Good day and welcome to the Alto Ingredients' Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.

Thank you, and thank you all for joining us today for the Alto Ingredients third quarter 2023 results conference call. On the call today are President and CEO, Bryon McGregor; and CFO, Rob Olander. Alto Ingredients issued a press release after the market closed today, providing the details of the company's financial results. The company has also prepared a presentation for today's call that is available on the company's website at altoingredients.com. A telephone replay of today's call will be available through November 13th, the details of which are included in today's press release. A webcast will also be available at Alto Ingredients' website. Please note that the information on this call speaks only as of today, November 6th. You are advised that time-sensitive information may no longer be accurate at the time of any replay. Please refer to the company's Safe Harbor statement on Slide 2 of the presentation available online, which states that some of the comments in this presentation and conference call constitute forward-looking statements and considerations that involve risks and uncertainties. The actual future results of Alto Ingredients could differ materially from those statements. Factors that could cause or contribute to such differences include but are not limited to events, risks and other factors previously and from time-to-time disclosed in Alto Ingredients' filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements. In management's prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believes these measures will assist investors in assessing the company's performance for the periods reported. The company defines adjusted EBITDA as unaudited net income or loss before interest expense, interest income, provision for income taxes, asset impairment, loss on extinguishment of debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense. To support the company's review of non-GAAP information, a reconciling table is included in today's press release. On today's call, Bryon will provide a strategic plan and activities review and Rob will comment on our financial results. Then Bryon will wrap-up and open the call for Q&A. It is now my pleasure to introduce Bryon McGregor. Please go ahead, sir.

Thank you, Kirsten. Thank you all for joining us today. As the new CEO, I've spent the last 90 days on the road meeting with customers, investors, and the dedicated teams of our facilities. I've been listening, learning, and collaborating to reinforce our continued mission: to profitably provide ingredients that make everyday life better. I'm proud of our talented team and our overall accomplishments to date. We continue to successfully transform our company from a supplier of low-margin commodities to a provider of high-margin differentiated specialty alcohols and essential ingredients in consumer, pharmaceutical, food, beverage, and industrial products. This strategic realignment has greatly improved our financial profile over the past three years. We continue to make good progress, although we are subject to intermittent operational and commodity market challenges. Q3 2023 results reflected a positive contribution from improved ethanol crush margins, particularly in September, as corn basis declined as the harvest commenced. However, unusually high unscheduled downtime lowered our anticipated production volumes and shifted our mix towards lower-margin products. Combined with higher repair and maintenance costs, we did not generate the results we anticipated. Despite these operational challenges, we delivered positive adjusted EBITDA in Q3 2023 and a significant improvement over Q3 2022. We expect the extensive repairs and maintenance work completed during the quarter to benefit future periods' uptime and reliability going forward. Rob will provide greater detail in a few minutes. First, I'll review our various initiatives. In early 2023, we outlined our revenue-enhancing and cost-reducing capital initiatives. Each project has a different timeline, return on investment, and risk profile. As such, we've intentionally evaluated and prioritized funding needs and options for each project separately, with the overarching goal of remaining fiscally responsible. We have already completed several of our short-term projects. These include expanding our high-quality alcohol products, installing additional corn storage capacity, and replacing boiler equipment at our Pekin site, along with other various upgrades in our plant systems. For our more capital-intensive projects, we have engaged experts, third-party front-end engineering and design firms, or FEED firms, to conduct deeper analyses on scope, timing, and cost. These projects include primary yeast; carbon capture and sequestration, or CCS; natural gas pipeline; cogeneration; and biogas conversion capabilities. Here are a few material updates. Beginning with our specialty alcohol sales, our 2024 contracting season is going well. We are on pace to exceed 2023 delivered gallons at premiums to fuel-grade ethanol. As mentioned previously, our goal is to move up the value chain and capture a larger share of the beverage-grade market, where our high-quality, low-moisture, and location differentiations create competitive advantages. Regarding Magic Valley, we continue to line out this facility to achieve the performance guarantees of the installed high-protein and corn oil technology. While this process has taken longer than we anticipated, we remain resolute in our efforts to improve the consistency of the facility's product output and optimize the plant's production. We continue to evaluate the rollout of the high-protein and corn oil technology at our other locations. In the interim, we have achieved comparable improvements in corn oil yield at our Pekin dry mill through process optimization unique to its ICM design. Regarding primary yeast, we have just received preliminary results from our FEED study. While the findings are promising, inflationary pressures and supply chain constraints have materially impacted the installation cost with increases of over 70% from our original estimate, and extended our construction period from 18 to 27 months. As a partial offset to this change, the anticipated operational costs have declined, and the market price for primary yeast has improved. In short, we are evaluating this project and exploring funding alternatives to make this unique opportunity a reality. Considering these results, we are critically reviewing all our projects to better ensure that the construction costs reflect current market conditions. We remain fiscally-vigilant given the current challenging capital market environment and are giving priority to those projects with sustainable long-term profitability. As previously reported, we completed the installation of our new grain silo in the second quarter of 2023. We have seen the benefit of this expanded capacity and reduced costs for delivered corn and lower operating costs through more timely silo clean-outs. We expect the added capacity to further benefit operations this winter. Regarding the natural gas pipeline and cogeneration capabilities, we are now negotiating engineering, procurement, and construction contracts. We continue to make progress on our carbon capture and sequestration project. With our development partner, we are designing an Alto-dedicated pipeline and sequestration system located within a relatively short distance of our facility, materially reducing installation costs and decreasing external risks. Based on the current economic environment, the preliminary FEED study findings and changing capital requirements, we have extended our EBITDA expansion goals by six to 12 months. We are now targeting to increase annual adjusted EBITDA incrementally by over $65 million by the middle of 2026 with the completion of our near-term projects and by approximately $125 million by year-end 2027 when our yeast, CCS, and other long-term initiatives are fully realized. Before I turn the call to Rob, I'll mention that we remain steadfast in our sustainability efforts to be a good community steward while addressing our customers' current and future needs. This quarter, our Pekin facility earned Safe Food/Safe Feed, another third-party product safety certification, for our corn meal and germ products, further differentiating our products and services. We plan to publish our sustainability report publicly by year-end and look forward to providing key disclosures in this format on an annual basis. Now, I'll turn the call to our CFO, Rob Olander.

