Alto Ingredients Inc (ALTO) 2024 Q4 法說會逐字稿

Good evening, and welcome to the Alto Ingredients fourth quarter and year-end 2024 financial results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Kirsten Chapman with Alliance Advisors, Investor Relations. Please go ahead.

Thank you, Asha, and thank you all for joining us today for the Alto Ingredients fourth quarter and year-end 2024 results conference call. On the call today are President and CEO, Bryon McGregor; and CFO, Rob Olander. Alto Ingredients issued a press release that 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 12, the details of which are included in today's press release. A webcast replay will also be available on Alto Ingredients website. Please note that the information on this call speaks only of today, March 5. You're advised that any 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 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 Ingredient's 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 consolidated net income or loss before interest expense, interest income, provision for income taxes, asset impairments, unrealized derivates gains and losses, acquisition-related expense, and depreciation and amortization expense.

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 and Rob will comment on our financial results. Bryon will wrap up the call and open the call for questions.

It's now my pleasure to introduce Bryon McGregor. Please go ahead, sir.

Thank you, Kirsten. Thank you all for joining us today. We have a lot to discuss what's gone well and what hasn't, what we've done about it so far and what we will be doing to make additional improvements to take advantage of our strengths and opportunities. I'll start with some highlights.

In January, we leveraged a long-term partnership to acquire a beverage-grade liquid CO2 processing plant adjacent to our Columbia facility, bolstering economics and increasing asset valuation. This transaction will improve the top and bottom line results for our Columbia facility, as well as create cost synergies and growth opportunities.

Additionally, in the fourth quarter of 2024, and again, in the first quarter of 2025, we took action to rationalize our footprint and cut costs while supporting customers and our goal of becoming a low-cost producer. We'll discuss this further in a moment, but I will note that these actions and associated non-cash impairments make up a material portion of the losses for Q4 and 2024 year-end results.

Lastly, as part of our ongoing efforts to maximize shareholder value, with the assistance of our financial and legal advisers, we are considering a broad range of options, including asset sales, a merger or other strategic transactions to better align the long-term value potential of the company.

Turning to our operational review. As expected and discussed on our last call, fourth quarter market conditions proved challenging and crush margins were down compared to the prior quarter and year, as Rob will cover shortly. As mentioned, we have implemented the following cost saving initiatives.

First, we cold idled Magic Valley. To provide context, in 2022, we saw an opportunity to take advantage of premium prices in high-quality protein and corn oil. Pursuing greater yield of high-margin products, we installed and commissioned a high-quality protein and corn oil technology. However, the installation took much longer and cost significantly more than expected. Further, we underestimated the negative impact of the build-out of renewable diesel and soy crush capacity would have on corn oil and protein market prices in the region.

Compounded by the dramatic swing and delivered corn prices for Western operations in comparison to Midwestern facilities, it became impossible to operate our Magic Valley plant profitably. By cold idling the facility and cutting our variable and fixed costs as much as possible, we stopped the drag on profitable areas of our business. For the fourth quarter, we took a significant impairment charge related to this plant. To partially offset remaining carrying expenses and to serve our customers in the area, we are opportunistically using Magic Valley as a renewal fuel terminal.

Second, we rationalized Eagle Alcohol. Since the acquisition, we have integrated Eagle Alcohol's high-quality alcohol old operations and customers into our [Peakon and Kinergy] Marketing business. With this reorganization, we reduced head count at the Eagle Alcohol. Now we are focused on training the remaining break bulk warehousing and trucking operations into profitable service centers.

Third, we implemented additional rightsizing opportunities. We aligned the company to our smaller operational footprint while maintaining excellent customer support during Q4 2024 and Q1 2025, we streamlined staffing, reducing both COGS and SG&A.

In aggregate, we expect to save approximately $8 million annually, which will improve our bottom line run rate and manage liquidity. We continue to evaluate initiatives to grow our high-margin offerings, unlocking unrealized value and improve efficiency.

