Business Overview and History
Alto Ingredients, Inc. (ALTO) is a leading producer and distributor of specialty alcohols, renewable fuels, and essential ingredients. With a diverse portfolio of high-quality products and a steadfast commitment to sustainability, Alto Ingredients has established itself as a key player in the renewable energy and specialty chemicals sectors.
Alto Ingredients was founded in 1984 as a small ethanol production facility in Pekin, Illinois. Over the past four decades, the company has grown into a multi-faceted organization with a strong presence across the Midwest and Western United States. In its early years, Alto Ingredients focused on producing fuel-grade ethanol at its facilities in the Corn Belt region of the Midwest, leveraging its strategic location and access to abundant, low-cost corn supplies to establish itself as a significant player in the renewable fuel market.
The company has since expanded its production capabilities to include a wider range of essential ingredients, such as dried yeast, corn protein meal, corn germ, and distillers grains, which are used in animal feed and pet food markets. In 2007, the company made a strategic move to diversify its product offerings, expanding into the production and distribution of specialty alcohols used in a wide range of consumer and commercial applications, including cosmetics, pharmaceuticals, and food and beverage products.
A key milestone in Alto Ingredients' history was the acquisition of Eagle Alcohol Company, LLC in 2019. This acquisition allowed the company to further diversify its product portfolio and expand its distribution capabilities, particularly in the specialty alcohol market. Alto Ingredients now specializes in break-bulk distribution of specialty alcohols, which are used in various consumer and industrial applications, including mouthwash, cosmetics, pharmaceuticals, and cleaners.
Today, Alto Ingredients operates five production facilities, including three in Illinois and two in Oregon and Idaho. The company has a combined alcohol production capacity of 350 million gallons per year, with the ability to produce over 1.6 million tons of essential ingredients. Alto Ingredients' products serve a diverse range of end markets, including health, home and beauty, food and beverage, industry and agriculture, and renewable fuels.
Throughout its history, Alto Ingredients has faced various challenges, including volatility in commodity prices, particularly for corn and natural gas, as well as fluctuations in the demand and pricing of its products. The company has navigated these challenges by implementing risk management strategies, such as hedging, and by continuously working to optimize its production processes and product mix to enhance profitability.
Financial Performance and Ratios
In the most recent fiscal year (2023), Alto Ingredients generated revenue of $1.22 billion and a net loss of $28.01 million. The company's operating cash flow (OCF) was $22.0 million, while its free cash flow (FCF) was negative $7.5 million. Alto Ingredients' gross profit margin stood at 1.3%, while its operating margin was -1.8%.
For the most recent quarter (Q3 2024), the company reported revenue of $251.8 million, a net loss of $2.4 million, operating cash flow of $18.6 million, and free cash flow of $18.1 million. The decrease in revenue and net income compared to the previous year was primarily due to lower average sales prices for both specialty alcohols and renewable fuels, as well as lower essential ingredient prices, resulting from a lower commodity price environment. This was partially offset by lower corn costs and improved productivity at the Pekin campus.
Alto Ingredients' current ratio, a measure of short-term liquidity, was 3.22, indicating a strong ability to meet its short-term obligations. The quick ratio stood at 2.15, further underlining the company's liquidity strength. The company's debt-to-equity ratio of 0.33 suggests a moderate level of leverage, providing a balanced capital structure.
Over the past three years, Alto Ingredients' revenue has remained relatively stable, fluctuating between $897 million and $1.34 billion. However, the company has faced challenges in recent years, with net losses ranging from $15.12 million to $41.60 million. These losses can be attributed to a combination of factors, including volatile commodity prices, increased competition, and ongoing investments in facility upgrades and diversification initiatives.
Liquidity
Alto Ingredients maintains a strong liquidity position, as evidenced by its current ratio of 3.22 and quick ratio of 2.15. This indicates that the company has sufficient short-term assets to cover its short-term liabilities. As of September 30, 2024, the company had $34 million in cash and $27 million in available borrowing capacity under its operating line of credit. Additionally, Alto Ingredients had $65 million that may be available for capital improvement projects under its term loan facility, subject to certain conditions. This liquidity provides the company with the flexibility to meet its operational needs and pursue growth opportunities.
Product Segments and Operations
Alto Ingredients operates in three key product segments: Pekin Campus Production, Marketing and Distribution, and Western Production.
The Pekin Campus Production segment includes the production and sale of alcohols and essential ingredients at the company's three production facilities in Pekin, Illinois. This segment produces specialty alcohols used in various products such as mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants, and cleaners. It also produces fuel-grade ethanol and essential ingredients like dried yeast, corn protein meal, corn protein feed, corn germ, distillers grains, and liquid feed used in commercial animal feed and pet foods.
The Marketing and Distribution segment handles the marketing and merchant trading for company-produced alcohols and essential ingredients, as well as sales of fuel-grade ethanol sourced from third parties. Alto Ingredients has extensive customer relationships, both domestic and international, for its specialty alcohols and essential ingredients.
