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Alto Ingredients, Inc. (NASDAQ:ALTO) - Navigating Volatility with Diversification and Strategic Initiatives
Published on September 24, 2024 | Ticker: ALTO

Alto Ingredients, Inc. (NASDAQ:ALTO) is a producer and distributor of renewable fuel and essential ingredients, as well as the largest producer of specialty alcohols in the United States. The company has navigated a challenging market environment in recent years, marked by volatility in commodity prices and the ongoing impact of the COVID-19 pandemic. However, Alto Ingredients has demonstrated resilience through its diversified product portfolio, strategic initiatives, and operational improvements.

Financials

In the fiscal year 2023, Alto Ingredients reported annual net income of -$28.0 million, annual revenue of $1.22 billion, annual operating cash flow of $22.0 million, and annual free cash flow of -$7.5 million. These results reflect the company's efforts to adapt to changing market conditions and invest in initiatives to drive long-term growth.

During the first quarter of 2024, Alto Ingredients reported net sales of $240.6 million, a decrease from $313.9 million in the same period of the prior year. This decline was primarily attributable to lower average sales prices for both specialty alcohol and renewable fuel, as well as lower average sales prices of essential ingredients due to a lower commodity price environment. However, the company's gross loss improved to $2.4 million, compared to a gross loss of $3.2 million in the first quarter of 2023. This improvement was driven by slightly higher average commodity margins, increased sales of higher-margin specialty alcohol, and the positive impact of the company's efforts to increase returns on essential ingredients, reduce costs, and expand operating efficiencies.

Business Overview

Alto Ingredients operates in five key markets: Health, Home & Beauty; Food & Beverage; Industry & Agriculture; Essential Ingredients; and Renewable Fuels. The company's production facilities are strategically located in Illinois, Oregon, and Idaho, allowing it to serve both domestic and international markets.

The company's Pekin Campus production segment, which includes the production and sale of alcohols and essential ingredients at its three facilities in Pekin, Illinois, contributed $155.4 million in net sales during the first quarter of 2024. The marketing and distribution segment, which includes the marketing and merchant trading of company-produced alcohols and essential ingredients, as well as sales of fuel-grade ethanol sourced from third parties, generated $57.2 million in net sales. The Western production segment, which encompasses the production and sale of renewable fuel and essential ingredients at the company's two western facilities, reported $28.1 million in net sales.

Strategic Initiatives and Operational Improvements

To navigate the volatile market environment, Alto Ingredients has implemented a range of strategic initiatives and operational improvements. The company's focus on diversifying its product portfolio and expanding its presence in higher-margin specialty alcohol markets has been a key driver of its performance.

One of the company's most significant initiatives is its carbon capture and storage (CCS) project, which aims to substantially reduce the carbon footprint of its Pekin Campus facilities. Alto Ingredients is working with Vault 44.01, a leading CCS company, to safely transport and permanently store the CO2 produced at its Pekin facilities. The company believes this project will create value for its customers, surrounding communities, and shareholders.

In addition to the CCS project, Alto Ingredients has been investing in its corn oil and high-protein technology at its Magic Valley facility to improve profitability and reduce the impact of periodic low-crush margins and higher destination corn basis costs. The company has also completed a biennial wet mill outage at its Pekin Campus, which will result in more consistent and higher production rates, improving reliability as the company approaches the summer driving season.

Liquidity

As of March 31, 2024, Alto Ingredients had $29.3 million in cash and cash equivalents, and $12.8 million in restricted cash, for a total of $42.1 million in cash, cash equivalents, and restricted cash. The company also had $25.9 million available for borrowing under its Kinergy operating line of credit and $65.0 million that may be available for capital improvement projects under its Orion term loan, subject to certain conditions.

Outlook

Looking ahead, Alto Ingredients expects ethanol crush margins to continue improving in the second quarter of 2024 and the market outlook for the next three quarters to remain favorable. The company anticipates lower feed prices for the remainder of the year, and it has solid corn inventories and improved export demand for ethanol. Additionally, the EPA's summer waiver for 15% blends will facilitate sustained use of higher-blend renewable transportation fuel.

Operationally, the company expects its recent maintenance and upgrade work to result in more consistent and higher production rates, improving reliability and profitability. Longer term, the updated guidelines around tax credits for including ethanol in the production of sustainable aviation fuel further validate Alto Ingredients' CCS efforts.

Risks and Challenges

Despite the company's strategic initiatives and operational improvements, Alto Ingredients continues to face several risks and challenges. These include volatility in commodity prices, particularly corn and natural gas, which can significantly impact the company's production costs and profit margins. The company also faces regulatory risks, as changes in government policies and mandates related to renewable fuels could affect demand for its products.

Conclusion

Alto Ingredients has demonstrated its ability to navigate a challenging market environment through its diversified product portfolio, strategic initiatives, and operational improvements. The company's focus on expanding its presence in higher-margin specialty alcohol markets, investing in its CCS project, and optimizing its production facilities have positioned it for long-term growth and sustainability. While the company faces ongoing risks and challenges, its resilience and adaptability suggest it is well-equipped to capitalize on emerging opportunities in the renewable fuel and essential ingredients markets.

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