Thanks, Bryon. Due to strong crush margins, our third quarter gross profit improved over the same period in 2022. However, there were several factors that substantially tempered results in the current period. Corn basis levels increased by $0.31 compared to Q2 2023, illustrating a sharp increase sequentially and by $0.03 compared to Q3 2022, demonstrating a similar supply and demand profile as last year. In addition, as Bryon noted, we incurred significant increases in unexpected repair and maintenance costs. The associated downtime reduced anticipated production volumes. This adversely impacted our hedging strategy to lock in favorable market crush spreads, which resulted in derivative losses of $3.7 million and shifted our product mix to more wet ingredients that carry lower margins. Year-to-date, our specialty alcohol sales were impacted by lower consumer demand. We are working with our customers to roll a portion of the 2023 contracted volume commitments into 2024. As such, sales and profitability were lower than expected for the third quarter. Additionally, we incurred higher feasibility and legal costs associated with our strategic capital projects. On the positive side, during the third quarter, we received an additional $2.8 million cash grant as the USDA closed out the Biofuel Producer Program. Adjusted EBITDA was positive $4.7 million for the third quarter compared to negative $20.6 million for the same period in 2022. Looking ahead to the fourth quarter, although crush margins remain positive currently, we will refrain from providing projections for several reasons. First, during Q4, customer commitments are not solely based on market demand; rather they are reflective of buyers managing their fuel-grade inventory balances with the goal of minimizing inventory levels by year-end. Second, winter buying patterns tend to start the day after Thanksgiving and typically demonstrate a deep decline in volumes from Q3. Third, with an intention to take advantage of higher crush margins in Q3, we postponed our planned winter facility outages until October. Fourth, as we fill our fixed-priced specialty alcohol sales booked for the entirety of 2024, we are also building our hedge portfolio. The derivatives we used to preserve the margin on these sales don't qualify for hedge accounting treatment, and the quarterly results can be materially impacted by mark-to-market unrealized gains and/or losses depending on commodity price swings. In summary, we faced unique factors in Q4 that cannot be forecasted with confidence. Therefore, it would be improperly speculative to guide investors towards a particular expectation in this regard. With the goal of improving our facilities for the long haul, in the second half of 2023, we have undertaken numerous repair and maintenance projects, which have bettered our position heading into 2024. Regarding liquidity, during the third quarter, cash flow from operations was $23 million. Our quarterly capital spend was $7 million, bringing our year-to-date investment in our plants to $25 million. As of September 30, 2023, our cash balance was $26 million, and our total loan borrowing availability was $118 million to support business operations and growth initiatives. Our borrowing availability includes $53 million under our operating line of credit, $40 million under our term loan facility, and an option to request up to an additional $25 million under the facility. With that, I'll turn the call back to Bryon.

Thank you, Rob. Throughout our strategic realignment, we have been committed to creating and pursuing opportunities that target long-term profitability and maximize shareholder value. While the path has been and will continue to be dynamic, we remain agile and financially prudent while continuing to capitalize on the most promising and profitable opportunities. We remain enthusiastic about our prospects and confident in our long-term growth strategy. Now, I'd like to open the call to questions from our sell-side analysts. Operator?

We will now begin the question-and-answer session. The first question today comes from Eric Stine with Craig-Hallum. Please go ahead.

Yes, good afternoon, Bryon and Rob. It's Aaron on for Eric. Thanks for taking the questions.

Hi Aaron.

Hello. So, maybe first for me, just on the six to 12 months kind of timeline, you called out yeast. I mean, are there other certain areas you can point to that are kind of driving that? And then just maybe speak to some of the confidence you have that we don't see extensions further than that? And then just on high pro at Magic Valley, did that reach full capacity in the quarter? And just kind of some updated thoughts on the rollout to other plants there, too, please?