More specifically, the carbon markets continue to show promise. And on January 1, 2025, we acquired Kodiak Carbonic, a beverage-grade liquid CO2 processor for just over $7 million in cash plus working capital. This processing facility renamed Alto Carbonic is located on the same property as our Colombia plant in Gordon, Oregon and has been operating profitably since its first full year of operations in 2016.

Alto Carbonic takes biogenic CO2 gas produced as a byproduct of the fermentation process at our Columbia plant and converts it into premium liquid CO2. The finished product is sold into the Northwestern region of the United States for use in food and beverage processing, industrial cooling and other applications. The facility produces, on average, approximately 56,000 tons annually of liquid C02 with the capacity to produce over 70,000 tons annually.

This transaction, which included an amended long-term sales offtake agreement with a leading North American industrial gas supplier was immediately accretive and has a compelling payback of approximately two years. We have been integrating the plant with our Columbia facility, improving coordination and collaboration between the operations. We expect to realize additional cost savings with synergies in production and overhead. We are also evaluating an opportunity to increase storage capacities to improve logistics and to take advantage of spot market premium liquid CO2 demand.

To add a finer point, this acquisition immediately stems the recent lack of profitability at the Columbia site, provides a stronger financial foundation to overcome destination plant competitive challenges, and significantly increases the value of these combined assets.

At our Pekin campus, we also continue to diligently pursue opportunities to optimize our CO2, which historically was considered only away stream with marginal value. In November, we achieved a milestone finalizing our CO2 transportation and sequestration agreement with Vault. This partnership will be critical in our execution of carbon capture and storage, or CCS.

In December, Vault submitted the formal application for the EPA Class VI permit required to commence construction of a CCS pipeline and for long-term CO2 storage indeed geological formations. The complexity and constructing operations to capture transport and store CO2 require significant development and planning work. The EPA requires extensive site analysis, monitoring and safety measures to safeguard underground water supplies.

Currently, the approval process is estimated to take at least two years. We anticipate this will allow the time necessary to address Illinois's current moratorium on new CO2 pipelines as part of the SAF CCS act, which is in effect until July 2026 or until revised federal safety standards are established, whichever comes first. While the CCS project time line has been slow, it is important to recognize the significant changes that have occurred in the CCS environment and the carbon regulatory and political markets during that time. Alto's deliberate pace has been advantageous as we navigate these changes and discover more effective and efficient options.

The extended time required for regulatory approvals provides us the flexibility to lay the necessary infrastructure plans, including compression and energy solutions. We also intend to use this time to secure financing. In addition, working with Vault, we are focused on meeting with local groups and authorities to educate the community about the process, strengthen support and address concerns.

Regarding our omni business at our Pekin campus, we are proactively modifying operations to deliver the higher value products to market demands. During our biannual wet mill outage in May 2024, we were able to improve plant utilization.

As a result, the wet mill has been operating at nameplate capacity of 100 million gallons. Q4 Pekin campus production volume was up 3.8 million gallons over the prior year. This 7% increase demonstrates the effectiveness of our maintenance program. Carrying these improvements into 2025, we expect to produce an additional 8 million gallons for the year. lowering our cost of production on a per gallon basis and providing an opportunity to produce a greater volume of specialty alcohols.

In renewable fuel, over a year ago, we applied for ISCC certifications to allow us to ship qualified renewable fuel to the EU at a premium to our domestic alternatives. Both Alto ICP and Pekin were ISCC certified in late summer. We began exporting certified product to Europe market in Q4 and anticipate expanding exports further in 2025.

In premium specialty alcohol, our certifications and customer relationships continue to be material differentiators. For 2024, we sold nearly 90 million gallons of specialty alcohol. In 2025, our goal is to balance production levels between specialty alcohol and ISCC product to maximize margins and address customer needs. Since our last call, we completed another ISO 9001 audit. And I can proudly state that there were no adverse findings, a testament to our culture of quality at Alto.

