REX American Resources Corp (REX) 2022 Q2 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2022 Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, August 30, 2022.

I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining REX American Resources Fiscal 2022 Second 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 and 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 in 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 will first review our financial performance and then turn the call over to Stuart for his comments.

Sales for the second quarter increased by 23% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 71.4 million gallons this year versus 69 million last year. We reported gross profit of $16.6 million this year versus a gross profit of $14.2 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 20%, dried distiller grain improved by 21% and corn oil pricing improved by 53% for this year's quarter over the prior year second quarter.

Corn cost increased by 21% and natural gas pricing increased by 113% for this year's quarter compared to the prior year as inflationary pressures and the impact on commodity pricing from the Ukraine and Russia conflict continued. Gross profit comparison between years also benefited slightly from fewer ethanol contracts sold net of freight in the current year, which leads to higher sales. SG&A increased for the second quarter to $9.1 million from $6.2 million in the prior year. $1.1 million of the increase is due to the increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year and approximately $900,000 from increased incentive compensation.

We had income of $3.6 million from our unconsolidated equity investment in this year's second quarter versus income of $1.8 million in the prior year. The majority of the increase was a result of funds they received from in the COVID-19 relief grants from the USDA. The company's interest and other income in the current year includes approximately $7.8 million of income from COVID-19 relief grants, the consolidated plans also received from the USDA in May.

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 $4.3 million for this year versus a provision of $1.8 million in the prior year, primarily reflecting the higher level of income in the current year. These factors led to net income attributable to REX shareholders from continuing operations of $11.2 million for this year's second quarter versus $5.7 million in the prior year. Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.63 for this year's second quarter versus $0.44 in the prior year. I would like to point out all outstanding shares for all periods have been retroactively adjusted to reflect the recent 3-for-1 stock split.

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

Thank you, Doug. Continuing into the current quarter, we continue so far this quarter to be profitable. There are challenges in the ethanol business, which Zafar will discuss in his section. Our carbon capture project continues -- can -- we see very good news with the Inflation Reduction Act continue to work hard on that. Again, Zafar will discuss that in his section.

In terms of consolidated funds, we have cash of over $245 million. Our cash flow significantly helped by the carryforward of tax credits previously earned. We continue to use that cash for buyback, we buyback on dips. We bought 221,883 shares on a split-adjusted basis during the last quarter. We continue to look for profitable alternative energy possibilities. We're currently studying the Inflation Reduction Act to see if there's anything new there might be an opportunity for our company. Again, we are always looking for ethanol plants but nothing is imminent. We have not found anything at this point in time that would really work for us. In terms of our cash, we're now able to invest it at a much higher rate than before between 2% and 4%, which versus virtually 0 the year before. So that should help with our current cash position that should help our income over the next few quarters.

I'll now turn the call over to Zafar to talk about ethanol and carbon capture. Thank you.

Good morning. Thank you, Stuart. As I mentioned in our previous quarterly call, the operating environment in the beginning of the second quarter of 2022 has been some improvement. However, since then, it has been challenging for a number of reasons including serious logistic problems caused by railroad that resulted in delay of shipment. With an increase in inventory, we had no choice but the slowdown of the plant's production, but we are also seeing an increase in the price of corn greater than the ethanol price. On top of that, high price of natural gas is also negatively affecting the profit margin and production.

The USDA estimates 0.9% less yield and 5% less production of corn this year compared to '21, '22 crop year and approximately 20% of the corn production is within area experiencing draught. The USDA corn report this week showed 39% of Nebraska, 51% of South Dakota and 69% of Illinois corn and 54% total corn production are rated good to excellent this year. However, even the Illinois expected to yield less corn this year compared to last year. On the bright side, ethanol sales and DDG export have increased compared to last year through June 2022, and the nonfood corn oil price continued to increase and is expected to increase more.

Despite the challenges, at this very early stage of the third quarter, as Stuart mentioned, we expect the quarter probably will be profitable. As I mentioned in our previous call, we are also evaluating several other projects that would increase production, efficiency and energy saving as well as reduced water consumption. Some of the small projects, we were able to complete and some of them is expected to complete in the third quarter. We are still in the process of analyzing capital intensive projects before they can be undertaken and implemented. All of these projects are in a very early stage and may not materialize.

Let me share progress of our carbon sequestration project. As I mentioned in the previous call, 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 with total depth of around 7,100 feet. With almost 2,000 feet (inaudible) was incurred. The geologic models are predicting the movement of CO2 injection into the subsurface is complete. There are core analysis and well log indicate very good reservoir quality and well tests are being performed to further support this data.

