REX American Resources Corp (REX) 2021 Q2 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2021 Second Quarter Conference Call.

(Operator Instructions)

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

Please go ahead, sir.

Good morning, and thank you for joining REX American Resources Fiscal 2021 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 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, the Chief Executive Officer.

I'll first review our financial performance and then turn the call over to Stuart for his comments.

Sales for the quarter increased substantially by 398%, primarily due to higher production levels as we had idled our NuGen and One Earth plants for a portion of last year's second quarter due to the impact of the pandemic amongst other factors.

Ethanol sales for the quarter were based upon 69 million gallons this year versus 26.5 million gallons last year.

We also benefited from a significant increase in average selling prices in the ethanol and byproducts segment.

We reported gross profit of $14.2 million for the ethanol and byproducts segment versus a gross profit of $553,000 in the prior year.

Gross margin benefited from the increased volume and selling prices, which were offset somewhat by higher corn pricing.

Gross profit also benefited from certain shipping costs being recorded in SG&A this year based upon contract terms and our placement of outgoing shipping costs in SG&A.

Our refined coal segment had a gross loss of $3.1 million for the second quarter of fiscal 2021 versus $1.9 million for the prior year based upon increased volume.

These losses are offset by tax benefits from this segment of $5.4 million and $2.9 million for the second quarter of fiscals 2021 and 2020, respectively, recorded from the Section 45, credits and the tax benefits from operating losses.

As a reminder, we currently expect this business to end by November 18 of 2021, as this plant operation will no longer be eligible for tax credits based upon current legislation.

SG&A increased for the second quarter to $6.6 million from $4.4 million in the prior year.

This primarily represents increased shipping costs recorded in SG&A, as mentioned earlier, for certain ethanol contracts in which we pay shipping based upon contract terms as well as higher incentive compensation associated with higher profitability levels.

We had income of $1.8 million from our unconsolidated equity investments in this year's second quarter versus a loss of $507,000 in the prior year, reflecting improved ethanol industry conditions during this time period.

Interest and other income decreased to approximately $39,000 versus $197,000 in the prior year, primarily reflecting lower interest rates.

We recorded a tax benefit of $3.7 million for the second quarter of this year versus a benefit of $4 million in the prior year.

Fluctuation in rates are largely caused by level of refined coal production and credits and the prior year having a pretax losses versus pretax income in the current year.

These factors led to net income attributable to REX shareholders of $7.9 million in this year's second quarter versus net loss of $1.7 million in the prior year.

In addition, our weighted average shares outstanding declined from 6,216,000 to 6,011,000 from last year's second quarter, further benefiting the earnings per share.

As we announced this morning, we completed our most recent share repurchase authorization and the Board of Directors has approved an additional 500,000 share repurchase authorization.

We currently have approximately 5,971,000 shares outstanding.

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

Thank you, Doug.

We're -- going forward, we're currently running in the ethanol business at a profitable rate, but significantly less in the quarter we just reported.

The industry is hampered by high corn prices, corn shortages and a number of other issues, which our CEO, Zafar Rizvi, will discuss in his segment.

Also, RINs remain up in the air as the Biden administration has not issued any RINs for the future, so we still don't know where that exactly stands.

In refined coal, it continues to run at a good rate and should be profitable again on an after-tax basis.

This quarter, this business, as Doug said, is scheduled to end in the middle of December, but we could hit what we could and should, and I'm sure we'll have significant tax credits to carry forward, which should help our cash flow for the foreseeable future.

In terms of cash, we had a consolidated cash balance of $187.6 million.

We have completed the 500,000 share buyback, have authorization for another 500,000 shares.

We try to buy on dips and we prefer to return our shareholders' money in buybacks versus dividends since it reduces share counts, increases the earnings per share and provides liquidity to shareholders looking to possibly sell our stock.

We're looking for other opportunities in the ethanol business to buy plants.

We've looked at a few things this year.

We've had no success in buying anything and we have nothing imminent.

In terms of carbon capture, that will be our biggest new project, we're working hard on it.

We have a possibility of being a large player in that industry.

We're working with the University of Illinois on a site and we've received -- the University of Illinois has received the grant to help fund these works from the U.S. government.

Zafar will now discuss more of that in the ethanol business in his segment.

Go ahead, Zafar.

Thank you, Stuart.

As I mentioned in our previous calls, our operating environment in 2021 is beginning to improve and production continues to increase.

These improved conditions helped in the first and second quarter and resulted in a profitable quarter, but now we are beginning to see a decline in the crush margin due to several factors, including the cash price of corns, as Stuart mentioned, availability of corns, corn export, a decline in the price of dried distiller grains, but an increase in the price of non-food grade corn oil.

Both of our majority owned plants are producing below the capacity due to a number of reasons: a planned shutdown, availability of corn at a reasonable price and logistic problems due to the availability of DDG containers.

We expect this trend may continue until harvest, but the logistic problem may continue longer.

Although we have seen some improvement in logistics lately, we expect the crush margin will continue to be under pressure in the near future, which could adversely affect the third quarter.