Now I'll turn the call over to Rob.

Thanks, Bryon. Before I discuss the quarter, I'd like to highlight cost-cutting steps we've taken to strengthen our financial results. As Bryon mentioned, we cold idled the Magic Valley facility, rationalized our Eagle Alcohol operations and reduced our head count by 16% to the length of our smaller company footprint. In aggregate, our workforce reductions are expected to lower our annual costs by $7.8 million. The savings are split 74% in cost of goods sold or COGS and 26% in SG&A.

We expect to realize the full financial benefit beginning in Q2. These are meaningful reductions, to put it into perspective, if we apply these measures retroactively to 2024, all other things being equal, adjusted EBITDA would have been positive for the year.

Now I'll review the financial results for the fourth quarter and compared to the fourth quarter of 2023. We sold 95.1 million gallons, up from 92.5 million gallons during Q4 2023, reflecting production improvements at our Pekin campus from our planned repairs and maintenance program. However, our sales price per gallon averaged $1.88 in Q4 2024 compared to $2.24 in Q4 2023. These lower market prices reduced net sales by $38 million for the same quarter year over year.

The market crush margin declined nearly $0.18, resulting in an $8.7 million net adverse impact to gross profit. In addition, our protein returns were negatively impacted by the expanded soy crush to meet renewable diesel demand, higher wet feed product mix, and the inability of a key customer to take deliveries following Hurricane Helene. While low carbon fuel credit prices were also down compared to a year ago, they improved from Q3 2024 and are recovering from their market wells.

I'll review factors that impacted our COGS in Q4 2024. Our realized derivative losses, which are included in adjusted EBITDA were $1.2 million greater than the same quarter in 2023 at $3.5 million compared to $2.3 million. Our unrealized derivative gains, which are excluded from adjusted EBITDA, were positive $5.5 million compared to a loss of $8.2 million resulting in a $13.7 million positive swing year over year.

Our noncash, lower cost or market adjustment on physical inventories the mark-to-market on corn commitments resulted in a $3.5 million reserve and was $1.3 million more negative than a year ago. As a result, total gross loss was $1.4 million improving from a gross loss of $2.5 million in Q4 2023.

In Q4 2024, we recognized final Eagle Alcohol acquisition-related expenses of $5.7 million of which $5 million was noncash compared to $700,000 in Q4 of 2023.

Q4 2024 asset impairments were $24.8 million. This consists of $21.4 million for the cold idling of our Magic Valley plant and $3.4 million on intangibles related to the integration of certain Eagle Alcohol activities. This compares to $6 million related to goodwill associated with Eagle Alcohol in Q4 2023.

Our consolidated net loss was $41.7 million, including the $30.5 million asset impairments and acquisition-related expenses compared to a net loss of $18.9 million including net expenses of $6.7 million in asset impairments, acquisition-related expenses and the USDA grant in Q4 2023.

Adjusted EBITDA was negative $7.7 million including the $3.5 million in realized losses on derivatives for Q4 2024. This compares to positive $3.5 million including $2.3 million in realized losses on derivatives in Q4 2023.

As you will recall, the best way to determine the derivative value or obligation to be realized in the future, measured as of a specific date is to note the amounts on our balance sheet. The net derivative asset or liability reflects what Alto would realize if we [liquidated] all of our positions as of that specific period end date.

For December 31, 2024, our derivative net asset position was $2.1 million. As of December 31, our cash balance was $35 million and our total loan borrowing availability was $88 million, including $23 million under our operating line of credit and $65 million, subject to certain conditions under our term loan facility.

We used $3.5 million in cash flow from operations in 2024. We invested $11.1 million in CapEx in 2024. We recorded $34.6 million in repairs and maintenance expense in line with our 2024 estimate. In summary, our restructuring has improved the company's financial position. We realized over $30 million in asset impairments and prior acquisition-related expenses, resetting our base. We also reduced our expense run rate by $8 million annually.

