Aemetis, Inc. (NASDAQ:AMTX) Q2 2023 Earnings Call Transcript

Aemetis, Inc. (NASDAQ:AMTX) Q2 2023 Earnings Call Transcript August 3, 2023

Aemetis, Inc. misses on earnings expectations. Reported EPS is $-0.68 EPS, expectations were $0.29.

Operator: Welcome to the Aemetis Second Quarter 2023 Earnings Review Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis, Inc. Mr. Waltz, you may begin.

Todd Waltz: Thank you, Kelly. Welcome to the Aemetis’s Second Quarter 2023 Earnings Review Conference Call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis; and Andy Foster, President of Aemetis Advanced Fuels and Aemetis Biogas. We suggest reading our website at aemetis.com to review today’s earnings press release, the Aemetis Corporate and Investor Presentations, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. The presentation for the call today is available for review or download on the Investors section of aemetis.com website. Before we begin our discussion today, I’d like to read the following disclaimer statement. During today’s call, we will be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activities and the execution of our business plan.

These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the company’s Securities and Exchange Commission filings, which are posted on our website and are available from the company without charge. Our discussion on the call today will include a review of non-GAAP measures as a supplement to financial results based on GAAP because we believe these non-GAAP measures serve as a proxy for the company’s sources or uses of cash during the periods presented.

A reconciliation of non-GAAP measures to most directly comparable GAAP measures is included in our earnings release for the three and six months ended June 30, 2023 which is available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating such net income, interest expense, income tax expense, intangible and other amortization expense, accretion and other expenses of Series A preferred units, loss on lease termination, gain on litigation, depreciation expense and share-based compensation expense. Let’s review the financial results for the second quarter of 2023. Revenues during the second quarter of 2023 were $45.1 million, compared to $65.9 million for the second quarter of 2022, principally driven by $33.6 million of sales from India Biodiesel.

Our California ethanol operation restarted after an extended maintenance cycle, which allowed for the acceleration of the implementation of several important ethanol plant efficiency upgrades, allowing for the generation of $11.3 million of revenue during late May and June. Delivery corn price decreased significantly from an average price of $10.21 per bushel during the second quarter 2022 to $6.80 per bushel during the second quarter 2023. Gross profit for the second quarter of 2023 was $2 million, a significant improvement compared to a $214,000 gross loss during the second quarter of 2022. Selling, general and administrative expenses were $9.7 million during the second quarter of 2023, compared to $7.4 million during the second quarter of 2022.

Including $1.3 million for fixed cost of goods sold that were allocated to selling, general and administrative expenses during the Keyes plant maintenance period. SG&A included $1.8 million of non-cash expense related to stock options and other considerations issued under stock incentive plans. Operating loss was $7.8 million and $7.7 million for each of the second quarter quarters of 2023 and 2022. Interest expense during the second quarter 2023 was $9.6 million, excluding accretion and other expense in connection with Series A preferred units in our Aemetis Biogas subsidiary, compared to $6.7 million during the second quarter 2022. Additionally, our Aemetis Biogas subsidiary recognized $6.9 million of accretion and other expenses in connection with preference payments on its preferred stock during the second quarter of 2023, compared to $1.5 million during the second quarter of 2022.

Net loss was $25.3 million for the second quarter 2023, compared to a net loss of $209,000 for the second quarter of 2022, including the impact in 2022 of a grant of $14.2 million received from the United States Department of Agriculture Biofuel Producer Program and the release of a litigation reserve of $1.9 million. Our India plant contributed $5.1 million of adjusted EBITDA during the three months ended June 30, 2023, offset by adjusted EBITDA from the restart of the Keyes plant and other operations for a total company negative adjusted EBITDA of $4.2 million for the second quarter of 2023. Cash at the end of the quarter was $3.5 million, compared to $4.3 million at the close of 2022. This completes our review of the second quarter of 2023.

During the first half of 2023, investments in capital projects were $9.8 million. Investments in capital projects related to Aemetis Biogas were $7.8 million. Investments in capital projects related to reduction of carbon intensity of Aemetis ethanol and other company initiatives were $2 million. Now I’d like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee for a business update. Eric?

