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Operator: Good afternoon, and welcome to the Alto Ingredients Fourth Quarter 2022 Results Conference Call. All participants will be in 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 with LHA Investor Relations. Please go ahead.

Kirsten Chapman: Thank you, Gary, and thank you all for joining us today for the Alto Ingredients’ fourth quarter and year-end 2022 results conference call. On the call today are Mike Kandris, CEO; and Bryon McGregor, CFO. Alto Ingredients issued a press release after the market closed today providing details of the company’s financial 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 March 16, the details of which are included in today’s press release. A webcast replay will be available at Alto Ingredients’ website. Please note that the information on this call speaks only as of today, March 9.

You’re advised that any time-sensitive information may no longer be accurate at a 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 on 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 and risks and other factors, previously 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 believe these measures will assist investors in assessing the company’s performance for periods being reported. The company defines adjusted EBITDA as unaudited net income or loss before interest expense, interest income, provision for taxes, asset impairments loss on extinguishment of debt, acquisition-related expense, fair value adjustments and depreciation and amortization expense. To support the company’s review of the non-GAAP information, a reconciling table was included in today’s press release. On today’s call, Mike will provide a review of our strategic plan and activities.

Bryon will comment on our 2022 financial results, then Mike will wrap up and open the call for questions. It’s now my pleasure to introduce Mike Kandris, CEO. Please go ahead, Mike.

Mike Kandris: Thank you, Kirsten, and thank you everyone for joining us this afternoon. We are pleased to have the opportunity to speak with you and to reinforce Alto’s transformation plan that will further diversify our products, expand our margins and increase EBITDA. That being said, the fourth quarter and December, in particular, were impacted by extreme commodity volatility in the form of regional natural gas price spikes, high corn basis, as well as a dramatic decline in ethanol prices. These factors outweighed our performance in what was already a challenging year. Our 2022 results clearly underscore our need to further mitigate the impact of renewable fuel and commodity price swings. Our near- and longer-term goals continue to focus on driving diversified margin expansion.

We are increasing production of our highest-quality products, including grain neutral spirits, corn oil, high protein and primary yeast. We are in advance stages to launch our carbon capture sequestration project. We are also executing strategies to increase plant efficiency and reliability by adding corn storage, installing a natural gas pipeline, converting our biogas to renewable natural gas, building energy cogeneration capabilities at Pekin and upgrading other equipment. As 2022 unfolded, it became clear that we needed to accelerate these growth initiatives. So, last November, we entered into a six-year term loan for up to $125 million. We are staging our projects and drying capital in tranches to minimize carrying costs and maximize return.

Our efforts will position us to add substantial EBITDA streams to our business, all of which will be enhanced as the operating environment improves. With the completion of our current projects, we expect to increase annualized EBITDA by over $65 million by the end of 2025 and by over $125 million in 2026 when our carbon capture, cogeneration and other initiatives are fully realized. Let me provide greater detail on our capital projects. First, I’ll review our high-quality alcohol strategy and achievements. We began expanding our high-quality alcohol production in 2020. And in 2021, we refurbished our 30 million gallon per year grain neutral spirits, or GNS, distillation system at our wet mill in Pekin. We raised the quality of our specialty alcohol, earning certifications to attract the most demanding customers in the pharmaceutical industry.

In 2022, we made additional upgrades to our GNS system to produce the highest quality beverage-grade product available in the market. Having now completed these improvements, we are excited to introduce our new high-quality 190 proof and low-moisture 200 proof GNS products to our existing and target customers in the beverage, food, flavor, personal care and pharmaceutical industries. Currently, we are working with customers to qualify our product in preparation for the yearly contracting period, which happens in the fall. Beginning in 2024, we expect to generate an additional $5 million in EBITDA annually from these products. Also in January 2022, we added break bulk and distribution capabilities by acquiring Eagle Alcohol. This collaboration has been fruitful with the Eagle team advising on high-quality alcohol production (ph) tote and drum packaging and distribution and building customer relationships for Alto’s specialty alcohol.

We are excited about future synergies with Eagle and our new GNS capabilities. Next, we are expanding production of high-margin products: corn oil and high protein. In October, we commissioned the corn oil technology at our Magic Valley facility and saw increased production levels of approximately 40% in pounds per bushel. When combined with the high protein enhancement system, we expect to reach 50% or better increased yield, generating approximately $4.5 million annually of additional EBITDA based on current market pricing. In the fourth quarter, natural gas prices increased in the western region, and, in December, spiked to over 400% compared to Q3 prices. As such, we decided to moderate production at our Columbia plant and temporarily hot idled the Magic Valley facility.