The well test include performing water injection tests in the well itself to evaluate the expected movement of CO2 as well as expected plume area and storage capacity under the subsurface area. That water injection will also tell us more about the reservoir, and we are testing an additional backup storage zone in case it is ever needed for more capacity. This can take a week or sometimes longer than that. The seismic process is expected to be completed by the end of August. Design of the compressor facility and the bidding process are complete. We are in the process of removing contracts. The Class VI permit documents are near final draft status and are expected to be completed very soon. The EPA required extensive support documents and complete analysis before granting a Class VI permit. Our goal is to provide all documents and information with the application. 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. We cannot yet predict the result of the simulation models and whether we will be successful or not. In summary, we are pleased to announce once again a profitable quarter in a very, very difficult environment as well as substantial progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of all colleagues on achieving these results.

I will hand over to Stuart for further comments. Thanks Stuart.

Thank you, Zafar. In conclusion, we were helped this quarter by both direct funds from the government and the Inflation Reduction Act, which should help us with our carbon capture project if -- assuming we can get permitted and get it built. But most importantly, we performed among the best plants in the country. And again, it's because we have good locations, good plants, good locations, good -- generally good corn areas but the greatest asset we have and it's going to help us with everything we have going forward is we feel that we have the best people in the industry, and we think that's the real reason why we outperformed the industry, done significantly better than the industry over the life of the plants.

I'll now leave the forum open to questions.

(Operator Instructions) And our first question is from the line of Jordan Levy with Truist Security.

Congratulations on a good quarter and also continued -- what seems like excellent progress on the capture side of things. Maybe we could just start off there. Stuart, you mentioned the Inflation Reduction Act and some of the positive read-throughs there. Maybe we just talked to the increase in Section 45Q as it relates to your carbon capture project. It's been, I think, a little while since we kind of walked through the potential economics at One Earth with the CO2 emissions there. So maybe if we could just walk through kind of the potential benefits there.

The new bill calls -- previously, we were to receive in 2025, I believe it is, $50 a ton in credits and now -- per ton, and now it's about $85 per ton for any carbon we capture in the ground that stays in the ground. In terms of the economics, I'll have Zafar go over that. But again, we -- once we get the hole completed, we're not just trying to capture our carbon, we will look -- we're designing the hole to be bigger than just us. We want to make that clear. So we don't have any contracts signed with anyone else, but we're definitely designing the hole to capture more carbon than what we can produce. And we believe that the hole is the most important part that finding people who are willing to sell carbon will not be as hard as building this hole, and that's been the bulk of our efforts.

Zafar, do you want to go over economics.

Yes. I think I can talk very briefly, as you know, Jordan, if we were able to -- we didn't put the final numbers yet because we are certainly evaluating the total cost of the compressor machine -- compressor facility and all sort of building and other well factors, which we're looking at it. But if we were profitable, which we think at that time and when we did the last forecast with the $50, we believe we certainly will be profitable at this stage with the $85.

The one thing is certainly open up for us that we can afford to bring or other people can afford to transport by rail or by truck and others to our facility, which, as Stuart mentioned, that we will have more capacity for the well than we can really need for our own ethanol facilities. So we will be able to, hopefully, able to bring from other facilities or able to transport from other area instead of taking so long to build a pipeline, $3 billion to $4 billion and go through the whole process. So that certainly will also help us and to increase our capacity for the well -- for the sequestration. But we certainly think that it will be better to have $85 and $85 can be also in cash for first 5 years compared to $50 tax credit. So that will also be very helpful.

And maybe just along that same line of questioning. Just -- so it seems like everything you're doing right now is to get all the documentation in order to submit to the EPA for the permit. I guess maybe do you have a sense on what that timing is looking like at the EPA level or what we should kind of expect over the next few quarters in terms of updates on that project?

I think as we have revised some discussion with them, EPS takes somewhere year to 18 months. But we have -- we are working with the people who have previously submitted these kind of permits. And if that's the reason we're taking everything practically possible to have document every single thing, including any financial guarantees or whatever they require. So that way EPA does not delay for asking further application or further papers or for the other further documents.

As you know, once you submit this application, then if it's not complete, then EPA can call you for after 3 or 4 months and says, "I need this document." So you submit that document. So it then they start reviewing that document, it takes longer to -- and they reach the conclusion. So our goal is to submit it with all documents as we have seen previously, they asked before we really submit the application. So we are in a final process, and we hope that we will submit it by end of the September if not middle of September.

Got you. Totally makes sense. Moving over to the ethanol side, maybe for Zafar, you also talked to kind of an increase in 2Q, an increase in the number of contracts where you all were responsible for covering freight. And Zafar, you also talked about just the ongoing logistical challenges with rail delays and that sort of thing. Maybe if we could just dive in a little deeper on the logistical challenges that are going on? And anything that can be done to kind of mitigate any of that?

I think I'm going to speak generally not specifically each location, but I think what we're finding it that is railroad really is not functioning properly. Certainly, we have seen, in some cases, that we had the -- train is ready to pick up our -- and they're supposed to pick up on Friday, but it will not be there up to next Friday and even Sunday. So they are delaying 7,7, 8,8, 9,9 days. And so I think basically, what they are continuously telling us that they have shortage of crews and workers and they cannot find drivers and that's causing the further delay.

