Welcome to Alto Ingredients First Quarter 2022 Results Conference call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.

Thank you, Vaishnavi, and thank you all for joining us today for the Alto Ingredients first quarter 2022 results conference call. On the call today are Mike Kandris, CEO; and Bryon McGregor, CFO. Alto Ingredients has 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 16th, 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 information on this call speaks only as of today, May 9th, and you are advised that any time-sensitive information may no longer be accurate at the time of the 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 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 period being reported. The company defines adjusted EBITDA as unaudited net income or loss attributed to Alto Ingredients before interest expense, interest income, provision or benefit 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 was included in today's press release. On the call, Mike will begin with some highlights of the financials and review of our vision and quarterly activities. Bryon will then provide additional detail on our Q1 2022 financial results. Then Mike will wrap up with a summary before opening for the Q&A. It’s now my pleasure to introduce Mike Kandris, CEO. Please go ahead, Mike.

Thank you, Kirsten, and thank you, everyone, for joining us today. I'm pleased to report that our further diversification into specialty alcohols and essential ingredients has provided us with a buffer against the macroeconomic challenges and weak renewable fuel crush margins we experienced in the first quarter. As a result, we were able to generate positive gross margin and adjusted EBITDA. We remain focused on managing the areas of our business within our control by executing on our strategic goals, investing for future growth and diversifying and high-grading our product offering. During the quarter, we continued to make good progress on our strategic plans. In January, we acquired Eagle Alcohol, an established leader in premium alcohol distribution. This downstream entity specializes in small package products preferred by most of the premium grain neutral spirits companies. As such, Eagle expands our scope of offerings, broadens our target customer base, increases our commercial opportunities and accelerates our ability to capture additional high-margin markets. Already, we have begun leveraging Eagle's capabilities, including enhancing our distillation process and optimizing our production capabilities. The integration is progressing on track, providing opportunities to focus on expansion opportunities and leveraging Eagle's strong distribution and sales services. In February, we expanded our certification portfolio by qualifying for two additional internationally recognized certifications at the Pekin campus, one for active pharmaceutical ingredients and the other for the use of excipients. Combined with the certifications we received in 2021, these new certifications now create redundancy across the entire Pekin campus. Further, it increases Alto's appeal to high-margin customers that use high-grade alcohols in pharmaceuticals, health, home and beauty, and distilled spirits that require documented high-grade products on a consistent basis. By achieving these standards, we are producing a highly sought-after product. As a result, we are expanding existing relationships and attracting new customers domestically and in the growing international markets. As previously reported, we restarted our Magic Valley facility in Q4. In Q1, we made progress installing our CoPromax high-protein solution. We expect to see initial benefits in the second half of this year from the corn oil extraction system to the tune of $4 million on an annualized basis in EBITDA. We expect the protein enhancements to be completed by early 2023, producing an additional $5 million annually in EBITDA based on current market prices. As we shared previously, we intend to reinvest further in diversification and other capital market strategies over the next few years. Regarding Eagle, we expect the base business to contribute around $4 million in EBITDA for 2022. Additionally, we plan to invest $5 million this year to further optimize our specialty alcohol production, quality and distribution. Subject to supply chain constraint delays, we plan to complete our improvements before fourth quarter contract negotiations begin, producing an additional $5 million in EBITDA annually beginning in 2023. We have begun expansion of corn storage at our Pekin campus. This will increase the company's corn buying flexibility, enabling Alto to reduce the need to purchase product at premium prices when farmers and elevators are not shipping corn during holidays or unfavorable weather conditions. This year, we will spend approximately $6 million to complete the storage installation and expect this project to provide over $2 million of EBITDA annually with payback in less than three years beginning in Q1 2023. We continue to reinvest in our facilities by upgrading equipment and operating systems to create efficiency and plant reliability. As an example, and for a nominal expense, we've now added the ability to load corn oil into railcars across our facilities, expanding access to higher-valued corn oil markets. Our capital expenditure projects like this will be more ongoing in nature, and we will provide color on these projects periodically as the year progresses. As previously discussed, once we have successfully completed the installation of the CoPromax system at our Idaho facility, we then plan to roll out these upgrades to our other three dry mills with the goal to have them fully operational by 2025. The total investment plan is approximately $70 million for all four facilities. The benefit is expected to exceed $34 million in EBITDA annually based on current market values. We are exploring additional opportunities for development. During the first quarter, we evaluated investing in a natural gas bypass at our Pekin campus, reducing the price we pay for natural gas by approximately 11% based on 2021 values and bypassing the local utility. This potential gas bypass system would also create the opportunity to sell renewable natural gas produced by the plant directly into the pipeline in the future. We would expect to invest approximately $9 million in 2023 for a return of approximately $5 million in EBITDA annually in 2024 and beyond. With regards to carbon capture and sequestration at our Pekin site, it bears repeating that we continue to evaluate multiple opportunities for this important project and are making progress in advancing our plans. Finally, like carbon capture, we will continue to pursue additional profitable opportunities with a focus on 2024 and beyond and look forward to sharing more details once they are sufficiently developed. I'd now like to take a minute to provide a brief overview of our focus on environmental, social and governance or ESG initiatives. Please note, that in addition to laying out the focus on our future actions much of the work will be increasing the transparency of the work we have already completed to date. An environmental focus is at the heart of Alto Ingredients business and social and governance are simply sound business practices that we have been implementing in the natural course of our business. As a producer and distributor of high-quality bio-based alcohols, we are committed to creating a greener environment. We've launched initiatives, set baselines, and began tracking resources to improve employee health and safety and further reduce environmental impacts. Earlier this year, we created an ESG Committee consisting of senior executives, subject matter experts, and members of our Board. Additionally, we completed an extensive company review with a third-party and refined our strategy. As part of this process, we promoted Stacy Swanson, who led our rigorous certification efforts to head our gate-to-day ESG programs in the newly created position of Vice President of Quality and Sustainability. We look forward to providing periodic updates on our ESG strategy and greater transparency of the many accomplishments to date and of our activities moving forward.