Taking advantage of the situation in Magic Valley, we focused our attention on installing the high protein CoPromax system, which is in the final stages of construction. We expect our high protein product to easily achieve or even exceed 52% protein and generate an additional $4.5 million in annual EBITDA. We expect to reach full production in Q3 ’23 and, with both corn oil and high-quality protein installed, we anticipate, on a combined basis, an additional annual EBITDA run rate of approximately $9 million based on current market pricing for the Magic Valley facility. In light of the positive proof of concept at Magic Valley, we plan to roll out the corn oil technology at our other three dry mill locations. Although each facility is a slightly different size, on average, we expect to produce similar financial results to Magic Valley.

For these plants, we anticipate the additional corn oil installations in aggregate will generate approximately $13.5 million in annual EBITDA. After the high protein system is fully and successfully operational at Magic Valley, we will evaluate and anticipate rolling out the high protein technology at our other dry mills with similar economics. We also plan to expand into primary yeast production. Having completed successful product trials, we are in advanced stages of selecting an engineering and design group to finalize our plans, schedule and budget. This project would extend the past upgrades made to our yeast operations. Our preliminary figures indicate our primary yeast product will contribute annual EBITDA of approximately $19 million in the first 12 months and approximately $25 million annually thereafter.

We believe construction could begin in early 2024 and end in mid-2025. As discussed before, we believe we have a significant and very large opportunity in carbon capture and sequestration. The arena has changed rapidly and our measured analysis shows significant potential benefits. For example, the Inflation Reduction Act increased the price of carbon to $85 per metric ton, significantly strengthening future economics. Also, competition for offtake agreements has dramatically lowered the operating costs. Currently, we are in advanced negotiations to provide turnkey transportation, sequestration and monitoring services for this important and game-changing project. We are also finalizing the selection of engineering services for the design and installation of the capture, compression and energy requirements at the Pekin Campus.

While it is premature to provide specific details, we believe beginning in 2026, the project will contribute over $30 million annually in additional EBITDA and this is based solely on the benefits under the Inflation Reduction Act associated with the 45Q incentive. Further, by sequestering our CO2 from our Pekin site, we expect to materially reduce Alto’s carbon footprint and to monetize additional value from the alcohol and essential ingredients we produce and sell. Regarding our strategies to improve plant efficiency, reliability and capacity, we installed additional corn storage at our Pekin site. We are currently conditioning the silo and expect it to be fully operational in Q2 2023. This will reduce the cost of delivered corn to our facility, lower the cost of silo cleaning and increase the reliability of operations at the facility.

We anticipate this installation to conservatively contribute over $2 million annually to EBITDA. Consistent with our sustainability efforts, we have been reviewing options to improve energy procurement and usage. For our Pekin Campus, we have made significant progress in planning the installation of a new natural gas pipeline to bypass our current utility. When fully operational, which we expect in 2024, the pipeline would reduce our energy costs by $3 million annually. Further, the line would help fulfill our increased energy needs associated with our numerous growth initiatives, including expanded yeast production and carbon sequestration. As a bonus, the new gas pipeline will lower our carbon score. Most of our biogas is currently flared.

We believe once converted to renewable natural gas, or RNG, we could use the natural gas pipeline to monetize the value of this current waste stream and produce RNG for an additional $3 million in EBITDA annually. With the combined energy requirements for carbon capture and goals of lowering our carbon score and increasing our plant efficiency, we also are finishing a third-party study on cogeneration at Pekin. Based on preliminary results, we expect the cogen at Pecan to contribute approximately $15 million in annual EBITDA based on the current energy prices. With that, Bryon, over to you for a review of the financials.

Bryon McGregor: Thank you, Mike. I’ll provide some additional color around our results for the fourth quarter and full year of 2022. As Mike noted, the fourth quarter was disappointing and illustrative of why we are so focused on further differentiation, leveraging our core strengths, reducing our operating costs, improving operational reliability and invigorating our bottom-line. Crush margins turned particularly negative in Q4, compounded by soaring and sustained natural gas prices in the western region. As a result, our gross loss was $21 million for the quarter and $28 million for the year. Net loss available to common stockholders was $33 million for Q4 2022 and $43 million for the year. Adjusted EBITDA was negative $23.5 million for Q4 2022 and a negative $10 million for the year.

Despite the results, our liquidity remained strong with approximately $36 million in cash and $58 million in excess line of credit availability as well as $40 million in committed term loan funds to address our capital improvement plans. Our cash balance reflects a portion of the $60 million draw from our term loan facility during the quarter, offset in part by operating expenses and capital expenditures. In our drive to invest in a better future, we spent $12.5 million in the fourth quarter and $37.7 million for the year on the initiatives Mike discussed earlier, as well as on various improvements to reduce our high operating costs and increase reliability. This includes the purchase of a new high-efficient boiler to replace two rental boilers currently in operation at our Pekin Campus.

