ALTO - NASDAQ

Good day, and welcome to the Alto Ingredients First Quarter 2025 Financial Results Conference Call. Our 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 with Alliance Advisors Investor Relations. Please go ahead.

Thank you, Darcis. And thank you all for joining us today for the Alto Ingredients fourth quarter 2025 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 May 14, 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, May 7. 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 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 consolidated net income or loss before interest expense, interest income, provision for income taxes, asset impairments, unrealized derivative 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. During Q1 2025, gross margin and adjusted EBITDA improved compared to Q1 2024. This reflects our operational uptime and our carbon optimization initiative driven by our acquisition on January 1 of a beverage-grade liquid carbon dioxide processing plant adjacent to our Columbia facility. The combined ownership of both assets has reduced management and staffing costs while enhancing operational coordination and overall productivity. We continue our optimization efforts, which should facilitate longer-term feed sales commitments and expand premium liquid CO2 sales. As expected, this acquisition improved the Columbia facility's economics and increased its asset valuation. Also, we right-sized staffing to align with our current footprint. During Q4 and Q1, we reduced headcount by a total of 16%. As a result, we expect to save approximately $8 million annually with the financial benefit starting in Q2. Although we have completed our planned reorganization, we will continue to evaluate opportunities to reduce expenses. We are prioritizing quick return projects, including water and energy optimization that would reduce utility costs and lower our carbon footprint. Results of operations at our Pekin campus helped to illustrate Pekin's flexibility to shift production quickly to capitalize on market trends. For example, to diversify our revenue streams, we earned our ISCC certification in late last summer and began exporting qualified renewable fuel to the European markets beginning in the fourth quarter. This certification has enabled us to access higher-margin sales. During the first quarter, we experienced solid demand for ISCC certified renewable fuel priced at a premium to domestic fuel-grade ethanol. We grew ISCC sales as a percentage of our total renewable fuel volume sold at our Pekin campus in Q1. As a result, ISCC sales partially offset some domestic market challenges. Premiums on domestic high-quality alcohol were generally lower in Q1 than in the same quarter last year, reflecting increased competition in the market. Also, prices for essential ingredients declined because of the rise in soybean oil supply to support renewable diesel demand. In late March and early April, we completed our scheduled seasonal outages at the Pekin facilities. The repairs and maintenance successfully achieved our goal of sustaining the improved plant utilization rate set a year ago. Also in early April, during a period of rapidly rising river levels, our peak and load out dock was damaged, negatively impacting production, logistics and campus economics. We implemented temporary solutions, and we are now back to full operation. We are currently assessing our long-term remediation options and working with our insurance carrier to mitigate the financial impact. We'll provide further updates on our next call. Now I'll review market and regulatory trends. So far in 2025, we've experienced typical seasonal market patterns with spreads between corn and ethanol prices comparable year-over-year. These crush margins improved sequentially each month over the first quarter. We've seen spread improvements in April resulting from lower production rates associated with industry-wide scheduled spring plant outages. Nonetheless, margin expansion has been kept largely in check by high inventory levels with production outpacing demand. Without a meaningful reduction in ethanol supply, substantial crush spread improvements may be constrained. And although we are optimistic that margins will continue to improve with increases in demand from the summer driving season, concerns over tariffs and Chinese vessel restrictions have introduced greater export uncertainty. While these macro events are largely beyond our control, we will continue to minimize the impact as effectively as possible. On a positive note, as I mentioned earlier, we've seen solid exports to date. In addition, we applaud the EPA's recent E15 fuel waiver allowing blending through May 20. While this is temporary, it is expected that the agency will issue new waivers, effectively extending the allowance through the summer. Further, we're optimistic that pending national legislation will be passed later this year, resulting in long sought-after permanent adoption nationwide. There's also growing support for E15 adoption in California. The California assembly recently passed a bill aimed at accelerating the approval process for E15 fuel blends. Governor Newsom has also directed California Air Resources Board to expedite its review, sign potential benefits such as lower gas prices and reduced emissions. According to the latest EIA reports, California 13.4 billion gallons of annual fuel consumption represents 11.6% of the national volume. A 5 percentage point increase from 10% to 15% in ethanol blend in California alone would result in an additional 670 million gallons sold annually. Further, it is estimated that the national adoption of year-round E15 blending could boost ethanol demand by 5 billion to 7 billion gallons. In short, since the U.S. has approximately 18 billion gallons of ethanol production capacity and domestic demand of approximately 14.4 billion gallons currently, the national adoption of year-round E15 combined with strong exports would utilize over time much of the excess capacity and produce greater margin stability. Beyond the demand side, we believe E15 adoption would also have positive economic and environmental impacts, reducing greenhouse gas emissions, supporting farmers and lowering consumer fuel costs. Turning to our Pekin campus. Illinois Bill SB1723 is under consideration to prevent CO2 sequestration activity that underlies or passes through a sole-source aquifer. This would include the Mohammad aquifer, which underlies multiple counties throughout the state, including an area currently contemplated for storage in our Class 6 permit application. Together with Vault and other potentially affected parties, we are working with elected officials to address concerns to minimize or eliminate the potential legal impact of this legislation on our CCS initiative. We are also developing options to ensure that we are optimizing the value of our CO2 production no matter the outcome of this legislation, including relocating the proposed storage location for CO2. Further, we're working with Illinois state leaders on SB 41, the Clean Transportation Standard Act to develop clean ground transportation standards to reduce the lifecycle carbon intensity of fuels like the standards adopted on the West Coast. With that, I'll turn the call over to Rob for our financial review.

