Alto Ingredients (NASDAQ:ALTO) Q2 2026 Earnings Call

0:00 Good afternoon and welcome to the Alto Ingredients Second Quarter twenty twenty six 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 turn the conference over to Jody Burfering. Please go ahead. Thank you, Danielle, and thank you all for joining us today for Alto Ingredients second quarter twenty twenty six results conference call.

0:46 With me on the call are our president and CEO, Brian McGregor and CFO, Rob Olender. Alto Ingredients issued a press release after the market closed today providing details of the company's financial results for the second quarter of twenty twenty six. A webcast and webcast replay will be available on the Alto Ingredients website at altoingredients.com. Please note that the information on this call speaks only as of today, 08/05/2026. You are advised that time sensitive information may no longer be accurate at the time of any replay. Company also prepared a presentation for today's call that is available on its website. Please refer to the company's Safe Harbor statement in the presentation, which states that some of the comments constitute forward looking statements and considerations that involve risks and uncertainties.

1:39 The actual 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 company's 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 consolidated net income or loss before interest expense, interest income, provision or benefit for income taxes, asset impairments, unrealized derivative gains and losses, acquisition related expenses, excess insurance proceeds and depreciation and amortization expense.

2:42 To support the company's review of non GAAP information, a reconciling table has been included in the second quarter earnings release and presentation. With that, it is now my pleasure to introduce Brian MacGregor. Brian, please go ahead. Thanks, Jody, and thanks to everyone for joining us today. I'll begin with a high level review of our second quarter results and operational activities. Then I'll turn the call over to Rob for a detailed review of our financial results for the quarter. After that I'll wrap up and open the call for Q and A. We delivered our fourth consecutive quarter of positive gross profit, income from operations, net income and adjusted EBITDA. We have been consistently profitable during this period even without the contribution of 45Z tax credits.

3:33 These results demonstrate the strength of our diversified operating model which gives us the flexibility to shift production toward the most attractive end markets and capture premium value opportunities. We remain focused on disciplined execution of our strategic plan and unlocking additional values across our portfolio. Our latest twelve month results are also a testament to our efforts to drive profitability and maximize our asset base and to make smart capital allocation decisions including purchasing Alto Carbonic, investing in our dry mill optimization and carbon intensity reduction projects. We have executed well on these initiatives and more. For the second quarter our results reflect strong domestic demand and improved essential ingredient values compared to the same period last year.

4:26 The quarter's market crush margins improved significantly to $0.33 per gallon from $0.11 per gallon in the same period last year. This increase was driven by robust export demand, strong domestic blending activity, and tighter ethanol inventories following industry wide spring maintenance outages. As a result ethanol prices improved during the quarter supported by strong renewable volume obligation or RVO blending requirements. Meanwhile favorable crop conditions and larger projected grain supplies contributed to lower corn costs and higher margins. Q2 crush margins were not only significantly higher than the same period last year but were also strong by historical standards.

5:12 Q3 margins which in the past have marked the seasonal peak of the year continue to be healthy and profitable. While European demand remained robust ongoing geopolitical disruption in The Middle East negatively impacted export economics from The United States during the quarter. Higher freight costs and reduced certainty of vessel availability to move the exports from the Gulf Coast compressed The US to Europe arbitrage, increasing the competitiveness of Brazil exports into Europe. As a result, our renewable fuel export volumes declined compared to the second quarter of last year. Given the strength of domestic ethanol markets, we successfully optimized our product mix towards fuel grade ethanol sales in The U. S. Markets.

6:00 This underscores the benefits of our diversified commercial platform enabling us to adapt and capture the value of strong crush margin environments. Also we believe that the geopolitical disruption in Middle East created favorable conditions that drive domestic support for implementing E15 blending. More on that in a minute. During the quarter we continued to improve utilization, reliability and throughput with the goal of increasing total twenty twenty six volumes over 2025. At our Peking campus we completed the dry mill planned outage along with our debottlenecking project to increase annual production capacity by about 8% or 5,000,000 gallons. This project demonstrates our dedication to highly attractive ROI investments by increasing production at our most efficient facility.

6:51 We are positioning Alto for incremental gross margin and to qualify for additional 45Z tax credits. After a successful dry mill restart we are now ramping up to our new production levels and still expect to realize the full benefit of the additional capacity in the fourth quarter. We also performed our routine spring outage at ICP during the quarter. We remain on track to finish the repairs on our existing dock and the installation of the second alcohol load out by the end of the year improving our logistics and loading capacity. At our Columbia facility we began working to add a third CO2 storage tank and expect it to be operational in Q4. The expanded storage capacity will allow us to further capitalize on growing demand for premium CO2 in the Pacific Northwest.

