Good afternoon. And welcome to the Alto Ingredients Incorporated. Third Quarter 2022 Results Conference Call. All participants will be in a listen-only mode [Operator Instructions] 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, Gary and thank you all for joining us today for the Alto Ingredients third quarter 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 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 November 14, the details of which are included in today's 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, November 7th, 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 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 period being reported. The company defines adjusted EBITDA as unaudited net income or loss 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 later this call, a reconciling table was included in today's press release. On today’s call, Mike will begin with some financial highlights and review our vision and quarterly activities. Bryon will then provide additional detail on our Q3 2022 financial results. Then Mike will wrap-up with a summary before opening the call for 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. We are excited about our recent developments and look forward to sharing them with you. In the quarter, we continued our efforts to improve our long-term position by upgrading equipment and operating systems. This will increase plant efficiency, reliability, redundancy and capacity. And we have plans for larger capital-intensive growth programs. We entered into a six-year term loan for up to $125 million announced today, recognizing the importance of accelerating our diversification growth strategies including carbon capture, sequestration, corn oil, protein and yeast expansion as well as RNG and natural gas pipeline installations. As previously noted, we expect these projects to contribute significantly to both our top and bottom lines and to further insulate our results from commodity and margin swings. While expected, third quarter was challenging and our results were negatively affected by low commodity margins, driven by record corn basis, logistical constraints and repairs and maintenance associated with the maintenance shutdown of our ICP facility. I am proud of our team, who skillfully managed supply chain constraints and logistical issues and prevented disruption with our customer base. Bryon will review the financial details later, yet I'll highlight year-to-date through September 30, 2022, we have capitalized over $25 million of infrastructure improvements and spent an additional $3 million, in related costs that flowed through cost of goods sold further impacting both the operating margins and our bottom line results. Now, I'll review our progress on our major CapEx projects. At our Idaho plant, the first phase of the CoProMaX system to increase corn oil extraction is completed, and we are pleased that the yield has grown significantly meeting our initial expectations. Given these positive results, we plan to proceed with similar installations at our other dry mills. The…

Thank you Mike. I'll provide some additional color around our results and metrics for the third quarter of 2022. As stated on our call in August, we entered a late harvest with high corn basis and low corn inventories. To create a silver lining reduce our relative use of corn and minimize the impact of short-term higher commodity prices, we scheduled much of our fall repair and maintenance for August. However, the third quarter was also hindered by continued supply chain constraints and rail interruptions causing additional planned outages of over six days contributing to negative margins at our Western facilities. As the single largest receiver of corn on the Union Pacific system, we are working closely with the railroad and suppliers to improve the consistency and timely delivery of corn supply to our Western facilities. For the third quarter of 2022, net sales were $337 million, up from $306 million in the third quarter of 2021, reflecting primarily the addition of our Idaho plant production. Alcohol sales were $203 million. Production gallons sold reached $76 million, up 32% from third quarter 2021 as the Idaho plant came online. Specialty alcohol contributed 23 million gallons, increasing 18% over the third quarter 2021 due to expanded capacity and increased demand and we expect to exceed our contracted volume of 90 million gallons for 2022 by year-end. Cost of goods sold were $357 million versus $309 million in the third quarter of 2021. This increase included the charges associated with the uncapitalized portion of our infrastructure upgrades, as well as the logistical and service disruptions higher corn basis and greater delivery costs. Notably corn basis cost significantly increased in the quarter by approximately $11 million. Also we recorded $3 million of non-cash net loss on our forward derivative positions. SG&A expenses were…

Thank you, Bryon. The team has created the financial flexibility to accelerate the next phase of our transformation. During 2022, we have diligently completed strategic repairs and maintenance to diversify our product offerings, increase production yields and improve plant efficiency. With the recent capital proceeds, we will implement additional projects, furthering our specialty alcohols and essential ingredients diversification strategy. As we broaden our products and execute on our capital plan, we expect to minimize the effect caused by commodity pricing fluctuations and enrich our margin profile. And as Bryon indicated generate an incremental $50 million of EBITDA annually by 2025. And this does not include the significant benefits financially of carbon capture anaerobic yeast. We are excited about the future and look forward to delivering additional value to all our stakeholders. With that, I'd like to open the call for questions. Operator?

[Operator Instructions] Our first question is from Eric Stine with Craig-Hallum. Please go ahead.

Hi, Mike, hi, Bryon.

Hi, Eric.

Hey. So maybe just before getting to the capital projects, just some commentary on the contracting season. And obviously, it sounds like you're confident in growth there, but just maybe how the conversations are going? I know you have some new certifications that you got early last year, but you had missed -- kind of missed the window, how those are playing into it. And I don't know if you're willing to give kind of a thought of what the year-over-year increase might be in terms of contracted. But any details there would be great?

Sure. So as we indicated last year about this time, we're actually with our -- it was a slow report last year as well given the late harvest. And so I think it was during our fourth quarter results that we indicated that we had contracted 90 million gallons of volume for 2022. And we are well on our way to exceeding that amount probably approximately $100 million by year-end. Our expectation is to be able to match that or exceed that number in 2023. And that's before we actually bring online our improvements to the specialty alcohol production and that will be done in early 2023 and we expect to continue to be able to sell into that market. So I would expect production and/or sales to exceed That what we've done last year. So year-over-year-over-year improvement in that volume.

Okay. And then I mean on the specialty alcohols then we should think about that more as -- not necessarily contracted, right? I mean the volumes sold more back half loaded but just not contracted.

No, no. No we expect contracted volume for the full year of 2023. And then with full operation of the demethanizer [ph] column and the other improvements that we've made at that facility, the idea is to be able to sell into the highest grade beverage line throughout the year. So much like we did last year we -- you see incremental sales throughout the year, right? So we saw approximately 10 million gallons of additional specialty alcohol sales in 2022. And we would expect to be able to do the same in 2023.

