Alto Ingredients, Inc. annual report, FY2023

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Alto Ingredients, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. The filing also reports selected fourth-quarter results. Alto produces and distributes renewable fuels, specialty alcohols and essential ingredients, operating five production facilities and reporting Pekin production, Western production, and marketing and distribution segments.

Financial results and liquidity

  • Revenue: $1.223 billion, down 8.4% from $1.336 billion in 2022. Total alcohol gallons sold declined 9% to 382.5 million; the average alcohol sales price fell 6% to $2.47 per gallon. Essential ingredient volume declined 7% to 1.52 million tons.
  • Profitability: Gross profit was $15.7 million (1.3% margin), versus a $27.6 million gross loss in 2022 (negative 2.1% margin). Operating loss was $23.8 million, compared with $61.4 million. Net loss was $28.0 million, or $29.3 million available to common stockholders; loss per share was $0.40 versus $0.60 in 2022.
  • Fourth quarter: Net loss was $18.9 million versus $33.1 million in fourth-quarter 2022. Adjusted EBITDA, a non-GAAP measure, was $3.5 million versus negative $15.5 million.
  • Adjusted EBITDA: Full-year 2023 Adjusted EBITDA was $20.8 million versus negative $5.7 million in 2022. Management’s measure excludes specified items and is not a substitute for GAAP results or cash flow.
  • Cash flow: Operating activities provided $22.0 million, compared with $6.0 million in 2022. Investing activities used $33.0 million, including $29.5 million of property and equipment additions; financing activities provided $7.0 million. Cash, cash equivalents and restricted cash totaled $45.5 million at year-end, including $15.5 million of restricted cash.
  • Liquidity: Working capital was $103.5 million and the current ratio was 2.59. The company reported $33.3 million of availability on Kinergy’s operating line and up to $65.0 million of additional term-loan borrowing for capital projects, subject to conditions. Management believes liquidity is sufficient for at least 12 months from the report date.
  • Debt: Principal borrowings totaled $90.7 million: $30.7 million under Kinergy’s line of credit and $60.0 million under the Orion term loan. The term loan bears 10% interest and matures in 2028; the line matures in 2027. Reported long-term debt, net of discounts and financing costs, was $82.1 million. Net interest expense rose to $7.4 million from $1.8 million.

Changes from the prior comparable period

  • Results improved substantially as lower corn costs and improved crush margins helped lift gross profit by $43.2 million and full-year Adjusted EBITDA by $26.5 million. The company nevertheless remained loss-making.
  • Sales fell amid lower average prices, reduced total alcohol sales and lower essential-ingredient volumes. Sales were also affected by Magic Valley’s first-quarter 2023 hot-idle and unusually high unplanned Pekin downtime in the third quarter.
  • USDA Biofuel Producer Program grant income fell to $2.8 million from $22.7 million; the filing says these grants will not recur. Asset impairment charges were $6.5 million, including a full $6.0 million impairment of Eagle Alcohol goodwill.
  • Operating cash flow increased, but cash and restricted cash together declined $4.0 million. Long-term debt, net, increased 20.1% to $82.1 million.

Outlook, management commentary and risks

  • Management described the 2024 outlook as favorable, citing corn inventories, lower corn and natural gas prices, higher sugar prices, regulatory support for summer blending and expected global demand growth. It expects improved crush margins and positive crush spreads through most of 2024; these are forward-looking expectations, not guarantees.
  • Magic Valley was hot-idled again in January 2024 because of negative regional crush margins and to install additional equipment for its corn oil and high-protein system. Management intends to restart in the second quarter, subject to upgrades and improved margins. The system has had production-rate and product-quality challenges.
  • Management has prioritized a Pekin carbon capture and storage (CCS) project, pausing further development of primary yeast and biogas conversion projects. It estimates CCS could generate over $30 million of annual EBITDA after operating and storage costs, but the project requires substantial capital, is subject to financing and execution risks, and faces a longer EPA application timeline. The company signed an exclusive, non-binding letter of intent with Vault 44.01; definitive agreements were still being pursued.
  • Planned 2024 capital expenditures are approximately $25 million. Repairs and maintenance are expected to total approximately $34 million, including a roughly $4 million Pekin outage scheduled for April. Management expects a new Pekin boiler to add about $2 million in annualized EBITDA; the grain-storage project has already exceeded its $2 million annualized target.
  • Key risks include volatile ethanol, corn and natural-gas prices; narrow or negative crush margins; production downtime and aging facilities; project financing, delays and performance; debt service and covenants; dependence on renewable-fuel mandates and potential small-refinery waivers; weather, water and logistics disruptions; environmental and food-safety regulation; and customer and supplier concentration. The company reported an $8.0 million net loss related to changes in derivative fair values in 2023.
  • At December 31, 2023, the company had $15.6 million in capital-project commitments scheduled through 2024. Eagle Alcohol contingent payments may reach $5.5 million over two years if conditions are met. Management said pending legal matters were not expected to have a material financial impact, while noting that outcomes remain uncertain.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No material cybersecurity incident was reported as of filing.

Important facts for investors to verify

  • Whether crush margins, commodity costs and sales prices support a sustained return to GAAP profitability and positive operating cash flow.
  • Magic Valley upgrade completion, restart timing, production consistency and the economics of the high-protein and corn-oil system.
  • CCS financing, definitive partner agreements, permitting, capital requirements, schedule and the assumptions underlying the projected annual EBITDA.
  • Availability and terms of remaining borrowing capacity, debt-service requirements, covenant compliance and the effect of 10% term-loan interest.
  • Whether planned maintenance and capital spending stay within budget and whether projected efficiency and EBITDA benefits are realized.
  • The impact of nonrecurring USDA grant income, derivative mark-to-market volatility, impairments and preferred-stock dividends on reported and per-share results.