're on track contracting the remaining 50% of the specialty alcohol. But can you just give a little more detail on kind of the progress there, and if you're seeing any pricing pressures? And then maybe also talk a little bit about the 2 recent certifications and whether that's kind of spot or contract and just the outlook for international sales as well?

Sure, Aaron. It's Bryon. I'll take the first part and let Mike handle the second part. We remain on track in selling those gallons, but it's important to note as well that we view this as a long play, right? While we would love to, and we certainly are working diligently to be able to sell all 140 million gallons; particularly, in the 2020 contract for that billed gallons in 2022 and beyond; it would be, I think, an aggressive assumption on most people's part to assume that we could place all of that product immediately, but that we expect with the certifications that Mike will speak more about, to be able to do so effectively, over the coming years. Particularly, as you look at just the onboarding and the diligent processes that our customers go through in order to be able to buy the product.

With regard to certifications, Mike, do you want to…

Yes. So as you mentioned, Aaron, we have announced that we have gained additional certifications. I think the key here is that during the process of (inaudible) and it kind of goes back to what the first part of your question was, how do you get yourself in a position to be in -- be set up going into 2022 and beyond.

And one of the things that we saw early on was getting the certifications, getting qualified with customers and starting the conversations with customers early, is incredibly important. And we're working very hard at that as we go through the year, even though the contracting cycle typically is in Q4, there's a lot of work that gets done ahead of time. We've been very fortunate and a lot of our very good customers have worked with us and have guided us through what is important for them and what we need to do to increase our business with them.

So again, it's a process, as Bryon said, certifications are extremely important and not only domestically but internationally. And that's where our focus is right now.

Second, on corn and kind of just basis there, given recent developments. I know you talked a little bit about the hedging on the alcohol portion, but just on the fuel grade. Can you just talk a little bit about that, kind of what you're seeing, maybe kind of 2Q, near-term thoughts on just corn and any hedges and just basis as well?

Sure. So I think it's important to remember that while there are opportunities at times to be able to lock in spreads even on the fuel business. And we will take advantage of those opportunities as they present themselves. But generally speaking, what we have found historically is, is that where you're pricing your product on an index basis, that it is highly speculative and usually, not at your most profitable place to be locking in your spreads on that product because of the inverted nature of ethanol prices and the carry that's in corn. This year, it's kind of backwards, right? Where, Aaron, you've got an inversion in both corn and ethanol. So there are at times windows of opportunity to be able to lock in 1 or 10 months out, and that's all positive. But I would generally say that it is our intent for the product that we sell on index to be in the nearby. And so you're not pricing corn until you effectively are grinding it and selling it.

And then maybe last on carbon capture. We'll stay tuned for details on Pekin. But just curious, your thoughts on kind of Stockton and the developments in that market as well. Is there -- any color you can provide there on potential carbon capture would be helpful.

Yes. Well, we have publicly announced that we're pursuing a potential sale of the Stockton facility. And again, you have to pick your spots. And that is our goal right now is to sell that facility and take the resources to further pay down debt and use those proceeds to pursue other opportunities.

Pekin is such a fantastic carbon capture story, and we're getting a lot of interest there, and we're just trying to sort through what is the best opportunity for us going forward. And again, like we mentioned, we'll definitely keep everybody up to speed as we go through that process. But right now our focus primarily on carbon capture is at Pekin. And again, we are pursuing a sale of the Stockton facility.

And you have a question from Amit Dayal from H.C. Wainwright.

For the carbon capture opportunity, is there any specific technology that we need to sort of develop? Just trying to get a sense of like what will go into executing against building out this business segment?

I don't know, I mean, that there's any specific new fangled technology that needs to be used. I mean this is a technology that's used for years and years in enhanced oil recovery and the like. I think that -- but what it does require is clearly a significant capital -- requirement to be able to not only begin with test wells and develop your -- the resource, make sure that you've got a secure resource. But then it's largely pumps and compression and then -- and maybe pipelines to the extent that it makes sense as a gathering system to be able to gather that product before you inject. So while it has a significant capital requirement associated with it, and it requires -- it's not a 6-month project. It's a multiyear project. That being said, the economics are equally compelling.

And I'll take my other questions on this off-line. And then just going to the gross margin or gross profit comments, Mike made. The $60 million number, is that specifically attributed to the specialty alcohol line business in gross profit?

Yes, it is. Yes, it is. Yes. That is specifically addressing contractual $70 million that we talked about initially.

And with respect to sort of utilization levels, Bryon, could you maybe share what utilization levels were in 1Q? And what you expect potential utilization that was to be over the remainder of the year?

So I mean, just a clarifying question, are you looking for overall utilization across the entire portfolio? Or are you looking specifically towards specialty alcohols?

If you could break it out, Bryon, that would actually be very helpful. If you have that, if not, the overall number would help as well.

