REX American Resources Corp (REX) 2022 Q1 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2022 First Quarter Conference Call. (Operator Instructions) I would now like to turn the call over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining REX American Resources Fiscal 2022 First Quarter Conference Call. We'll get to our presentation and comments momentarily as well as your question-and-answer session, but first, I'll review the safe harbor disclosure.

In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements.

I have joining me on the call today, Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer. I'll first review our financial performance and then turn the call over to Stuart for his comments.

Sales for the first quarter increased by 18% as we experienced higher pricing for ethanol, distiller grain and corn oil. Ethanol sales for the quarter were based upon 64.5 million gallons this year versus 70 million gallons last year. We reported gross profit of $11.9 million this year versus a gross profit of $19.5 million in the prior year.

For the current year, quarter improved selling prices were offset by higher corn and natural gas pricing. Ethanol pricing improved by 27%, dried distiller grain improved by 5%, and corn oil pricing improved by 91% for this year's quarter over the prior year first quarter. Corn cost increased by 27% and natural gas pricing increased by 86% for this year's quarter compared again to the prior year first quarter. As inflationary pressures and the impact on commodity pricing from the Ukraine-Russia conflict continued.

Gross profit comparison between years was also impacted by lower sales prices on certain ethanol contracts in the current year when the purchaser paid the freight. SG&A decreased for the first quarter to $5.2 million from $9.9 million in the prior year. Again, this primarily represents decreased outgoing freight cost charge to SG&A in the current year based upon certain ethanol contracts. We had income of $2 million from our unconsolidated equity investment in this year's first quarter versus $570,000 in the prior year.

The discontinued operations reflected in the prior year numbers are from the refined coal business as we ended those operations on November 18, 2021. There was no impact in the current year. We reported a tax provision from continuing operations of $1.8 million for this year versus a provision of $2.2 million in the prior year. These factors led to net income attributable to REX shareholders from continuing operations of $5.2 million for this year's first quarter versus $7.3 million in the prior year.

Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.87 for this year's first quarter versus $1.30 in the prior year.

Stuart, I'll turn the call over to you.

Thank you, Doug. Going forward, the ethanol operations for the current quarter are currently running significantly ahead of last year's corresponding quarter, and we are being -- we will be helped by a onetime government payment, which -- from the -- related to COVID relief and some improvement in ethanol profits quarter-to-date. Zafar Rizvi, our CEO, will discuss this further.

Currently, we have $234 million in consolidated cash, and we also have tax credits that we're able to use -- that we have carried forward that we're able to use against our pretax earnings and help our -- and continues to help our cash flow. Uses of this cash include buying the stock on dips. Should the stock dip, should the market dip, should our stock go down significantly, we have the cash to buy in shares. We're also working very, very hard on a carbon capture project. Zafar Rizvi will discuss this also in his segment.

Looking at compatible industries that currently emit large amounts of carbon, nothing imminent, but we found something where we can make an industry less carbon-intensive using our carbon capture holes that would be something we would consider. And we continue to look for other ethanol plants that are well located, they use the same technology we use. And again, that's an industry we know very, very well. To date, we have nothing imminent in that area either to report, but we are -- we continually look.

I'll now turn the conference call over to our CEO, Zafar Rizvi.

Thank you, Stuart. I will be very brief. As I mentioned in our previous quarterly call, the operating environment in the beginning of first quarter of 2022 was very challenging. Since then, we have seen some improvement, but it continues to be a challenge for a number of reasons: an increase in ethanol production, logistic problems and increase in the price of corn greater than the ethanol price and the high price of natural gas, all of which are negatively affecting the crush margin.

As a note, we consider the crush margin as the price per gallon of ethanol and the price per bushel of grain divided by the realized yield. At this very early stage of the second quarter, we expect the second quarter will be profitable. On May 23, 2022, the company received $7.8 million as a part of COVID relief bill passed by Congress in December 2022 -- I'm sorry, December 2020. In June of 2021, USDA announced $700 million biofuel producer program to distribute these funds to impacted producer of ethanol, biodiesel and other renewable fuels.

As I mentioned in our previous calls, we are also evaluating several other projects that would increase production, efficiency and energy saving as well as reduced water consumption. Some of these projects are capital intensive and require much analysis before they can be implemented. All these projects are very early stage and may not be materialized.

Let me give you a little bit details about the carbon sequestration. As I mentioned in our previous calls, we are working with the University of Illinois on drilling a carbon sequestration well. The first test well at One Earth Energy was successfully drilled to total depth of around 7,100 feet, in which almost 2,000 feet of Mount Simon Sandstone was incurred. The geological models are predicting the movement of the CO2 injection into the subsurface is making success -- progress. Additionally, we will be performing water injection test at the well itself this week and to evaluate the expected movement of CO2 as well as expected plume area and storage capacity under the subsurface area.