Eric McAfee: Thank you, Todd. Aemetis is focusing on producing below zero carbon intensity products by growing and diversifying our existing dairy renewable natural gas and ethanol businesses in California and expanding our biodiesel and tallow feedstock business in India. We are executing on a five year plan to grow to $2 billion of annual revenues and more than $600 million of annual positive cash flow. We invite investors to review the company presentation on the homepage of the Aemetis website. The Aemetis five-year plan includes growth in our five business segments to produce sustainable aviation fuel and renewable diesel, biodiesel, renewable natural gas and low carbon ethanol, along with carbon sequestration of the CO2 produced by these businesses in California.

Byproducts of these businesses include distillers corn oil in California and refined tallow from India. So we plan to use as feedstocks for our SAF and RD production facilities, as well as using our dairy renewable natural gas to replace diesel while trucking our feedstocks and finished products, reducing fuel cost, carbon intensity and air emissions. We already have achieved many of the significant milestones for the current year of the five year plan, though several important events are scheduled over the next few months. In the India biodiesel business, $33.5 million of biodiesel contracts were fulfilled by Aemetis for the three India government oil marketing companies during the second quarter of 2023 generating $5.1 million of positive adjusted EBITDA during the second quarter.

We are now shipping new OMC orders for the third quarter, we are seeing steady improvement in the speed of the OMC procurement processes and note the positive impact of cost plus pricing that’s now being used by the OMCs to purchase biodiesel. The India business is debt free and now generally funds its own operation without outside working capital financing. The planned export of refined tallow from the India facility to renewable diesel producers in the U.S. is making steady progress with final negotiations underway for storage tanks at two California ports and feedstock sales to several biorefinery customers in active discussions. In the Aemetis Biogas business, we closed the second $25 million USDA guaranteed loan to build dairy biogas digesters for an additional eight dairies, bringing our total to 15 fully funded dairies that are designed to produce a combined 400,000 MMBtus of renewable natural gas each year.

At $100 per MMBtu of future expected revenues, when the low carbon fuel standard carbon intensity pathways for the Aemetis Biogas project are issued by the California Air Resources Board. These 15 dairies are estimated to generate approximately $40 million of annual revenues and more than $30 million per year of annual positive cash flow under primarily 35 year contracts, including optional extensions. Until the California Air Resources Board pathway approval is processed and we are able to begin selling into the renewable natural gas markets at its full LCFS value, we will be storing the renewable natural gas we produce underground and carrying it on our books as inventory. We already have signed agreements to build biogas digesters for 37 dairies and plan to build digesters for 65 dairies in the five-year plan.

We now have built and are operating seven diary digesters, a 40 mile biogas pipeline, a central biogas to RNG production facility, and a PG&E utility gas pipeline interconnection unit. The 20-year long-term debt financing provided by the U.S. Department of Agriculture Renewable Energy for America Program known as REAP has now funded $50 million of project financing to Aemetis Biogas. An additional $75 million of USDA guaranteed project funding is in process, with an expectation of obtaining USDA commitment letters later this year. In total, we plan to receive $125 million of USDA REAP funding and commitments for Aemetis Biogas by the end of this year. Though we plan to continue to utilize USDA REAP loans for the construction and operation of the Aemetis Biogas projects, we are negotiating a repayment of the Third Eye Capital financing by a new lender.

We expect to close a new financing for Aemetis Biogas this fall and along with an allocation of investment tax credits to fully repay the Third Eye Capital financing that funded the launch of the Aemetis Biogas project. The Aemetis Biogas Central Dairy project is expected to generate more than $60 million of federal tax credits under the Inflation Reduction Act by bringing the 40 miles biogas pipeline, the Central RNG production facility and other biogas — Aemetis Biogas assets in service in the first half of 2023. We are in the process of selling these tax credits to a large corporate buyer and expect to receive more than $50 million of cash proceeds upon closing of the IRA investment tax credit sale. In the Aemetis sustainable aviation fuel and renewable diesel business, we have nearly completed the two primary permits for the construction of the 90 million gallon SAF and RD plant at the Riverbank site.