The Western Production segment encompasses the production and sale of renewable fuel and essential ingredients at Alto's two western production facilities. These facilities produce fuel-grade ethanol and essential ingredients such as distillers grains, corn oil, and other feed products.
In the third quarter of 2024, Alto's consolidated gross profit improved to $6.0 million, representing a gross margin of 2.4%. This improvement was driven by higher margins and production volumes at the Pekin Campus. However, the Western Production segment experienced a gross loss of $2.1 million due to production downtime and higher costs at the Magic Valley facility.
Sustainability and Innovation Initiatives
One of Alto Ingredients' key strategic priorities is its focus on sustainability and environmental stewardship. In 2024, the company took a significant step forward in its sustainability efforts by entering into a definitive CO2 Transportation and Sequestration Agreement with Vault 44.01. Under this agreement, Vault 44.01 will handle the transportation, injection, and sequestration of the CO2 produced at Alto Ingredients' Pekin campus into the Mt. Simon sandstone formation in Illinois.
This partnership marks a critical milestone in Alto Ingredients' journey towards a more sustainable future, as the company aims to lower its carbon footprint and monetize the value of the biogenic CO2 it produces. The company is also actively investing in upgrades and improvements across its production facilities, with the goal of increasing efficiency, reducing operating costs, and further minimizing its environmental impact.
In addition to its sustainability initiatives, Alto Ingredients has been at the forefront of innovation within the renewable fuels and specialty chemicals industries. The company has made significant investments in upgrading its production facilities, including the installation of Harvesting Technology's patented system at its Magic Valley facility in Idaho. This system has enabled Alto Ingredients to capture and produce high-value corn oil and protein products, diversifying its product mix and enhancing its overall profitability.
Challenges and Risks
While Alto Ingredients has made strides in diversifying its product portfolio and enhancing its sustainability efforts, the company faces a number of challenges and risks that could impact its future performance. One of the primary risks is the volatility of commodity prices, particularly those of corn and natural gas, which are key inputs in the company's production process. Fluctuations in these prices can significantly affect Alto Ingredients' profit margins and overall financial results.
The company also faces competition from both domestic and international producers of renewable fuels and specialty chemicals. As the industry continues to evolve, Alto Ingredients must adapt its strategies and product offerings to maintain its competitive edge and market share.
Additionally, the regulatory landscape in the renewable fuels and specialty chemicals industries can be complex and subject to change. Any shifts in government policies, such as changes to the Renewable Fuel Standard or the implementation of new environmental regulations, could have a material impact on Alto Ingredients' operations and financial performance.
The company's business is sensitive to fluctuations in commodity prices, and Alto Ingredients uses various hedging strategies to mitigate price volatility. The renewable fuels and essential ingredients industries have faced some challenges in recent years, including policy changes and market volatility. However, Alto Ingredients remains focused on operational improvements, cost reductions, and expanding its specialty alcohol business to drive future growth.
Recent Performance and Future Outlook
Alto Ingredients has been working on improving its operational efficiency and product mix. The company's Pekin campus has increased its production capabilities and uptime compared to the prior year quarter, improving its profitability. Notably, the Pekin campus increased specialty alcohol sales to 42% of total Pekin sales volume, 7 percentage points higher than the same period last year. Alto Ingredients remains on track to sell 90 million gallons of specialty alcohols in 2024 and expects to match this volume in 2025.
Looking ahead, Alto Ingredients expects corn prices to remain low, reflecting a good harvest and resulting in a strong carryout into 2025. This could positively impact the company's input costs. However, the company also anticipates higher transportation costs to affect all ethanol producers, with a more substantial impact on their western operations.
In response to challenging economics at its Magic Valley facility, Alto Ingredients plans to idle the plant before the end of Q4 2024, unless there are notable improvements. The company believes this move will have a positive impact on its financial results.
Conclusion
Despite the challenges it faces, Alto Ingredients remains well-positioned for long-term growth and success. The company's focus on sustainability, innovation, and diversification has positioned it as a leader in the renewable fuels and specialty chemicals industries. With its strong asset base, diverse product portfolio, and commitment to environmental stewardship, Alto Ingredients is poised to capitalize on the growing demand for sustainable, high-quality ingredients and renewable energy solutions.
As Alto Ingredients continues to execute on its strategic initiatives, investors will closely monitor the company's ability to navigate the complex market dynamics and regulatory environment, while delivering consistent financial performance and shareholder value. The company's ongoing efforts to improve operational efficiency, expand its specialty alcohol business, and invest in sustainability initiatives demonstrate its commitment to long-term growth and value creation.
With its robust industry expertise, innovative spirit, and dedication to sustainability, Alto Ingredients remains a compelling investment opportunity in the rapidly evolving energy and specialty chemicals sectors. The company's ability to adapt to market conditions, optimize its product mix, and leverage its strong liquidity position will be crucial in driving future success and shareholder returns.