7:44 We continue advancing multiple pathways to further monetize our CO2 stream including both utilization and sequestration opportunities. Our strategy emphasizes low capital high return projects while preserving flexibility as regulatory and commercial markets continue to evolve. Our intent is to move quickly by pursuing partnerships with stakeholders that already have compression capabilities allowing us to accelerate commercialization. In the meantime we're focused on increasing our 45Z credits by producing more volume. We also continue to explore opportunities to lower our carbon scores without significant capital investment by working with our farming farmer partners to encourage them to lower the carbon intensity of their corn.

8:30 We remain on track to qualify 90,000,000 gallons or more of combined production this year supporting our expectation for generating a minimum of $15,000,000 in income from tax credits after monetization costs. We're encouraged by the growing momentum for year round E15 adoption. As an example, recently the Renewable Fuels Association reported that about 72% of U. S. Voters for year round E15 blending, the highest level recorded since polling began in 2016. Nationally support continues to build around the promise of E15 to reduce fuel costs, strengthen energy security, and to increase demand for domestically produced renewable fuels. Meanwhile several Midwestern states have moved forward with permanent year round E15 access providing an important blueprint for broader adoption.

9:22 California is also making progress following the passage of Assembly Bill 30. While final implementation steps remain, we believe the state's transition toward E15 represents a meaningful long term demand opportunity given its position as one of the largest gasoline markets in the country. Taken together expanding E15 adoption at both the federal and state levels has the potential to drive significant incremental ethanol demand, improved industry capacity utilization and support a more favorable margin environment over time. With that I'll turn the call over to Rob for a more detailed review of our second quarter financial results. Thank you, Brian. I'll start with a review of the second quarter twenty twenty six income statement compared to the second quarter of twenty twenty five. Consolidated net sales were $246,000,000 up $27,000,000 We sold 88,500,000 gallons of ethanol and specialty alcohols, an increase of 1,800,000 gallons at an average sales price of $2.15 per gallon, which was 20¢ per gallon or 10% higher than last year.

10:32 With the 2026 RVO regulations finalized during the second quarter, ethanol and RIN prices supported higher domestic ethanol sales and improved crush margins. With the diverse production capabilities at the peak in campus, we are well positioned to serve this changing market demand by shifting our production and sales mix. Revenue from renewable fuel exports increased by $800,000 reflecting a 2,200,000 reduction in gallons sold at a significantly higher premium to domestic renewable fuel than last year. This decrease in volume reflects the impacts of the conflict in The Middle East on the cost and availability of freight. High quality alcohol volumes increased by 3,600,000 gallons.

11:19 Although average premiums over ethanol narrowed, reducing revenue by approximately $2,900,000, realized gains from our derivative positions, largely offset the impact as intended, limiting the net premium decline to $02 per gallon. As a result, the higher volumes generated a modest increase in profitability, despite the lower premium environment. Essential ingredient sales increased $6,100,000 on overall improved average sales prices. Dry distiller grain sales were supported by a strong export market and tighter domestic supply as a result of the seasonal spring maintenance downtime in the industry. In addition, the 2026 RVO set strong demand for Cornwall and germ as a feedstock for biodiesel and renewable diesel drove prices up.

12:13 Coupled with a 5% decrease in our cost of corn, our essential ingredients return improved to 51.6 compared to 45.2% for the second quarter last year. Gross profit increased by $19,000,000 year over year to $17,000,000. In addition to the sales mix changes, the improvement was primarily driven by stronger industry crush margins, which increased to 33 per gallon from 11¢ per gallon in the second quarter of last year, contributing approximately $17,000,000 of incremental gross profit. We also benefited from lower utility costs with natural gas and electricity expenses declining by nearly $600,000 year over year.

12:59 Offsetting these positives, we incurred approximately $2,000,000 more in repairs and maintenance expense due to our peak and dry mill and ICP spring outages and continued work at our carbonic facility to ensure we are prepared to reliably support the increased demand for our premium CO2 during the seasonally strong summer months. Even with these higher expenses, our Western facilities remain profitable on a gross profit basis for Q2 twenty twenty six. As a reminder, we employ hedging strategies to protect the premiums over ethanol on our high quality alcohol contractual commitments and to adjust our fixed price corn back to market. For the second quarter, realized derivative gains increased $1,200,000 while unrealized derivative losses related to future shipments increased $1,500,000 As of the end of the second quarter, our open derivative positions resulted in a net asset of $3,900,000 SG and A expenses increased by $1,800,000 because of our strong second quarter and year to date results.