Thank you, Bryon. I'll review the financial results for the first quarter of 2025 compared to the first quarter of 2024. We sold 89.6 million gallons compared to 99 million gallons, reflecting our decisions to idle Magic Valley and to rationalize our warehouse break bulk business. Net sales were $227 million, $14 million lower than the same quarter year-over-year due to the combined impact of both positive and negative factors. While the market crush margin only increased by $0.01 or so year-over-year, improved domestic market prices for ethanol increased our overall average sales price per gallon to $1.93 in Q1 2025 compared to $1.86 in Q1 2024. Also, greater sales of ISCC exports delivered a $1.4 million benefit from premium prices versus domestic renewable fuel sales this quarter. However, a decline in high-quality alcohol premiums equated to $4.6 million in lower sales and the drop in return for essential ingredients to 48% from 50% had a negative impact of $3.8 million, which most affected our Pekin campus results. COGS were $15 million lower than the same quarter year-over-year due to the following reasons; we idled Magic Valley, accounting for $10 million of the decrease. We also marketed less volume in proximity to the Magic Valley plant, resulting in a 5 million gallon decrease in third-party renewable fuel volumes sold. We lowered repairs and maintenance expenses by $1.2 million. While net realized derivative gains were negligible for both quarters, our unrealized derivative gains, which are part of COGS, but excluded from adjusted EBITDA, were $1.6 million in Q1 2025 compared to $3.2 million in Q1 2024, resulting in a $1.6 million negative swing year-over-year. Gross loss improved $1.8 million from $2.4 million. We lowered SG&A by $700,000 to $7.2 million, reflecting the conclusion of our Eagle Alcohol acquisition-related expenses in 2024. Interest expense increased $1.1 million, reflecting higher average outstanding loan balances and interest rates. Our consolidated net loss was $11.7 million for both periods. Adjusted EBITDA improved to negative $4.4 million from negative $7.1 million in Q1 2024. This improvement includes $4.8 million saved by idling Magic Valley and a $2.9 million improvement at our Columbia site, primarily reflecting our ownership of Alto Carboni. Our net derivative asset or liability reflects what Alto would realize if we liquidated all of our positions as of that specific period end date and is the best way to determine the derivative value or obligation to be realized in the future measured as of a specific date. For March 31, 2025, our derivative net asset position was $3.8 million. As of March 31, our cash balance was $27 million, and our total loan borrowing availability was $77 million, including $12 million under our operating line of credit and $65 million subject to certain conditions under our term loan facility. During the first quarter of 2025, we used $18 million in cash flow from operations. We invested $7.3 million in our acquisition of Alto Carboni. We spent $500,000 in CapEx, and we recorded $7 million in repairs and maintenance expense, in line with our 2025 estimate of $32 million. In summary, our entry into the European ISCC markets, our cost restructuring efforts and integration of Alto Carbonic has improved our financial position, enabling us to better weather the typical low to negative operating margin environment in Q1 and to navigate unexpected challenges. Now I'll turn the call back to Bryon.