Thank you, Mike. I'll provide some additional color around our results and metrics. For the first quarter of 2022, net sales were $308 million, up from $219 million in the first quarter of 2021, due to an increase in specialty alcohol gallons sold, higher average sales price per gallon, and the addition of Magic Valley production. The average sales price per gallon of renewable fuel largely reflects supply constraints translating into higher ethanol prices. We had alcohol sales of $230 million and $74 million in revenue from sales of our essential ingredients. In the first quarter of 2022, 72 million production gallons were sold, of which 23 million gallons consisted of specialty alcohols in line with our previously stated 90 million gallons of annual contracted volume anticipated for all of 2022. The specialty alcohol gallons sold increased 23% or 4 million gallons over the first quarter 2021, reflecting expanded capacity as well as increased export and industrial demand. The increase in total production gallons sold were partially offset by a reduction in third-party sales as we rationalize certain areas of our third-party business. We experienced a decrease in gross profit of $9 million year-over-year, same quarter. This change is attributable to many factors, including extreme commodity price volatility, drawn out supply chains, rail and operational disruptions, and rising transportation costs and weak renewable fuel crush margins. It is worth noting that our cost of goods sold includes $7 million in non-cash mark-to-market inventory adjustments and unrealized losses recorded on our derivative position for forward positions. Even with these challenges, we delivered a gross profit of $4.8 million for the quarter. SG&A expenses in the quarter were $7.6 million compared to $7 million in the first quarter of 2021, with a slight increase year-over-year being attributable to our acquisition-related accrual for future contingent payments for the Eagle acquisition of $800,000. Net loss available to common shareholders was $2.9 million, or $0.04 per share. This compares to a net income of $4.4 million, or $0.06 per diluted share in the first quarter of 2021. Adjusted EBITDA was $4.4 million, compared to $13.4 million in the first quarter of 2021. Finally, our balance sheet remains clean and strong with cash and cash equivalents totaling $36 million as of March 31, 2022, down approximately $15 million from December 31, 2021, largely reflecting our acquisition of our specialty alcohol distribution facility.

Thank you, Bryon. It is gratifying to experience the positive impact of our transformation so quickly. We have grown our specialty alcohol business, and our diversification has delivered financial benefits. To recap, we began our transformation in the second quarter of 2020. Since then, we have redefined and implemented our strategy. And even with costs associated with the transformation, we still generated over $50 million in net income and $160 million in adjusted EBITDA over that same period. Rather than looking retrospectively over the past two years or the latest challenging quarter, it is clear to see that Alto Ingredients is on the right track and well-positioned to execute on key initiatives in 2022 and beyond. I'd once again like to thank our employees for their commitment to long-term sustainable growth. And finally, I'd like to invite investors to our virtual conferences with H.C. Wainwright in May and Craig Hallum in June. With that, I'd like to open the call for questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Shar Pourreza with Guggenheim Partners. Please go ahead.

Good afternoon, team. It's Constantine Lednev here for Shar. Thanks for taking our questions.

Hi, Con.

Starting off maybe a bit high level, can we get your view on the elasticity of the product pricing that you anticipate with the product lines between ethanol and consumer products? Just maybe what have you seen in terms of implementing end-use pricing adjustments from our customers to account for the corn and crush economics?