14:10 We accrued performance compensation for the first and second quarters in the amount of $800,000 whereas last year, we did not accrue performance compensation until the second half of the year. Last year's SG and A expense also included a one time $800,000 gain related to the final payment for the Eagle Alcohol acquisition. Excluding these notable items, SG and A was comparable, reflecting the actions taken last year to right size our staffing levels and cut costs. We continue to maintain strict discipline over our spending. Moving down the income statement, we generated $5,100,000 in 45 Z tax credit earnings, reflecting $4,000,000 of credits earned in the second quarter and 1,100,000 in final adjustments on our 2025 sales proceeds as we completed the sale of our twenty twenty five credits in June.

15:07 In Q2 twenty twenty five, we did not recognize any 45Z tax credit earnings, as we were not yet accounting for them on a quarterly basis. Year to date, we have accrued $7,900,000 in net 2026, 45 Z tax credits, which we expect to monetize in the future. Interest expense decreased $900,000 on lower outstanding debt balances, reflecting our continued focus on minimizing idle cash and reducing our interest expense burden by paying down debt. Adjusted EBITDA improved by $23,900,000 to $23,700,000 compared to negative adjusted EBITDA in the prior year period. The improvement was driven by a combination of the $19,000,000 swing to positive gross profit and a $5,100,000 increase in 45Z tax credit earnings, partially offset by higher SG and A expenses.

16:07 Net income attributable to common stockholders was $11,400,000 or 15¢ per share, compared to a net loss of $11,300,000 or a negative 15¢ per share for Q2 twenty twenty five. A significant improvement of $22,700,000 Our tax provision amount is zero, as we expect to use a portion of our NOLs to offset income this year. Turning to the balance sheet, as of 06/30/2026, our cash balance was $24,000,000. During the second quarter, we generated $28,500,000 in cash flow from operating activities. Capital expenditures for the quarter amounted to $10,600,000 and $11,500,000 year to date. We are on track with our annual targeted CapEx spend of $25,000,000.

17:01 With strong earnings and positive cash flow from operations, we paid down an additional $8,500,000 in principle on our term debt facility and ended the quarter with $29,900,000 in term debt outstanding, bringing our total principal payments this year to $25,100,000. At quarter end, our total borrowing availability was $106,000,000 consisting of $41,000,000 under our operating line of credit and $65,000,000 under our term loan facility. Today, we established a 50,000,000 at the market equity program. Alongside our available borrowing capacity and operating cash flow, the ATM gives us additional financial flexibility and a prudent and low cost tool to effectively access equity capital.

17:53 We see a number of attractive high return organic opportunities across our platform. Having the ATM in place allows us to remain prepared to pursue these opportunities when expected returns, market conditions and shareholder interests align. Any use of the program would be disciplined, measured and evaluated against other available sources of capital. With that, I will turn the call back to Brian. Thanks, Rob. Our results for the past four quarters demonstrate the success to date of the strategic realignment we began three years ago. With a diversified product portfolio, a leaner cost structure, we have positioned Alto to capture higher value revenue opportunities to enhance profitability and drive shareholder value.

18:44 Our operating model is now capable of generating annual positive adjusted EBITDA through the commodity cycles while providing meaningful upside when market conditions are favorable. In addition, this year we're executing high return capital projects focused on capacity expansion, CO2 optimization, and process efficiency improvements. These projects represent over $10,000,000 of capital investment, offering attractive returns and are expected to generate paybacks of just over one year on average. Importantly, these investments are within our control and are designed to enhance earnings and cash flow regardless of commodity market conditions. These are only a few of many compelling organic opportunities that we intend to pursue while maintaining our disciplined approach to capital allocation.

19:35 In summary, we remain on track to increase production volumes in 2026 compared to 2025. We will continue optimizing our product mix, capturing more value from our unique asset base and executing high return opportunities and improve profitability and cash flow. Our diversified strategy is working. Our operating model is stronger and our financial results reinforce our confidence in Alto's ability to generate sustainable earnings and create long term shareholder value. Danielle, we're ready to begin the Q and A session. Thank you. We will now begin the question and answer session. The first question comes from Eric Stine from Craig Hallum. Please go ahead.

20:33 Hi, Brian. Hi, Rob. Hey, so I mean, obviously, you've kind of laid out these capital projects and the progress, pretty steady progress you're making, but also alluding to a host of others. Know, should we think about that as, you know, just kind of going deeper in the paths that you're already on, or are there others? And if so, could give some details on what those other areas might be? Sure. So while in general they are deeper moves along some of the same things that we've been talking about right. We're clearly around monetizing CO2 capturing taking advantage of the 45Z opportunities that are available at least through 2023 to help monetize that value and be able to reinvest those dollars into other longer term projects. It's about leaning into our efficient projects and expanding capacity where it makes sense to do so particularly in our most efficient locations and making them those that may be less efficient more efficient.