Okay. No, that’s great. Maybe just obviously more detail it sounds like you're getting close to taking further steps on carbon capture. I mean anything you can share there does this make it more or less likely that you partner with someone, it sounds like direct sequestration may be more of the route that you're going. Any details there would be helpful as well.

Yes. What I'd say Eric is that obviously with the recent changes this is a very significant item for not only us, but the industry. And one of the reasons -- one of the primary reasons, we wanted to be able to enhance our financial capabilities and working with Orion. We wanted to be able to pursue a multitude of options. So we have identified some very good options for us. Again we're taking bids from various contractors that will provide us with front end feed engineering that's the compression stage kind of behind the fence line and people to actually do the sequestration of pipelining. So it could be that we would partner with somebody, but we haven't gone that far yet. We're evaluating the opportunities. The good news is with this financing in place this has really risen to the top of something we want to get done and we want to get it done quickly.

Got it. Thanks a lot.

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

Thank you. Good afternoon, everyone. Bryon maybe for you. When you're talking about around $20 million adjusted EBITDA improvements expected in 2023. What should we benchmark this against? Should we use sort of a 4% to 6% gross margin normalized level type calculations to arrive at the $20 million adjusted EBITDA improvements for next year. I know you've had variances last -- fourth quarter of 2021 was very strong. And this quarter it looks like the third quarter this year is a little bit of an anomaly too. Just wanted to see what would be sort of a normalized level of EBITDA prior to all of these improvements and where we can come out with the $20 million improvements you're expecting?

Amit, it's a great question. And we -- as you mentioned, it's a challenge to be able to forecast commodity prices, particularly where things have been so dramatic either with inflation or war in Europe other things and then supply constraints and logistical constraints. That being said, if you looked over the last five-year history of the industry, you're looking at somewhere between $0.15 and $0.20 EBITDA margin. So, whether you want to use an average, what that would translate in for us is you're probably looking at somewhere around north of $30 million to $40 million as a baseline of EBITDA and then you want to incrementally add these numbers on top of that. But, our expectation is this year is definitely an anomaly, especially after what was a bit of a volatile year last year but finished on a very strong note.

That’s pretty good. Are you seeing improvements already? I know we're sort of 1.5 months almost into the fourth quarter. How are margins and other pricings coming through so far?

Yes. We've seen significant improvement, especially over the last three to four weeks off of September levels, as I mentioned in the prepared remarks. And it looks -- it'd probably be too premature to forecast a 2024 like we saw last -- or in Q4 last year duplicating that. But -- and particularly, in light of the fact that we are -- corn supply is still are -- and corn basis is higher than it was last year, but we're seeing much stronger margins in this fourth quarter. But I guess, what I'd also emphasize and that's why as you see in the emphasis in the most of the material comments that we've made is, is that our goal and desire is to continue to further our diversification and move away from what is otherwise clearly a volatile market and be able to provide stability of earnings.

No, that’s fine. Thanks. How many days was the maintenance-related shutdown for in the third quarter, Bryon?

Yes, about a week. We can ask. But then if you think about that it's just -- there's a multiplier event you have to bring it down and then bring it back up and the impacts associated with that. So -- and then on top of that repairs and unusual or significant regards to maintenance that had come along with that.

And these are all downgrade. There's nothing in the fourth quarter along with that?

That's correct. There may be still a little bit of -- we may be doing some just normal types of scheduled outages but nothing material.

Okay, understood. Okay. That’s all I ask. I’ll take another questions offline. Thank you.

Thank you.

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

Hi. Good afternoon, guys.

Hi, David.

I just wanted to touch on a couple of things real quick. One was I know you guys had talked about hedging out a lot of your input costs like utility natural gas last year. Where are you at for that in 2023?

Yes. We've locked our positions, and particularly through the winter strip on natural gas and then well on electricity through much of the year.

`Got it. And I heard on your last question from Amit that, you expect your kind of baseline EBITDA to be around $40 million or so given historic gross margins. It sounds like even at zero then you guys would still be cash flow positive with where you're at with your current upgrades before the new stuff comes online?

That's correct.

Okay. And then on these Section 45 credits, its $85 a ton and 650,000 tons roughly for the location?

That's correct. That's correct, just Pekin, David, right.

Okay.

Yeah. That's in its current capacity right, on the three facilities.

All right. And you're in the final stages of getting this locked down. So can we hope to actually hear something on this on the Q4 call you think?

Possibly there is some -- working with people that have to go out and secure the spot to sequester, sometimes want to get that done ahead of time before announcing just for the ability to not let the prices go crazy on them to be able to do that with farmers or wherever you are going to sequester the CO2. But our hope is we're pretty far along. We have been evaluating our options for a while now. And again, as I mentioned the motivation to lock in some really good financing with a really good partner that understands kind of where we're heading as a company was very important to us and will allow us to accelerate that decision.

Got you. And so, if I'm doing some back of the envelope math that gets me to a $50 million or $60 million a year for you guys, even if you have to put $80 million or $100 million in upfront that's a pretty fantastic IRR if this is online in three to four years. Is that about right here?

And that would be just based on just the carbon tax credit. That doesn't include any of the benefits that you get in uplift in price for product associated with the low-carbon footprint, right? So your blue ethanol, clean fuel, sustained aviation fuel, blue ethanol.

Got it. Thank you. That's very helpful. Good to hear.

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

Yeah. This is a very exciting time for us. And I want to thank everybody for joining us today and for your continued support. We look forward to chatting with you next quarter end. Thank you very much.

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