The Conditional Use Permit and California Environmental Quality Act approval allowing the use of the 24-acre site for construction of a Sustainable Aviation Fuel and Renewable Diesel plant was posted for public notice and is expected to be approved in the next month. The authority to construct air permit is expected to be approved by the end of September in order to allow project financing to close early next year. In the Aemetis Carbon Capture and Sequestration Business, we designed CO2 carbon capture and sequestration systems for the Riverbank and Keyes site and recently were awarded the first CO2 Characterization Well Permit ever issued by the State of California. The CO2 Characterization Well is designed to provide soil data for the EPA Class VI injection well planned for the Riverbank site.

The well site compacted access road and high capacity well drilling pad have now been engineered, permitted and constructed at a cost of about $500,000. Let’s briefly review progress with external legislation regulations and incentives including the Federal Inflation Reduction Act and the California LCFS. The external political and regulatory environment for renewable fuels and the reduction of carbon pollution in the U.S. and India has improved significantly during the past year. The passage of the Inflation Reduction Act in August 2022 provides an estimated $400 billion of funding towards renewable energy and carbon reduction projects. On June 21 of this year, the IRS issued guidance for the process to transfer IRA tax credits. The IRA investment tax credits the Aemetis Biogas business generated during Q1 and Q2 of 2023 from placing six digesters, 40 miles of biogas pipeline and the renewable natural gas production facility with utility interconnect in service in late January are expected to be sold to a single corporate buyer in the next month or so.

We expect that more than $450 million of Inflation Reduction Act, transferable tax credits will be generated by the Aemetis Biogas business in the next four years and substantial amounts are expected to be generated by the reuse of CO2 by the ethanol plant, construction and operation of the SAF plant, and underground sequestration of CO2. The sale of investment tax credits is expected to be booked as other income and could generate a substantial amount of adjusted EBITDA cash and aftertax earnings. During the second quarter, the California Resources Board held an LCFS Scoping plan webinar where staff stated that CARB plans to significantly increase the number of credits required under the Low Carbon Fuel Standard Program starting in 2024 by significantly expanding the LCFS mandates.

CARB expects the increased mandates will raise the price of LCFS credits to more than $240 per credit in the next two years. Recent discussions have focused on a 48% reduction in greenhouse gas emissions by year 2030, up from 40% which should have a positive impact on LCFS credit prices. LCFS credits generate revenues for Aemetis and all of our U.S. businesses and indirectly benefit our India business that produces feedstock for renewable diesel and sustainable aviation fuel biorefineries. Now, Andy Foster, the President of Aemetis Biogas and Aemetis Advanced fuels businesses, will review some highlights.

Andy Foster: Thanks, Eric. Late last year, we closed our first USDA $25 million financing and just last week our second USDA $25 million financing utilizing the Renewable Energy for America program. Allow me to quickly recap the Aemetis biogas RNG Q1 project milestones. We completed the installation of 40 miles of biogas pipeline. We completed commissioning of the biogas-to-RNG upgrading facility. We completed commissioning of the RNG interconnection unit with PG&E’s Pipeline. We now have seven fully operating digesters and will be constructing eight additional digesters this year. These 15 dairy digesters are expected to generate approximately 400,000 Mmbtu per year of renewable natural gas. We recently received our default negative 150 carbon intensity pathway approval for four dairies to begin generating LCFS credits and expect two more approvals in the coming weeks.

While we await the approvals of our provisional LCFS pathways for credit generation, we are storing our RNG underground and carrying it as inventory until we deliver it to customers. With the dairy RNG business now operating seven digesters, and with eight more dairies fully funded and underway. The approval of CARB LCFS pathways for each digester will significantly increase revenues for RNG that is already being produced. We are working diligently to obtain the provisional LCFS carbon intensity pathways as quickly as possible, which we expect to be in the negative 415 CI range, resulting in significantly more revenue than the negative 150 default pathway that we are currently using, while the full pathway applications are in process. Operationally, we’re focusing on executing the construction of additional dairy digesters to fill our 40 miles biogas pipeline, the centralized biogas-to-RNG production facility, and the PG&E interconnection unit, which are all currently on operating.