21:51 Probably not appropriate to share the exact details yet because we haven't committed full capital to those yet but we will certainly be sharing with know quarters to come but as I mentioned in our in the prepared remarks is that we see really exciting organic opportunities with excellent paybacks that we see as almost obligations to pursue. So with that that's the focus of the company and we'll share more as we commit capital to those projects. Yep, understood. Mean, it's worth a shot to ask, but maybe just on the talking about to improve the CI scores and going down the path on the crop side and with farmers. I mean, you think about that, given that the I mean, 45z has been in place, but is relatively new to the market.

22:54 I mean, do you feel like that is I mean, farmers how open are they to that? Or what are you finding? Is that something an opportunity that people have kind of already mined? Or it really is ripe to make further strides in that area? It's relatively fresh for the farmers especially because the rules have not yet been established until earlier a month or two ago. But I think with the rules now and while there's still some clarifications that need be made I think that the pathway is clear for for the farmers and there's a lot of inquiry and a lot of work that's being done on our part and as well others in the industry and the farmers are very keen to it. You think about it from a context of you know on a relative basis if we were to save an additional 10¢ or you know generate additional 10¢ in carbon intensity credit or the credits around the 45Z that translates into almost 30¢ per bushel for those farmers who are participating and that's real dollars especially where you know the price for corn this year and last is somewhat difficult to justify the investment that farmers are making but these are easy some of the steps are incredibly easy for them to do as far as registration and doing some of the other things and so we see this as a real opportunity And I know that, you know, more and more farmers are only asking questions, but,

24:25 you know, doing what they can to get on board. Okay. Got it. Last one, just I know q two you had the the dry mill, plant outage there and got through that. It had a very good quarter, but limited to an extent by that outage. I mean, when you think about third quarter, I know you're ramping that back up. Do you feel like you get a with the market conditions still quite good that you get a greater capture of that since you're through the outage? Yes. I mean, as we said in the prepared remarks, we expect to fully be able to realize it in Q4. Don't want to rush our team too quickly when you're making changes not only to debottlenecking but making improvements to your DCO, your IT systems and the like. So you want to make sure you line all that out and keep things safe. That said, we're excited about the opportunity we've seen it seeds and real promise and what we're seeing at the plant excess capacity things like that.

25:31 So really excited about that. And the nice thing about that facility is not only just an additional amount of production but as well again it's one of our lowest cost not our lowest cost facility in operations so really driving profitability to the bottom line, but also those gallons are eligible for 45Z credit. So it has a multiplying effect and again, really excited about that opportunity. Okay, thank you. Thanks Eric. Thank you. The next question comes from Sameer Joshi from H. C. Wainwright. Please go ahead. Hey, good afternoon, Brian, Rob. Thanks for taking my questions and congratulations on a great quarter.

26:18 So just stepping back, when you make decisions whether to deliver or to invest, because you do have these projects that you just have outlined to work on to improve CI scores, monetize this year, to expand capacity. At the same time, you're also paying back some of the principal. What are the takes and puts in that decision making? So we have a full committed process around evaluating each one of our projects, stacking them against you know weighing them against other opportunities and then some of the projects may not have as solid as a return but they're core and or foundational in being able to then expand into other areas So a good example of that would be the improvements in the debottlenecking that we did at the dry mill at the Beacon Campus, but it actually lays the foundation to be able to do an incremental or a significant higher expansion on that facility going forward. That said, that also requires an additional amount of capital or significantly more amount of capital than the debottlenecking and so those are things that we have to take into account, weigh those against the cost of capital and against other projects that may have other more beneficial returns or less beneficial returns right

27:50 and so we're going to stack with those. Rob, anything you want to add to that? Yeah, sure. Thanks, Brian. I guess I'd just add, know, with a strong profitability and cash flows year to date, we've been able to fund a lot of our low cost, high return projects. And we've commented before, as opposed to letting that cash sit idle in the bank, we'd rather put that to work and reduce our interest expense burden. So we're taking the opportunity to pay down debt, which also improves our profitability as well. Understood. Thanks for that color. My second question is, you explained the European disruption and how it or rather European exports impacted by the disruption in shipping.