We expect to complete the installation in early 2024 and, once operational, we expect to significantly reduce our energy footprint, producing over $1.5 million per year in incremental EBITDA. Regarding our contracts for specialty alcohol for 2023, we expect to maintain or grow share with our existing customer base while adding new accounts in the beverage category, particularly in 2024 and beyond, with our improved Pekin GNS production system now online. While it’s difficult to speak to our — pardon me, while it’s difficult to speak to or forecast ethanol margins in 2023, we expect to benefit from approximately $10 million in additional EBITDA generated from the capital projects we have already completed or will complete this year. In addition, with funding from the new term loan and associated accelerated investment in the further diversification of our specialty alcohol and essential ingredient products, we expect to almost double our EBITDA by year-end 2025 compared to our three-year historical average, and nearly double it again when our other projects are fully operational by year-end 2026.

We look forward over the coming quarters to discuss the progress we’ve made. With that, I’ll turn the call back to Mike.

Mike Kandris: Thank you, Bryon. Appreciate that. In summary, we have accomplished a lot and we continue to focus on the future. Commodity fluctuations are cyclical and will pass. In the meantime, to reduce their impact, we are continuing to transform our business. As stated earlier, the projects that we are contemplating, we expect to generate EBITDA of roughly $65 million by the end of ’25 — 2025, and to increase to $125 million in 2026 when our carbon capture, cogeneration and other initiatives are complete. We’re very excited about our revenue diversification plans, margin expansion of planned optimization initiatives and look forward to sharing our progress on future calls. With that, I’d like to open the call for questions. Operator?

Operator: We will now begin the question-and-answer session. Our first question is from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine: Hey, everyone, thanks for taking the questions.

Mike Kandris: Hi, Eric.

Eric Stine: Hey. So, you gave a lot here. A lot to digest. I guess, maybe I will start with on the carbon capture and sequestration. The numbers that you gave and maybe parsing just some of your comments, does that imply that potentially this would be with a partner, or is that the wrong way to think about it?

Mike Kandris: No, I think on the transportation side and the — well, the pipeline that would be with one of the partners. We are talking with various folks about — it’s a pretty extensive cost on the compression and so forth. And exactly how we approach that, we’re considering all of our options. So, it’s fluid. We’re deep into it. We’re talking to a lot of folks, and we have advanced this project pretty substantially since the last time we talked. So, more to come on that.

Eric Stine: Okay. And just to clarify, so when you say transportation, I mean, you’re talking about on potentially one of the — a number of pipelines that are in planning stages trying to get right away and permitting and all that?

Mike Kandris: Correct. Yes. That’s correct, yes.

Eric Stine: Got it. Okay. And does this — I mean, should we still think of direct — I mean, given your location, they are in Pekin, direct sequestration, that still is a possibility? I mean, even though I guess, you’re focused right now on utilizing the transportation side, but could — I guess, direct sequestration, would that — could that be part of it and would that be incremental to even the targets you’re given right now?

Bryon McGregor: Yes. So, let me clarify, it’s Bryon, real quick. Clear there needs to be a pipeline. We’re in a suburban location and adjacent to the Illinois River. So, it’s not a good location for injection, although we sit atop the Mount Simon formation. So, there is opportunities and consideration with regards to how far you need to take it. We could certainly link into one of the more public pipelines, but you could also go with your own effectively with a partner to handle the pipeline and sequestration part of the business.

Mike Kandris: Yes. The roadmap that we have, Eric, is we are — we don’t have to go far to look into some really good geology.

Eric Stine: Right. Got it. Okay. That’s helpful. Maybe just on the GNS, on that side of it, is that you expect spot sales to be meaningful or — I guess, in 2023, with the ultimate goal being that you want to hit that contracting window for 2024?

Mike Kandris: That’s correct. 2023, we’ll certainly work real hard to qualify our products. We’re very happy with the results we’ve got from the refurbishing of the system and the upgrading of the system done recently here. So, this year will be more qualification, targeting customers, existing customers and new customers, and to really be ready to go full out when we get to the fall contracting cycle. We expect that the $5 million that we talked about would be for 2024 and beyond. But we do expect to get some spot market activity this year.

Eric Stine: Okay. All right. That’s good. And then, maybe last one from me. You might have mentioned it and I probably missed it, but can you just remind on what the CapEx is? And — maybe it’s even in release and I missed it. I apologize if I did. But just the CapEx associated with these and have they changed versus what you provided last quarter?