Thank you, Rob. We continue to execute our long-term plan to diversify revenue and mitigate the volatility of commodities. We have leveraged our plant flexibility and our efforts are working. New initiatives in beverage-grade CO2 and ISCC renewable fuel have been economically beneficial. Additionally, our measures to become more efficient have reduced our expense run rate going forward. The regulatory environment remains dynamic, yet there are encouraging developments, including the increasing state and potential national adoption of year-round E15. Additionally, the Illinois Clean Transportation Standard Act presents exciting possibilities to further support industry growth and innovation. Our team will continue to proactively evaluate alternatives for revenue streams and value, leverage our flexible and unique plans and commit to driving long-term shareholder value on a sustainable and consistent basis. With that, operator, we are ready to begin Q&A with sell-side analysts.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from Sameer Joshi from H.C. Wainwright. Please go ahead.

Good afternoon. Thanks for taking my question. Just a quick one on the acquisition completed in January, the liquid CO2. It was expected to be immediately accretive. Was it accretive during the first quarter?

Yes. It's a good question. The Columbia facility and Carbonic integration, it moved ahead as we expected. We have already benefited from increased communication and operation synergies. We immediately eliminated redundant accounting and management buses. While we typically don't speak specifically about plant results, the Columbia assets improved $2.9 million compared to Q1 2024. So we are seeing significant positive benefits from that acquisition.

Understood. And then the $8 million in annual savings that I think will be fully realized in 2Q according to the commentary, would it mostly come from the operations -- operating expenses? Or is there any portion of cost of goods sold overhead that will also be reduced...

Yes. Thank you for the question. So the anticipated benefit of $8 million workforce reduction to better align with our current company footprint, you'll see about a 13% reduction in both cost of goods sold and SG&A respectively. And we expect the benefit to start to be realized in Q2 2025.

Okay. Got it. And would you just elaborate or just give us a little bit more insight into the CCS impact that the United bill might have on your -- I mean you briefly described it, but just wanted to understand how it could impact your plan?

Sure. So it's difficult to assess at this time, Sameer, it's so dynamic. That said, if it goes through as I generally expressed it in the prepared remarks, it's a fairly short and limited bill as currently drafted, and it would prohibit drilling through -- in summary, drilling through above or through the aquifer directly. So you have to go around it. And our current siting under our Class VI is contemplates relocating through or going through the aquifer. So we would have to, at a minimum, relocate that well.

Okay. Thanks a lot.

Which would potentially extend you'd have to then resubmit or reimend your -- at a minimum, you have to amend your Class VI permit to adapt to those changes. And again, there's other work that we will be doing. As I mentioned in our prepared remarks is the focus is really around, again, optimization and working with our partners as best we can to address this issue.

Got it. Understood. And then the last one, you mentioned the Beacon load dock damage and the temporary solution. What was the estimated cost of that temporary solution? And do you have any estimate on what it will cost to like more permanently repair that?