Sure. Depending on which product line we're talking about, there are greater relationships and then there are some that make it more difficult to pass some of those costs on. If you actually look at the fuel part of the business, that product is usually sold on an index price and we effectively incur the cost as we grind the corn. So there's a tight relationship between the two, and the costs usually pass on through the system. And really, the only thing that becomes a bit challenging is that what really happens is that crush margin reflects demand/supply balance or imbalances depending on which way it's reflecting. If there's a lack of excess supply of fuel, then you'll see a widening of that spread significantly, and if you see too much of a supply of ethanol, then it starts to tighten against the input cost of corn and the freight associated with that. On the specialty alcohols, those contracts are fixed in price and volume, making it more difficult to pass on some of those costs. Some of the contracts do have allowances for that. But the way that we account for or the way that we handle that and making sure that we lock in that spread is optimal use of tools and other derivatives that allow for the capture of any additional delivery costs to the customer. So, while it's not perfect and probably a little less flexibility, we do what we can to continue to preserve that spread.

Thanks. That's helpful. And maybe as we kind of look at the Eagle Alcohol distribution integration, providing some level of hedging against the commodity in 2022. Do you have any refreshed thoughts on the contracted portion of the product? Are there any updates to securing input costs and margins for the near-term or is that more longer term?

Yeah, I would say that those are probably more long-term. But as I think we mentioned in the prepared remarks, we are on track, and actually we are seeing an increase in demand on a spot basis. And so we're responding to that. We would certainly expect trends to continue to be able to meet or exceed the contracted volume that we stated at the beginning of this year. It’s worth noting that Eagle is also less sensitive to some of those price changes. They're able to pass on freight costs often. So the ability to capture that spread in that business is beneficial as well and less sensitive to some of the constraints that we face with volatile prices.

Excellent. And I think the last one that I have is on just the growth opportunities from the new co-product systems that are being installed in the efficiency improvements due to the near-term economics impact the investment decisions at all just given the backdrop, or is it still on track as you fourth quarter?

Yes, we're still pretty much on track with the projects. We feel we're in a position to where we can continue to do these things. They're very important for the future. And I think we definitely want to keep them in front of us. And so far, we haven't pulled back on any of those projects.

Excellent. I'll jump back in the queue. Thank you so much.

The next question comes from Eric Stine with Craig-Hallum. Please go ahead.

Hi, Bryon?

Hi, Eric.

Eric, how are you doing?

Doing well. So maybe just on the HiPro or CoPromax, and maybe it's a little bit early for this, but curious just what you're seeing on the commercial side, whether it's conversations with customers around products coming out of Magic Valley demand you anticipate? And if you're not necessarily in that stage yet, when would you anticipate locking in some of that demand under long-term agreements?

It's unique at Magic Valley. I think we've said before that we have a great relationship with the person we've done commodity marketing with in that area for a long time. We have done a lot of work getting samples out in front of folks and talking to a lot of the customers that they have relationships with. Again, it's a very unique market. It's a growing market. There's a huge demand for protein. Aquaculture is big in that area, and we're extremely optimistic with Magic Valley that we'll be able to market the product as soon as it's available.

Got it. Okay. And then maybe just turning to Pekin, and I guess in your prepared remarks that you mentioned that you had a $5 million project and it was targeted at efficiencies at that plant. So, I mean, we should take that as that's not additional volumes. Is that just – I mean, is it certain systems that would contribute to that efficiency, or what – maybe more detail on that targeted investment?

Yes. That particular project is actually an enhancement of our GNS system to improve the quality of that product. One of the things with Eagle is they have very strong relationships in the beverage space, and in order to take advantage of that, we make a very good product out of our GNS system, upping the grade was something that we felt would be very beneficial. With the help of Eagle, we feel we can penetrate that market further. So that's what that investment is all about. So it's going to be a margin enhancer. And that's really where the added EBITDA comes from.

Got it. That's helpful. And maybe last one for me. Obviously, I'm not going to ask what you think 2023 volumes are contracted. But just what kind of impact do you think having the redundancy of those certifications across Pekin? What type of opportunity that potentially opens up, or maybe conversely, just maybe what you potentially missed out on in 2022 that you might have otherwise had if you would have had those certifications in hand?

Well, I think the certainty of supply to customers is incredibly important. One of the things we're very fortunate with the campus that we have in Pekin is we have two facilities that can produce the high-quality products. It was important that we had that redundancy across the system. If you have a hiccup on one side, you've got the other side to create that redundancy. And that's very important to the customer base. We've talked to several of our existing customers and they see a tremendous value and benefit in having that redundancy.

Got it. Okay. I’ll jump back in the line. Thanks.

This concludes the question-and-answer session. I would like to turn the conference back over to Chief Executive Officer, Mike Kandris, for any closing remarks.

Thank you, operator, and thank you again for joining us today and for your continued support. We are excited about the progress we've made, and we continue as we execute on our strategic plan. We feel extremely optimistic about the future of Alto and look forward to sharing more with you in future quarters. Thank you.

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