Combined with our improved performance at the Pekin wet mill, our synergistic acquisition of premium liquid CO2 processing and our entry into the European market, we are optimistic about 2025.

Now I'll turn the call back to Bryon.

Thank you, Rob. In summary, every day, we are focused on exceeding customer expectations in the services we provide and products we sell as well as maximizing the value of our specialty alcohol and essential ingredients. Our recent acquisition of Alto Carbonic bolstered economics and increases asset valuation in the Columbia facility. Our reorganization improves profitability on a more sustainable consist basis and reinforces our commitment to create long-term shareholder value. Operator, we are ready to begin Q&A with sell-side analysts.

(Operator Instructions) Samir Joshi, H.C. Wainwright.

About the carbonic acquisition, how are you planning to balance the carbon sequestration versus the carbon -- like getting the high premium carbon oxide for the beverage industry. Like is there some strategy on that?

So while there may be opportunities for carbon sequestration in the Pacific Northwest, it's not as readily apparent or prevalent as it is in our Pekin location. And this is -- and the Carbonic structure and arrangement is clearly beneficial for us, particularly over the more lengthy period of time under contract. Situation is interesting and unique in the Pacific Northwest, there's just not a lot of supply in CO2, particularly if you look along the Pacific Coast as you've seen in reduction significantly and the amount of CO2 being produced at providers and the like.

So it's a unique market, and most of the product that comes into that region is under a long-haul transportation, which is not efficient. So I put that facility to be in a very unique position to be able to take advantage of the needs that are in and the market demands in that area just by far (inaudible).

Understood. Is this site certified for -- or Medic qualified for the 45Q incentive already? Or is there some more work needed to be done to get that in order?

Yeah, it's very close. I mean there's clearly still work that needs to be done in 45Z. But if you look at the overall score of the Columbia facility that's within striking distance of that requirement. So it's certainly something that we're going to be focusing on. We'll provide you more information as those rules become codified and we can be clear about the opportunity.

Understood. And then for the specialty ingredients or high-value alcohol, I know you said 90 million gallons in '19 -- in 2024 Also, you have the EU export option. Do you know or do you have an estimate of how much of this will be sent to EU versus here? And how does that ratio impact pricing and profitability on this front?

So it -- because of the nature of the product, it actually captures a premium, and it depends clearly on what -- there's not one price for the EU as a whole. Each country and each location has its own requirements. So it's not just an easy layup. That said, it's -- think about this and as a displacement of what otherwise would be sold domestically at fuel.

So it's not necessarily a displacement or use of our high-quality product. And we still -- our goal is to continue to achieve the high volumes that we've been able to do, but it is around -- if you look at the flexibility that's provided by our location in Pekin, our ability to shift between products and be able to take advantage of market improvements and conditions, it provides a great opportunity for us to be able to have a nice profitability in that area or at least revenues in that section and in our operations.

Understood. And then last one, the asset sale versus merger or other strategic options, how far along are these discussions? Have you identified any particular asset that is initially targeted to be divested? Or are you talking to -- like I just to get an idea of where the discussion is on that front?

Yeah. So it's a great question. It's not really productive for us talk to about M&A opportunities and activities. But I want to be clear that we're considering all options and as a part of our ongoing efforts to maximize shareholder value and to better align our long-term value potential of the company. So we'll provide updates effectively when they occur.

That's fair. Thanks for taking my questions, Bryon.

(Operator Instructions) Eric Stine, Craig Hallum.

Could we just go back to Pekin in the CCUS, I know you're juggling a lot of things, you're juggling the length of time it takes for the EPA permit, the more recurring in Illinois. Just trying to think, so you've got -- you expect that to take two years, so that gets you to early 2027.