Let’s briefly discuss progress at our Keyes California ethanol production plant. During Q1 and a portion of Q2 this year, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant, which helped us to avoid significant losses during the quarter due to extraordinarily high natural gas prices. But equally important, helps us avoid future plant shutdowns that would have been required to install key components of our energy efficiency upgrades. The results is an acceleration of our reduction of energy costs and driving lower carbon intensity of our biofuel through several plant efficiency and electrification projects. We also accelerated the installation of an entirely new Alan Bradley Decision Control System, or DCS with artificial intelligence capabilities, along with several other important process upgrades.

While a top priority for Aemetis is to maintain our decade long track record of continuously operating the Keyes plant to supply feed and fuel to local markets, doing so under extremely negative conditions that developed late last year and continued into the second quarter of this year in California. Natural gas markets would have been unsustainable and frankly, irresponsible. Rather than just shutting down and furloughing our employees, we instead chose to use this time to conduct an extensive plant maintenance program and pull forward many of the critical components of our energy efficiency projects. In the long run, this decision to focus on fundamental improvements in our energy efficiency will save us millions of dollars in project costs through avoided down days and lost production, and save us time in completing the projects.

Ultimately, this also puts us on a faster path to improving our operational expenses through increased energy efficiency. We restarted the Keyes ethanol plant in late May and ramped up production during June and July. As a strong endorsement of our carbon reduction and energy efficiency projects. Aemetis has been awarded $16 million of energy efficiency and other grants by PG&E, the California Public Utilities Commission, and other entities to supplement our own funding to complete these projects. Our goal is to significantly reduce or even eliminate the use of petroleum-based natural gas at the Keyes plant. When these projects are completed in 2024, we expect that natural gas usage at the Keyes ethanol facility will be reduced by 80% or more.

This transformation from traditional natural gas to renewable electricity will put Aemetis at the forefront of decarbonized manufacturing facilities in California and is expected to reduce the carbon intensity of the fuel ethanol produced at the Keyes plant by double-digits. The installation of the solar microgrid mechanical vapor recompression or MVR, operation of the all-electric Mitsubishi ZEBREX dehydration unit, the replacement or upgrading of various heat exchangers and other process equipment, and the installation of a new AI enabled DCS system will allow Aemetis to achieve meaningful energy cost savings and increased revenue through lower carbon intensity fuel ethanol sales. In summary, despite facing some temporary and highly unusual external headwinds in the first and second quarters of this year in our ethanol business, operational performance and project milestones for the Aemetis biogas and ethanol plant business continue to be on track with our five year plan.

Eric?

Eric McAfee: Thank you, Andy. Let’s review our growing biodiesel tallow feedstock refining and glycerin refining businesses in India. The national biofuels policy in India was updated in 2022 and now is being implemented to achieve a 5% blend of biodiesel that is equal to about 1.25 billion gallons per year. During the second quarter of 2023, the three government oil marketing companies issued tender offers to purchase biodiesel under a feedstock plus pricing formula that was used very successfully last fall to bring biodiesel plants into production. The tender offers were for a delivery during the second quarter of 2023. Aemetis selected specific delivery locations and amounts then received supply contracts for about $34 million of biodiesel to be delivered during April, May and June of this year.

The cost plus pricing formula used by the oil marketing companies is expected to be the ongoing format for sales to the OMCs. We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula. Our plant in India is uniquely situated to benefit from the successful feedstock plus pricing mechanism in India, since importing biodiesel or renewable diesel is not allowed under India law. And Aemetis owns and operates the largest production capacity biodiesel plant in India. We’re negotiating the sale of tallow feedstock that’s refined by our tallow pretreatment unit in India for export to the U.S. for the production of renewable diesel and sustainable aviation fuel.