These simulation models are helping to complete the Class 6 permit application as we predict the behavior of the CO2 when it is injected. We expect to file the Class 6 permit by the end of June or early July. The simulation model results are currently at preliminary stage, and a little more work -- and a lot more work is still required. However, the data indicates all the CO2 produced by the One Earth Energy facility and more can be injected and stored at the potential sequestration site. We will continue to evaluate further as we make progress and decide the injection well location.

Once again, this is a highly technical and time-consuming project, and it will take time to make material progress. The 3D seismic testing was completed in the middle of February. We are still in the process of evaluating and modeling of the 3D data, and that's one of the reasons we are trying to make sure the well location is at the proper location, which can have maximum carbon can be stored.

As I mentioned in a previous call, almost 16,000 nodes were placed to different points, and 116 million points of data was collected, and that's still being analyzed. I want to treat that this project is still a very preliminary stage. It requires a lot of time-consuming modeling and analysis. We cannot yet predict the result of the simulation models and whether we will be successful or not.

In summary, as Stuart mentioned, we are very pleased to announce once again a profitable quarter in a very difficult environment and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues on achieving these results.

I will give the floor back to Stuart Rose for additional comments. Thank you, Stuart.

Thank you, Zafar. In conclusion, again, we made money in a quarter when most of the public companies in the industry reported a loss. In our company, we're a well-run ethanol company that makes money -- that consistently over the years has made money in ethanol and also have great hopes for the future in carbon capture. We feel our carbon capture as well -- is far more advanced than almost everyone else is trying to -- just trying to get into this industry. More importantly, like I said, we make money now for our shareholders. We're not just living on dreams and hopes. We have a real very, very good operating company in the ethanol business.

We really have a few things to thank for that. It's good plans, good locations, but most importantly and the biggest thing and the biggest thing that separates us from the rest of the industry and why we've consistently done so much better than most of the other public companies in the industry, is our people. And they're important to us. And again, we think we have the finest people in the industry, and that's really why we continue to outperform the industry.

I'll now leave the forum open to questions.

(Operator Instructions) Our first question is from Jordan Levy with Truist Securities.

Really nice quarter and a really nice quarter against a clearly challenging backdrop, and I think that's a testament to how you all have continued to run the company. So I wanted to say great job there.

I'll start out on the carbon capture side of things for either Stuart or Zafar. I'm curious if you can -- Stuart, you mentioned looking at other carbon-heavy industries or ethanol facilities that might be able to benefit from carbon capture. And I'm curious how you think about, knowing we're still early stages in carbon capture, how you think about that or an outright purchase of an asset like that versus entering into supply agreements with third parties that could also benefit from carbon capture. I'm just curious how you guys frame that up when you're thinking about the (inaudible).

I'll take that first, and I'll give it to Zafar. I believe the most important thing is to have the capacity, the carbon hole, and that's where we're working on most. There's a lot of, like you just mentioned, ethanol plants out there that are emitting carbon. There's ammonia plants emitting carbon. There's electric utilities emitting carbon. And if we have the hole, we have the opportunity to capture carbon in a number -- not just in the ethanol business but the most important thing is to have the hole -- to have the carbon capture hole. And it's not an easy thing to do. So far I mentioned we have literally millions of points of data that are involved in getting a Series 6 permit, and he can talk more about it. But it's not easy. We think that's the most important thing.

Then while he's doing that, we are looking around in different industries that emit a lot of carbon, and we hope to have a very, very large carbon capture facility that can be used to lower the carbon footprint for our area, for the whole country. So that's our goal. I'll turn it up to Zafar if he wants to add on to that.

I think only thing I should -- you are exactly right, the well is the most important. If you don't have the well, you can have the carbon, but you will not be able to do the carbon sequestration. And to get EPA Class 6 permit, it takes somewhere 6 to 18 months after you apply for the permit. So as you know, we are working on this project almost 2 years. So we reached, at this stage now, to ready to file the EPA permit. This already takes so much time and now further, it's going to -- once we apply depending on EPA, other information they required, it will take 6 to 18 months. So it's a long process. And certainly, we will have our own well.

We already had a location, which is One Earth Energy, who's producing the carbon. And as Stuart mentioned, we will look at it in the future if there is more carbon from other locations or our own other business, which we may have in the future, and we can -- certainly can store that carbon also in the same place. I think we -- and most of all, we are sitting at the location at Mount Simon, which is really at -- is the best location, at least in the Illinois area, and we think it's the right place and to do it independently at this time and in the future, depends on which direction it may move.