In that timeframe, you're looking to get financing. Then just thinking about, all right, if you were to then give the green light to the project, remind us how long it would take for that project to be constructed? And what time line we're looking for where this could start to contribute to results? Is it 2029 or 2030? Or is it potentially sooner than that?

Yeah, it's a great question, Eric. And I guess, a little reluctant to give you a specific date. But I would say, however, is that if you -- and then it depends largely on what kind of technology you're using as well, either compression technology and things like that and the Q that you may have to line up depending on which technology you want to apply for.

That said, if you think about the -- do you -- again, your math, it puts you into just for your classics permit approval, if EPA sticks with their commitment, which was two years, right? And we all know how challenging or the things that EPA is having to deal with right now and the number of items in their queue.

That said, if we went with that you would expect that -- I can't speak to the queue with you -- the backup line with regards to the technology. But let's say, it's another one to two years, that's being generous, I'd say, two years. That puts you, what, in 2029, 2030? And you may be able to accelerate, right?

And Eric, you may be able to accelerate if there's a change in people were put down payments on piping and anything else, you've got a green light. There may be opportunities to take advantage of that where others may not. That could be expedited significantly. So again, there's a lot of factors that are going into this. But our eyes on the ball on that and very focused and have a good partner in pursuing this and trying to accelerate as quickly as we can.

Yes. Maybe just turning to the Columbia plant. You mentioned the acquisition. I mean, is that something that had you not made the acquisition, you would have looked to potentially Cold Idle that plant as well? I mean it sounds like now with that acquisition in place, that's off the table. But I mean what kind of was the thought process there based on market conditions.

Yes, I'll take that one. As we talked about in the past, both of our Western assets were particularly challenged due to regional issues, particularly higher corn basis, the smaller size of the facilities. And ultimately, the efforts that we put forth at Magic Valley we'll see high protein and corn oil technology wasn't enough to overcome those regional challenges, particularly accounting for the impact that the additional soy crush had on both carbon and corn oil and protein prices.

So that led ultimately to our decision to [cool idle down] in Q, because you just couldn't overcome that, at least not at this time. But fortunately, with Colombia, they were well positioned, and we were able to leverage the relationship that we have to acquire this CO2 processing facility. And that does -- that's essentially a game changer for the site.

I want to be clear about that. It is a very interesting acquisition that has a very accretive payback for the facility. So we're really excited particularly about the fact that there's an expanded opportunity to increase the business in the CO2 area. I mean right now, we're processing through that facility about 55,000 tons per year. But it has the current capacity go closer to 70,000 and we're only using maybe half of the Columbia facilities CO2 waste gas.

Got it, okay. No, it makes total sense. Maybe last one for me. You mentioned Magic Valley. I'm just curious with that cold idled, I know you were going through the process of potentially going back to CoPromax and whether it was for damages or figuring out best path forward, how does -- I mean, does this impact that process at all changed maybe what we should think the results might be?

I think generally, no, Eric. I think that we've evaluated. It doesn't mean that we won't pursue what we can with regards to addressing issues outside of the plant itself and with technology providers and like. That said, we decided and taken actions needed to do in order to stem the losses and basically to put that facility in place until there's an opportunity to realize more of that value and whether that occurs through an asset sale or other unique opportunities that there's a significant change in the marketing.

But for right now, the facility is idled and the staffing investments have been significantly adjusted well there. So we're running that as a terminal, as we said in our -- in its offsetting, its beneficial in that regard because it's offset some of the fixed costs other ways have to carry even with the Magic plant.

Okay. Thanks a lot.

This concludes the question-and-answer session. I would like to turn the conference back over to Bryon McGregor for any closing remarks. Please go ahead.

Thank you, operator, and thanks again, everyone, for joining us today.

On a final note, we will be participating in the 37th Annual Roth Conference later this month and look forward to seeing those in attendance. We appreciate your ongoing feedback and your support. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.