I think that it's -- the numbers that we've shown in our reported numbers are pretty consistent or probably a good target for you, as you model out the remainder of the year. With regards to specialty alcohols, not to be trite, but if you do the math, you're looking at -- based on our contracted volumes, you're looking at 50%. And so we want -- we definitely expect to be above 50%. I think as I mentioned earlier, to be at 100% of utilization of our specialty alcohols would be certainly a goal, but -- but as well an aggressive assumption. So I think that you -- as you think about it and as we think about it, probably a more appropriate assumption to be to think about that as growing over time. More this year, but then again, adding more of that -- or utilizing more of that capacity as you contract out more volumes over the coming years, next 1 to 2, 3 years.

And did you already have some international sales for the specialty alcohol products in 1Q?

Yes.

(Operator Instructions) And you have a question from Shahriar Pourreza from Guggenheim Partners.

It's actually Constantine Lednev here for Shahriar. Just a couple of questions to follow-up for kind of an abundance of information.

On kind of the realized margins and product sales, can you talk about the structure of the contract denominated sales? And how -- specifically, how price elastic are the specialty alcohols and ingredients and in light of corn prices escalating? And what kind of cost protections that you may have kind of both near-term and longer-term as kind of prices have been stepping up.

Constantine, so it's Bryon. I -- maybe the best way to answer that is both in the short and so thinking about 2021 and then thinking about 2022 and beyond. Clearly, in the short run there within the next -- within this calendar year, they're really quite inelastic, right? They're -- we've got fixed volumes, fixed prices. You may expect to see some, depending on customers and their demand adjustments sometime around the fourth quarter, maybe renegotiating into the new year and adding additional capacity or making adjustments there, too.

But generally speaking, I think we hedged our input costs associated with that. So we're feeling -- and I'm feeling good about those margins. And that's why we provided the framework that we did around the 70 million gallons and the $60 million in gross margin. As you think about 2022, I think it would be naive to assume that the additional capacity that -- not only that we brought on, right, where we went from 110 million to 140 million gallons by -- entering this year. But in addition, other producers in this marketplace who have also announced production capacity expansion to not have some kind of an impact potentially on prices. That being said, we believe and are optimistic that there will always be a positive or a premium in that -- in the product at the specialty alcohol markets in comparison to your next best alternative, which would be fuel. If not, why would you not then just reduce your operating costs and sell fuel ethanol instead.

And I think that probably the more important part of the business is to really focus on that Mike mentioned and has emphasized, is around, again, the onboarding, the quality control, the, if you will, kind of what would be barriers to entry, both that work both ways for us, right? They both protect us, but they also require us to work significantly to make sure that we can place our product and do so effectively and be able to then hopefully retain those customers for a very long period of time. And that's generally been the behavior that we've seen. Mike, anything you want to add to that?

No. I think you got it there, Bryon.

And just a bit of a follow-up on kind of the economics and the market. Do the -- do kind of the recent kind of price moves and changes in the margin change any of the economics on kind of the planned investments, the $18 million that you talked about. But any kind of color on the payback kind of the time frames? And just thoughts on kind of capital allocation at this juncture?

Yes. With the $18 million, we're being very specific in terms of where we are investing our capital dollars. We have a lot of infrastructure that we are continuing to upgrade to improve reliability. There are kind of 2 buckets you put it in, further growth opportunities and reliability and improvement in your efficiencies and reliability within your existing plant structure. So we carefully look at those and analyze them. There were certain things that within that $18 million that we had to focus on, for instance, at our ICP plant, it was important to upgrade the cooling tower, which was part of that $18 million capital expenditure and that we have planned for 2021. So there's a variety of things that go into that, no one single answer.

I think above and beyond that, as I mentioned in the remarks, we now we have a solid platform. And we've worked really hard over the last 12 months to kind of put ourselves in a position, working on the debt, working on a variety of issues to put ourselves in a position to where we can aggressively pursue some other activities above and beyond the $18 million, and we're looking at those also.

And just kind of in regard to the opportunities, you obviously talked about the kind of carbon capture opportunities at Pekin. How are you thinking about the capacity for these future investments, and kind of maybe a range of capital requirements? And are you thinking about this from a stand-alone perspective or kind of a joint venture agreement of some sort?

It's a really great question. I think probably the best way to answer that is we're considering all of those options. And the real goal is to be able to, as being the client, the producer of the carbon and the CO2 that we intend to try and capture as much value as we can and retain it for the benefit of the company and the shareholders, right? And so we'll certainly -- certainly intend to and will continue to -- the process where we keep these competitive and try and optimize value with regards to this resource.

So I don't mean to answer the question. It's just, we consider both. But yes, I mean, we're considering all options, and we'll make sure that we bring to bear that, which makes most sense for us and for -- while mitigating risk appropriately. Effectively assigning risks to where - -the the people who can best handle that risk.

And there are no further questions at this time. I'll turn the call back over to Mike Kandris for any closing remarks.

Thank you for joining us today and for your ongoing support. As you can tell, we are excited about the progress we have made and the bright future we have ahead. We look forward to continuing our dialogue with you as we make further progress. Thank you, and I hope everyone has a good afternoon. Thank you.

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