That's great color. And maybe a follow-up on a different topic on the corn oil side of things. Obviously, we've seen a lot of price increases in that product as we've seen with all oil products in the ag space, but especially corn oil and some of that's probably driven from the renewable diesel sector and some with just the relationship with the grain prices. Just curious how the demand you're seeing on that versus how you've historically seen it.

I think, certainly, we have seen a lot of corn oil demand at this time. We literally get called almost every day or every week, and suddenly, there's a higher demand and certainly that the reason is that corn oil price is consistently carry on going up. And as soybean oil is going up, so it's almost trading closed to the soybean oil. And that certainly is one of the bright side in this business at this time, and as you can see, corn is trading today about $7.60, which is -- don't compare to last few weeks, it was up almost $8.15, and natural gas is trading $9.20, ethanol is $2.75.

When you look at all of these situations and DDG -- lately, we have seen the price of DDG has gone down compared to even a few weeks ago. So I think there is so many other -- and logistic concerns. So there is so many other challenges at this time we have, but I think we're taking it one at a time and making sure that we cross this bridge.

Our next question comes from Pavel Molchanov with Raymond James.

It's been a little while since I've been on one of your calls. I think this is the first -- your first call since the war began, and I thought I would just ask kind of an open-ended question. How has the war affected the ethanol market from the kind of top line perspective or the cost of goods perspective or both?

I think if you look at the recently, which we have seen, corn price certainly has gone up because Ukraine produce approximately 1.3 billion bushels a year, and they export are almost 1 billion bushels a year. So they are not able to export as much as they can. But, on the other hand, some other countries like Argentina and Brazil, other top 4 countries, are taking over that, exporting more than the United States. We were certainly were concerned in the beginning that if all the export goes from United States, then it will be really -- we will have no carry for the 2022, '23 years.

And then also the concern -- other concern we see is that overall, USDA has recently announced that the corn production forecast down due to primarily due to Ukraine and U.S.A. Also, we've seen the weaknesses in China and the European Union. But on the other hand, we certainly have seen a lot of bumper crops in Argentina and Brazil. So there is certainly effect. And as you can see, there is also effect on natural gas because there is -- expect the natural gas will be -- liquid natural gas will be exposed to European countries or others. So there certainly is a very big pressure on ethanol industry to these commodities.

Yes. I appreciate the perspective on that. Let me zoom in on the EPA allowing higher blending levels this summer. How do you anticipate that having an impact in practical terms in the United States?

I'll answer that one -- we don't. We don't make much difference at all. It's peanuts overall, and it's just talk. And most gas stations, if you go to your gas stations in the East or the West, they don't even offer E15. And they didn't do it on a permanent basis. So there's no incentive to put in E15 across the country. So we think it was just more bluster than it was real help to the industry. There will be some minor help, very, very minor help if a few people, a few pumps use E15 instead of E10, but this was not -- this -- it was very similar to what the Trump administration did related to E15 and whatnot. And it's more talk than it is any help to us whatsoever. The big help that we received, and we're very grateful, was that USDA payment. That's real money, and that really counts. And that was great. Zafar, you want to add to that?

Yes, I think you are exactly right because unless EPA make this -- that we can sell it all year around, no one is willing to invest for 8 or 9 months and then they have to shut down their pumps and then start over. So this uncertainty is certainly is creating a problem. So we need to we have -- Biden administration should really -- we should be able to sell E15 all year around just like any other brand. That's the only reason we can certainly can increase this demand more for ethanol and -- otherwise, it's going to be continue a problem.

Okay. And then just last question. What's the latest on exports to China? Been a recurring conversation, I guess, for, what, 4 years now?

Export to China is still really not as much as we expect. As you can see in the last even March number, we have not seen any export to China at all. U.S. government, and I think they have to work together to somehow to find a way to lift this tariff, and maybe as Biden administration is saying some of the goods, they will be importing from China, they're going to lift the tariff -- U.S.A. will lift the tariff to meet the inflation, because that's one of the reasons the inflation is also happening.

Contrary to some politicians believe that we are collecting tax. Actually, the tax are paid by the citizen, because as you charge the tariff, price of the goods goes up and somebody has to pay for this. So that's one of the also reason the inflation we are facing that a lot of these imports, which we were getting from China and other countries, they were cheaper priced, but we put the tariff on it and it become more expensive for the citizen. So that tariff has to be eliminated. And on the other hand, also, China should also eliminate all other tariffs which they have. It should be a fair trade.

Mr. Rose, there are no further questions. At this time, I'll turn the call back to you for closing remarks.

Okay. Thank you very much, and we'd like to thank everyone for listening, and we look forward to talking to you with you again at the end of next quarter. Thank you. Bye.

Bye-bye.

This concludes the conference, and we thank you for your participation. Thank you. Please disconnect your lines.