Since our India subsidiary has no debt and the 50 million gallon per year biodiesel plant, the 50 million gallon per year tallow refining facility, and the glycerin plant are fully constructed. We are well positioned for profitable operations as we scale of operations to meet OMC requirements for biodiesel blending. Let’s discuss our carbon zero sustainable aviation fuel and renewable diesel projects in Riverbank, California. A year ago, Aemetis took operational control of the 125 acre Riverbank site. For construction of our sustainable aviation fuel and renewable diesel plant, as well as the Riverbank portion of our CO2 sequestration well project. We have signed and announced more than $3.8 billion of sales contracts with Delta Airlines, American Airlines, Japan Airlines, Qantas and other airlines.

We’ve now completed offtake contracts for contracts for about 45 million gallons per year of blended sustainable aviation fuel to be produced at the Riverbank plant. In addition, we signed a $3.2 billion renewable diesel sales agreement to deliver 45 million gallons per year under a 10 year sales contract with a major travel stop chain for its Northern California locations. Incentives included in the recently passed IRA legislation, expand the market for sustainable aviation fuel by allowing a price to airlines that is about 10% higher than petroleum jet fuel and is partially or entirely offset by CORSIA carbon credits generated by the airlines. During Q2 2023, we continued to make steady progress toward air permits and other building permits for the 90 million gallon per years Riverbank SAF/RD plant.

We look forward to completing engineering and permitting in order to begin construction of the Riverbank renewable jet diesel plant later this year or early next year. Let’s review our subsidiary Aemetis carbon capture. Currently, Aemetis captures the 150,000 metric tons per year of CO2 emissions from our ethanol plant near Modesto and reuses the CO2 for local customers. This reuse of CO2 generates 45Q transferable tax credits under the Inflation Reduction Act. In Phase 1 of the Aemetis Carbon Capture project, we plan to inject up to 400,000 metric tons per year of CO2 emissions from our biogas ethanol and jet diesel plants into two sequestration wells, which are planned to drill near our two biofuels plant sites in California. We expect to construct two CO2 injection wells that each have a minimum of 1 million metric tons per year of injection capacity with additional CO2 supplied by other emission sources to sequester a planned total of 2 million metric tons per year of CO2.

During 2022, Aemetis completed the purchase of 24 acres at the Riverbank site and built a heavy equipment access road and a well drilling pad for the soil characterization well to provide data for our EPA Class VI injection well permit. The initial phase of construction includes drilling two characterization wells to provide empirical data for the EPA Class VI permits. We expect to receive our first well drilling permit for the characterization well last month, which we’ve just recently achieved, but this is key in that it’s on track with our well development plan. The direct key feature of the Inflation Reduction Act provides a federal tax credit of $85 per metric ton of CO2 as a cash refund to Aemetis each year for the first five years of production.

The planned 2 million metric tons of CO2 per year from the Aemetis carbon capture projects would generate an expected $170 million per year from the federal direct pay tax credit as well as an estimated $400 million per year at a projected $200 per ton for sequestered CO2 under the low carbon fuel standard in California. We believe the fixed amount of $850 million provided by the direct pay funding over the first five years of the project could support the funding of an estimated $250 million capital cost for the two injection wells and related equipment. In summary, the India Biodiesel business showed $5.1 million of adjusted EBITDA on sales of $33.5 million in the second quarter, while the Aemetis Ethanol business was in a maintenance and upgrade cycle during the quarter.

In response to the temporary exorbitant pricing of natural gas in California during the first quarter and early second quarter of this year. With this extraordinary natural gas price event behind us, we restarted the Keyes plant and continue to expand a diversified portfolio of negative carbon intensity projects dairy, renewable natural gas, biodiesel in India, sustainable aviation and renewable diesel fuel, low carbon ethanol using zero carbon intensity electricity and renewable hydrogen and CO2 sequestration. All these projects are synergistic and create what we refer to as a circular bio economy within Aemetis in which we use byproducts and waste products from our facilities and local areas as feedstock to produce low and negative carbon intensity renewable fuels.