Sure. So, that extension from six to 12 months reflects clearly the yeast project, but it also includes extending out the implementation of the high pro installations. We want to make sure that we see that through to a successful completion before we roll it out. There are many things that we're learning in the process. It has taken longer than we anticipated, but as we mentioned in the prepared remarks, we have seen success. The challenge is lining up that success across at full capacity. So, we see good protein levels, we see good corn oil levels, but being able to have those aligned with the full capacity all at the same time on a sustainable basis has been a bit of a challenge. But we continue to chip away at it and make good progress. Therefore, we remain optimistic about that. That said, we want to make sure that it's fully achieved what it needs to achieve before we roll that out to our other facilities. Did I cover your questions, Aaron?

Can you provide more details on carbon capture? Are you still expecting a similar contribution? Have there been any changes in your go-to-market strategy or any updates regarding legislation or regulations?

It's clearly a dynamic situation. We're observing a lot of activity and changes in the space. We're excited about the options still available to us and are currently negotiating finalized documentation on sequestration. We're also continuing to secure funding for the installation of the compression. Our analysis to date supports this project, which we believe will be incredibly transformative. It aligns well with our overall objectives, and the site is a perfect fit. We're enthusiastic about the direction we're heading and are making significant progress. There is some work underway, and we look forward to sharing more information, but it would be unwise to disclose too much at this moment. However, as we achieve significant milestones that are suitable for public announcement, we will be happy to share that information.

Thanks for the information. I have one last question regarding specialty alcohols. You've mentioned some successes with contracting so far, and you hinted at some potential for 2024. Can you provide any insight into the division between spot and contracted as we look towards next year?

So, I think through Q3 of this year, we think we're running at about 58 million or 70 million, what's the number?

We're tracking closer to 85 million for 2023 with the falloff in demand, but we're a good portion of the way of contracting for 2024 and we are on track to achieve the 90 million gallons for 2024. And some of the volume and consumer demand that has fallen off for 2023, we are in the process of working with several customers to roll a portion of that volume forward into 2024.

Understood. Thanks for taking the questions. I'll turn it over.

Thanks, Aaron.

Thanks, Aaron.

The next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you guys. Good afternoon. Bryon, any additional color on what caused some of the extended downtime? Was it work that was going on at the Pekin facility or some other locations?

You may recall that we typically plan the wet mill outage every 18 to 24 months because it is a major shutdown. This isn't just a brief closure for maintenance; it lasts about one to two weeks. During this downtime, we invest a significant amount of capital in repairs and improvements to the facility. When we last spoke in our earnings call, we mentioned our outlook. We usually schedule the outage in August, as we've observed a decline in corn supply over the past couple of years, resulting in high basis and corn prices compared to ethanol prices. Therefore, it makes sense to take the facility offline during this period to reduce losses and capitalize on that situation. Given this year’s margins, particularly for crush, and the availability of additional local corn supply, we decided to postpone the wet mill outage to the first quarter of next year, specifically April. Nevertheless, some preparations were necessary beforehand, leading to capital expenditures for equipment and materials that were recorded in the third quarter and will be utilized during the upcoming shutdown. Additionally, we encountered some water balance and dryer issues. As Rob pointed out, the combination of these factors resulted in increased repair and maintenance, lower production, and decreased sales. The quality of sales was also significantly affected, leading to a considerable impact on what could have been a much stronger quarter. That said, these repairs were timely, and we anticipate they will greatly benefit the plants moving forward, especially the wet mill. However, there were impacts on other plants that were perhaps less significant. While I wouldn't characterize it as a perfect storm, we did face a series of operational challenges across all three plants this quarter, influenced by seasonal temperature variations and other typical summer events.

Got it, understood. Thank you for that Bryon. And then in the press release and in your commentary, you highlighted potential funding needs. Just to clarify, are these for projects that you walked us through in your commentary or do we potentially also have working capital-type funding needs that need to be addressed?

Yes, I'll provide a general comment and then Rob can elaborate. We have sufficient working capital for the company and its operations. However, we will require additional capital to advance some projects, particularly the yeast project, which is expected to cost significantly more than we originally anticipated. We are currently engaging with several interested parties and vendors to help make this a reality.

I agree.

Got it. Thank you for that. And just one last one, I guess, for me. On the third-party renewable fuel gallons, it looks like year-over-year decline on that front. Is that just market situation or is that something a bit more, I guess, permanent in terms of how you are focused on bringing sort of other products and improvements to the overall business?

Yes, I'll take that, Amit. Third-party volumes declined year-over-year. As you recall, we did sell our California plants and we also no longer provide marketing services for the two other non-owned ethanol plants. Additionally, in Q3, we also had a bit of a timing issue on some of the third-party volumes. They were lower due to product in transit that did qualify to be recognized as sales in Q3 but will be recognized in Q4.

Okay, understood. All right, I'll take my other questions guys. Thank you so much. That’s all I had.

Thanks for that.

Thanks.

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

Thank you, and thank you all again for joining us today. We hope to see you in New York in November. Have a nice day.

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