Bryon McGregor: Yes. So, some of the stuff pretty consistent with last quarter that we gave, I think, that we provided for the various upgrades to the specialty alcohol. I think the number we gave was something like $6 million to $8 million. We have not provided details on a certain number of the other larger projects like the pipeline, the biogas to RNG, the carbon sequestration or the yeast project, largely because those are still in finalization. We’ve got FEED study work going on and we want to make sure that we give you good numbers. So, I mean, we think we have a pretty good idea, but we’ll provide more details as we continue along over the next couple of quarters and qualify those and get those under Board approval and moving forward.

Eric Stine: Okay. Thanks a lot.

Mike Kandris: Thanks, Eric.

Operator: The next question is from David Bastian with Kingdom Capital Advisors. Please go ahead.

David Bastian: Hey, guys. Thanks for taking the question. Tough environment for fuel alcohol, fuel ethanol. I was curious if you could give guidance on what’s locked in for the specialty side for 2023?

Bryon McGregor: Yes. So, as I mentioned in — hi, David, by the way. As I mentioned, I think, in some of my prepared remarks, we expect to at least have roughly the equivalent, if not, more of alcohol sold — specialty alcohol sold this year as well. There was a significant amount of additional capacity that came on in 2023. So, it was a very competitive market. So, we were one glad to have not only retain and manage our existing balance, but again, as Mike mentioned, we expect to continue to be able to make progress with regards to placing more of our higher-quality and highest-quality products in the marketplace. So, I think what we showed in our earnings release is showing something around 90 million, 93 million gallons of specialty alcohol sold. So, you should use that as a proxy.

David Bastian: Okay. And no commentary on margins at this point?

Bryon McGregor: Well, I guess what I’d say is it’s better than last year. Although it started wrapping — it started wrapping — carried over from really pretty crappy margins in December into January, but we’re seeing significant improvement. You see a positive crush margin right now. Our hope is that, that will continue to sustain itself. And it bodes well for, hopefully, a better year.

David Bastian: Got it. Thanks. Thanks for breaking out all of the different capital projects in your presentation here. This is really helpful, I think, for tell the story of where you’re trying to get to. I’m curious if you’d just give some commentary on what’s already funded, what still remains to be funded, kind of what the capital requirements are going to be versus continuing to operate the business? It seems like you have a lot of stuff here. I know you provided some of that in the past. Just wanted to understand kind of cash sources and uses for the next 24 months.

Bryon McGregor: Sure. So, we have funded the projects that are clearly well in bad stages. So, the improvements to the specialty alcohol, the Harvesting Technology installation at Magic Valley…

Mike Kandris: Corn silo.

Bryon McGregor: Sorry, corn silo. I think those are built into that. Those that are pending would be the pipeline, the RNG, the yeast and carbon sequestration and cogeneration. So those ones that are largely going to be occurring. And then, also what I’d add to that is the corn oil and the additional protein projects for the remaining dry mills. So, there’s a number of — while we’ve got a lot under our belt and a lot that we’re working on right now, I would say that the lion’s share is still sitting ahead of us. So, we tried to give you some reasonable times and what we expect to be able to produce over the next couple of years.

David Bastian: Got it. Okay. And then, maybe on the fuel side, what are you guys seeing in terms of capacity coming out of the market given how terrible margins have been? And are you seeing any opportunities to lock in some lower input costs like with natural gas down where it’s traded to?

Bryon McGregor: Yes, I have to say we’re pretty excited about natural gas compared to what we just went through in the Western markets. That being said, and I think that it looks like it’s a pretty favorable market in natural gas for the next, at least, 24 months. We’ll see what happens in further — a little further out. But I think we have a pretty good beat on that. That being said, I think some of the challenges we’re still facing, David, are a fairly low carryout of corn into 2023, and particularly in the Western Corn Belt. So, you’re actually seeing quite a bit of draw from the Eastern Corn Belt into that Western Corn Belt to support it. I think it begs the question then is — as to what’s going to happen in production as corn and corn basis start to rise as we move into the summer and move closer to the harvest, exactly what’s going to happen with regards to ethanol supplies and ethanol inventories.

Ethanol inventories currently are quite high. But interestingly, given in that high inventory state, we’re seeing relatively solid margins on a comparative basis. So, it’s probably part of the reason why — or it’s a large reason why we’re actually not comfortable providing — or not confident being able to provide good guidance for the next six to nine months. That being said, there’s a lot of moving parts. And the good news is that there seems to be a lot of support for the product and a lot of transitioning like ourselves out of being as dependent and reliable on that commodity space as we have historically. So, fingers crossed.

David Bastian: Got it. Thank you. That’s all from me.

Mike Kandris: Thanks, David.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mike Kandris for any closing remarks.

Mike Kandris: Thank you all, again, for joining us today and for your continued support. We look forward to providing a lot more information on all the details we gave today as we go forward. Thank you again, and have a good rest of your day.

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