Our company’s values include a long-term commitment to building value for shareholders, the empowerment of and respect for our employees and business partners, and making significant and positive contributions to the communities we serve. Now, let’s take a few questions from our call participants. Kelly?

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Q&A Session

Operator: Thank you, Mr. McAfee. We will now be connecting a question-and-answer session. [Operator Instructions]. Your first question is coming from Manav Gupta with UBS. Please pose your question. Your line is live.

Manav Gupta: Eric, you have a closer visibility with CARB than probably anybody else. You know those people very well and they listen to you. They take your inputs. Help us understand. I mean, we hear that CARB wants to fix this, that the price is too low right now for new development. What are the next milestones we should look for Eric when we — as this process unfolds? And when can we expect some kind of firm commitment from their side which helps the higher price of carbon to move higher and benefit Aemetis in multiple ways?

Eric McAfee: What do we have, Andy for that?

Andy Foster: Hey, Manav. Good question. I think we’re sort of in the interim period where CARB is obviously rescoping the LCFS program, a pretty significant undertaking that started last fall, and they’re hoping to have wrapped up this fall. They certainly sent a lot of very positive indications about the direction they’re going. But currently they’re doing things like working on the Tier 1 calculator, which they’ve sent out to all the various stakeholders to receive comment and feedback and any kind of insights from industry and other groups to help them as they start to finalize the rules that will be a part of this new LCFS. So I think in that period of time, Manav, it’s natural that there’s some level of kind of wait and see and we did see a nice little run up in the LCFS price about a month ago.

I think there’s a record number of credits that are out there, which obviously, that’s not helping the price. So I think our view is that take the long-term view of your investment or the marketplace and how we’re building our business. Probably seeing improvement in the first quarter hopefully, they’ll send some more clear signals by the end of this year. But in the first quarter of next year, when they begin the reauthorization and the implementation of the new LCFS, we know that they’re going to increase the requirements of the program. We know that for a fact. They’ve stated it publicly. They’ve set up to 48%. So unfortunately we’re in that kind of middle zone right now where everybody’s sort of waiting for this to happen. A lot of projects are being built out.

As you know, CARB has a huge backlog of applications that are sitting with temporary or default pathways. So there’s a lot of projects that want to come online, a lot of projects that are looking to actively participate in the program that are sort of in the queue right now waiting for CARB to get through those applications where we have six of them ourselves in there and we’re meeting with CARB and having good open dialog with them about how we can help them as an industry, how we can help them improve that process. Because I think once people start to see these projects really flow through the pipeline, that’s also going to have a very positive effect because the State of California needs to be mindful of their obligations and meeting their own goals.

And the renewable natural gas business is really at the front of that line in terms of helping them advance the program and meeting their obligations under the LCFS. So long answer. I apologize for being windy, but I hope that gives you some insight.

Manav Gupta: Perfect. I’m going to keep it to the macro again. Looks like the EPA also came out and with their RVO is going to be very supportive of renewable natural gas. Maybe not as supportive of Renewable Diesel, but definitely very supportive of renewable natural gas. And we have seen the price of D3 respond to that. So any thoughts on EPA being supportive of RNG? Maybe it was not as supportive earlier and EV RINs was a little tricky area, but looks like now they want to grow RNG and they want you to use it in the transportation vehicles.

Eric McAfee: That’s right. And I think they received a lot of input from industry, to be honest with you, over the last few months, we work with the Renewable Gas RNG Coalition and other groups, giving a lot of feedback, submitted a lot of information to the EPA and it appears that they were listening. So yes, we’re happy with the developments there and hope that they continue to show strong support for renewable fuels in general because despite the lofty goals and aspirations for EVs, which we certainly we support EVs, but there’s an aggressive timeline that everybody’s looking at in the one sector that can deliver and has proven it can deliver is renewable fuels.

Manav Gupta: Thank you so much, guys. And congrats on all the positive developments that are happening at Aemetis.

Eric McAfee: Thanks, Manav. Appreciate you joining the call.