Yes. Just as a recap, our peak and barge dock failed in early April due to quickly rising river levels. That essentially caused a pretty quick logistical challenge in moving both our liquid and our dry products. So we did take the dry mill offline for a week, significantly reducing our production volume during that time period, as a shout out to the operations and commercial teams who quickly made the necessary short-term adjustments logistically to get the product flowing again. And that included a temporary load out dock for liquids, and we're also working with the neighboring transload facility with respect to our DDGs. We are currently assessing our long-term remediation options, and we're working with our insurance carrier to mitigate the financial impact. We will provide more updates on the next call. And also, I'll just add that we are assessing what the long-term option will be in regards to what equipment that we can salvage, if any, and if we would replace it with a new floating load out dock.

Understood. Thanks for taking my question so I will turn it over.

Thank you.

Thank you. [Operator Instructions] Your next question comes from Eric Stine from Craig-Hallum. Please go ahead.

Hey, guys. This is Luke on for Eric. Thanks for taking my questions. So first starting with Magic Valley. You mentioned in the past corn prices as being a driver of unprofitability and leading to the ultimate decision to cold idle. So we were wondering these conditions consistent with other production sites in the region around Magic Valley or are they more specific to just Alto's logistical and cost structure?

I think it's pretty plant specific and location specific. So I guess, maybe to answer your question differently is if you had a different size planned corn facility and in near or adjacent to our Magic Valley facility, they would be dealing with the same kind of issues and consequences. Corn is grown in the area. There is some local corn that's not sufficient to address the need. And the cost of the logistical cost of bringing corn through that area with only one railroad, no competitors makes it very difficult to be able to get competitive pricing for delivery corn. And so while you can support and justify the services that are provided by that facility to the local market, there's more than sufficient demand if you're shipping within either Salt Lake City or all the way over to Boise, it covers a lot of area. There is there are other alternatives for cheaper sources of ethanol into that area. And so there really wasn't an opportunity to be able to -- really the solution would be if you wanted to run ethanol out of that facility would be find a different source of feedstock.

All right. That’s helpful.

So you can avoid that premium that you otherwise have to pay for corn.

Right. Thank you. And just to follow up quickly on that. I mean, given we've seen some slight market recovery in the past couple of months here, it would be helpful if you could just characterize what sort of sustained improvement you need to see in the market to potentially justify a restart at Magic Valley. And if that's something that's potentially still on the table for 2025? Or are we still a long ways off in just in terms of cost there?

I think that the fundamentals that we were evaluating a couple of years ago have changed dramatically, right? We've made the decision to proceed with the high protein and the higher corn oil system where you on a logistics could see a material difference and benefit of doing so. And I think the fundamentals, particularly around where corn prices are where they are today in low prices, makes it very difficult to be able to do that on a same basis. If you were looking at corn prices of $8 or $10 a bushel, right, at the high end, it actually makes it easier to justify operating that facility, because you're also getting such a better return for your co-products, your proteins and your oils. Anything you want to add to that, Rob?

Yes. I'll say, if you recall, that particularly challenged with we expected to get a lot more revenues from the expanded high-protein technology. But with the increased soy crush in the market, which we did not anticipate increasing supply levels that had kind of a negative compression on protein prices. So while the market conditions can change and we'll continue to monitor and evaluate those, things would have to change for a fair amount of time before we consider bringing that plant back online.

And I think you'd have to really address the question around sourcing your feedstock would you want to continue to do that with corn or would you be looking to other sources like either a mixture of wheat and corn or moving to wheat or some other including some other alternative altogether? And if you can do so when you wanted to spend the money on that, I think you'd actually have a fairly viable competitive facility, also be eligible for P5 RINs and be advanced biofuels. So there's a lot of benefits to think about that, but it's a significant capital to make that change.

Great. Well, thank you. I appreciate the color. That’s it for us.

Thank you.

That does conclude our question-and-answer session. I would now like to turn the conference back over to Bryon McGregor for any closing remarks.

Thank you, Darcy. Thanks again, everyone, for joining us today. We appreciate your ongoing feedback and support. Have a good day.