28:38 Would your EBITDA would have been higher if you had been able to avail of the European opportunity versus redirecting your efforts towards domestic sales? Yeah, so it's a dynamic market clearly, right? I mean, prices continue, you know, it's a commodity space market. It's a bit speculative, but, you know all things being equal if you had the same price and the same volume that you were experiencing in Q1 and Q4 of last year yes we would have generated more. That said margins were significantly higher in Q2 than they were in Q1 for domestic fuel as well. So it's a bit of a speculative analysis.

29:28 But we still continue as I think we said in my prepared remarks was it's still a very strong market. Of course that market is going to always in those consumers and those markets are always going to look for the most competitive product. And right now there's an arbitrage opportunity with Brazil and so it's an easy market to look to but those those change as share prices change and supplies and the like. Depending on what happens with the US dollar, particularly in relation to the real, we expect that to fully come around. And these are longer term projects, these are longer term relationships as well. So some of the countries or some of the parties in the specific countries also are just engaging in what would be twenty twenty seven types of volumes.

30:20 So we are we remain optimistic and we're excited that there's a domestic market that we can turn to be able to place our product. Understood. Yeah, and I do understand that the dynamics and disruption does not only affect the European market, it also in turn impacts dynamics in the domestic market. So I understand. A clarification on this 45Z. I think maybe, Rob, I heard that you had already accounted for 7,900,000 in credits that you are planning to sell in the second half. I was just not sure if I heard that right. Can you explain what that is?

31:08 Yeah, that's correct. We had set a minimum baseline target expectation of 15,000,000 in net 45Z proceeds and that's on 90,000,000 gallons. Now, with that said, we are still pursuing opportunities to qualify more volume, both with the peak and dry mill debottlenecking project, as well as efforts to improve our reliability and uptime, as well as potentially even qualifying other volume that is currently destined for other end markets outside of The United States. That as well as, the efforts to reduce our energy consumption and what Brian talked about earlier with the low carbon intensity corn.

31:54 So, getting back to your question, year to date, we have recognized just under 8,000,000, and 45 net 45 Z credits for the year. So, we're currently on track for fifteen to sixteen million dollar range. Understood. Great. Thanks for that clarification. I will take my other questions offline. Thanks, Samir. You. The next question comes from Justin Dobierella from Domo Capital Management. Please go ahead. Hey, thanks for taking my phone call. Hey, Hey, just have two questions here. First, did I hear that correctly? So after the quarter ended, you paid down an additional $6,000,000 approximately in debt?

32:45 No. During the quarter, we paid down an additional $8,500,000 of debt. Okay. The $8.5 was all during the quarter. Got it. And then just piggyback in last question then. So with the 45Z credits you've generated, so that will be cash that's coming in the door later in the year that could be used for further debt reduction as well, I would assume. Yes, we are in preliminary discussions with buyers on the twenty twenty six credits. So we expect to monetize those in the not too distant future. Excellent. But I should ask Justin that Justin just one clarification is that's not necessarily dedicated to the reduction of debt. We will certainly evaluate that and there are certain covenants that we have under our agreement with regards to that are based on EBITDA you know and ratios so we will do that but if it makes economic sense to do that rather than deploying it elsewhere we'll certainly evaluate that.

33:45 Okay and then regarding the farming practices I know you guys like to be conservative but I just wanna just wanna ask, like, is that something that could possibly be realized in 2026 where if you're able to get the farmers in line or whatever that you're able to realize extra $0.10 per gallon in '26? And if so, would that apply to all of the gallons that the dry mill in Pekin or unless you're also looking to do this at Columbia, clarifying that as well. But my question is, that then apply to the gallons for the entire year's worth of production? Rob, you want to start and I'll fill in? Yeah, I'll take that one. We're currently in discussions with our farmer partners.

34:37 We're not at the point that can support recognizing that benefit. We're definitely trying to set ourselves up for the future. But we're in the process of exploring how many bushels or how much volume could qualify under the low carbon intensity corn. And then that would be applied against our production and then calculate what the carbon intensity reduction would be. So we can't say definitively one way or the other at this time. We're still in that process, but definitely laying the groundwork for the future. And maybe what I'd add to that is if we can clearly we would right it would be derelict not to do that for 2026 but it's important note that even if you do if you don't pick it up for 2026 I mean it would be incremental or a relatively small change this year but you should see much more significant especially the more low carbon practices that are implemented you know cover crops things like that those won't apply this year unless they were already doing them but if they enter this fall after harvest and doing cover crops and you really start to see the benefit in 2027.

35:51 All right thank you fantastic quarter. Thank you. It. Concludes our question and answer session. I would like to turn the conference back over to Brian McGregor for closing remarks. Thanks Danielle. Thanks to everyone for joining us today. As always we appreciate your interest in and your support of Alto Ingredients. Have a great day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.