And I think one thing which I really care stressing in other people that as long as railroad has semi-monopoly that nobody has come to their train track, unless they pay a huge switching fee as President Biden said previously, that switching frees causing delays and transportation problems unless really federal government look at closely to eliminate that limited switching fee and that every train company -- railroad company to switch each other and pay the freight, and they will be easily switched the track without any extra charges. I think that will certainly will increase logistic problem that it will it will save a lot of hassle because now we are dependent only on railroad. If they don't have drivers, then we stuck. But we don't have any choice to call somebody else to come and pick up our freight and loaded cars, and that certainly is a major problem.

Our next question comes from the line of Pavel Molchanov with Raymond James.

First, you talked about being interested in acquiring some ethanol plants, given all the craziness in the ethanol market in the last 2.5 years, right, with prices as well as feedstock going from record lows to record highs and everything in between. What is the valuation landscape looking like for existing plants?

Well, to build a new plant would be well in excess of $200 million -- probably today in excess of $225 million. There is no good plants up for sale right now. There's a lot of bad plants. We sold the plant many years ago, a 100 million-gallon plant for about 2 -- we didn't own it all, we owned about 25% for about $200 million. And I would say with the excitement with most of the ethanol plants, ethanol is a unique industry. At the moment, the government favors it. And it is one of the few that emits pretty much pure CO2, which is easily captured. So we think most people in -- with $85, that could be a huge amount of money for the people that actually have the carbon capture, but it can also made money for any ethanol plant because they can sell their CO2 amount. So it's a new revenue stream.

So I think there's excitement in the industry. I don't think any of the really good plants would sell or less and we have not seen any recently that would sell that I know of that would sell for less than replacement value or less to built in a new plant in the years past, there have been some, and we tried to buy some. Unfortunately, we have been outbid in the last year that we tried to buy, but they have been out there. But today, I know nothing that's out there. And I think it is the excitement of carbon capture.

Right. Okay. So in that context, given that you ventured into carbon capture, I'm curious, do you have any interest in getting into RNG production, landfill or dairy gas?

No, not at this time. Nothing is impossible, but we have looked at it. And it's -- nothing is impossible, but at this time -- and I've spent over the years, a lot of time looking at landfill gas, and it's today because of the government -- because of the new regulations, is a different business. And I would just say it's something we're among many, many things we're studying related to the new act. But at this point in time, we have no -- nothing eminent and nothing -- no plans or nothing to -- nothing other than study in that industry. It's no different than any others to us at this point in time.

And along those lines, with carbon credit pricing in Europe is close to EUR 100 a tonne now, which is a lot higher than the subsidies given domestically through Section 45Q, with that in mind, would you consider looking at carbon capture project somewhere in the European Union?

Sure. We'd look at anything related to carbon capture. That's going to be a big part of our business.

Our next question is from the line of Chris Sakai with Singular Research.

Can you talk more about the Inflation Reduction Act? How is -- when are you going to see benefits from that? And can you quantify how much benefits you'll see?

Zafar?

I think as I mentioned earlier, specifically at this time, we're looking at the carbon sequestration, there is so many other things are really benefits with maybe people are -- some people are looking solar, some other projects, which can be energy-saving projects and other which can have generate a lot of tax credit and others. But specifically looking at it, carbon sequestration, as I mentioned earlier, $50 tax credit we were still -- when we original projection, we looked at it, we were profitable and now it's $85 and that will be -- certainly will help us to get more profitable.

As Stuart earlier mentioned, our well is also capable of taking more carbon than we can really do the carbon sequestration from our ethanol facility alone. So $85 make it easier for us to also bring it by rail or by truck or from other locations closer to us and still can be a profitable with those projects. So certainly, there is a positive impact on the tax reduction legislation.

All right. And then can you talk about -- are you guys seeing any more gas stations offering E15, how that's going?

Let me say that I was in a meeting. We have a meeting with agriculture secretary, Tom Vilsack on, I think, this Monday. Yes. Exactly. Yes, last week, Monday and he announced their $100 million for E15 structure bill and other things. So certainly, we have seen some of those in corn growers, states like Iowa, Nebraska, even some part of Illinois, even Indiana, we have seen more and more people are offering E15 and Iowa is also offering more tax credit and even Illinois is offering more tax credit to have --- encourage E15 pumps more. And it's certainly helping us lift some this year as it continue. Unless this E15 is available all year around the it becomes difficult -- but if it's all year around, then certainly, it will grow more. And with this $100 million, which is the agriculture secretary announced is going to help us also.

And there are no further questions on the phone lines at this time. I'll turn the presentation back to the speakers.

Okay. Thank you. We'd like to thank everyone for listening, and we'll talk to you again at the end -- when we report at the end of this quarter. Thank you very much. Bye.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.