I would also like to share progress in the carbon sequestration project, as Stuart just discussed.

We are working with the University of Illinois to drill a carbon sequestration test well.

A 2D seismic survey is completed.

As I mentioned previously that it will be -- supposed to be completed this quarter.

So it's completed.

And results are expected by the end of September.

The well site has been cleared and ready for site preparation and we expect those site preparations to start soon.

We have applied for a permit for a test well from the Illinois Department of Natural Resources and expect to receive the permit within next 1 to 2 weeks.

It will be permitted as a test monitoring well, and then we expect it will be converted into a Class VI monitoring well.

The first stage of preparing the Class VI permit application has been begun, existing -- using existing information and the U.S. EPA has been notified.

The completion of the application process will continue as we begin to receive more information after the test well is completed.

The RFQ for test well drilling has been sent out and several proposals have been received.

We expect to start drilling the well in the fall.

It should take approximately 6 weeks to drill and another several weeks of testing.

It will require extensive modeling and computer stimulation to predict the behavior of the CO2 when it is injected.

This simulation model will determine how much CO2 can be injected at the location, at what rate and its eventual distribution in the subsurface area.

Our field study of the capture of CO2 and the design of the facility is underway.

The design of the capture CO2 facility is expected to be completed soon.

As I have mentioned in previous calls, this project is still at preliminary stage and we cannot predict yet that will be -- that we will be successful.

Our target is to achieve net 0 emission.

In summary, we are pleased to announce once again a profitable quarter.

We are very appreciative and thankful for the hard work of our colleagues who achieved these results.

I'll give back to -- floor back to Stuart Rose for additional comments.

Thanks, Stuart.

Thanks, Zafar.

In conclusion, we've had a successful quarter, but we have a few obstacles in the near-term horizon.

Still we're running currently at a profitable rate due to good plants, good locations and most importantly, we feel we have the best people -- and we are working with the best people in the industry, and that's what really makes a difference that why our plants on a long-term basis have consistently outperformed the industry.

I'll now leave it open to questions.

(Operator Instructions) And our first question comes from Jordan Levy with Truist Securities.

Just first wanted to start out on, Zafar, you mentioned the logistics issues with the DDG containers that -- I don't know if it's one or both of the plants.

Can you just expand on that?

And is that a -- is that something that's specific to one area?

And what is the extent of that on what we're looking like on utilization into the third and fourth quarter?

I think that the problem we had last month and beginning of some of that in this month seems to be, as I mentioned, it's beginning to improve because yesterday, we received almost 50 containers.

And before that, we were not receiving that many containers coming back to One Earth Energy.

That was the concern on the -- we export mostly DDG at One Earth Energy.

So they require a lot of containers.

So that was the reason.

So due to that reason, we have to slow down a little bit because we have so many containers, which are supposed to be arrived there, they were not arriving and the DDG storage was getting full.

So that -- but it seems to be getting a little bit better since yesterday and last night.

I checked back and there was approximately 50 containers received.

So that's helping to reduce the load a little bit.

But certainly, as you know, the shipping problem is all around with -- even the President Biden mentioned that.

So those are the things, which we are also facing some of those.

Okay.

Got you.

And is that sort of the same situation, you mentioned running at somewhat of a lower utilization on inability to get corn at a reasonable price.

We've seen obviously the financial market for corn come down a bit over the last week or 2. Are you starting to see some pressure off on there, too?

Yes.

I think we have seen the -- although the CBOT price has come down, but I think the basis are also beginning to become weaken.

We have seen that not only in South Dakota area, in even Illinois.

One time the basis were as high as $1.25, $1.30 plus basis, and now the basis are coming down overall everywhere in the industry.

But yes, due to that reason, there was some concern that within next month, hopefully, there going to be harvest and the basis is expected to be minus and now it's still a plus basis.

So we are trying to be very careful not to overbuy and not to overpay.

And then we end up with a higher inventory price.

Sure.

Sure.

That's great color.

Stuart, maybe for you, definitely encouraging to see you all continuing to buy back shares and increase that authorization.

I'm just curious if you think about couple of years down the road.

Is there a point you get to where it doesn't make sense to continue to buy back shares?

Or is this something you think can remain at the pace it's been at?

And you all have been pretty opportunistic in when you choose to repurchase.

So is it just kind of a continuation of that?

Or I'm just curious how you think about it longer term.

That's a good question, Jordan.

I think the way I look at it is there's always times where we think not to buy when the stock's performing well on its own.

We're there to put a floor on the stock when the stock dips.

And that's -- so hopefully, I'll never have to use the 500 dozen shares buyback.

But should the stock dip to prices that we think are unrealistic in our minds, that's when we choose to do the buyback.

And we probably have been buying back for longer than anyone in the end.

I'm sure we have -- anyone in the industry.

And we certainly think we know what we're doing when it comes to buyback.

We don't just buy back to throw money out there, we buy it -- we do it opportunistically and we do it on dips and we've historically done it that way.

One of the things that I think separates us from the rest of the industry, first of all, we consistently make money.

Second of all, I think we're the stewards of that money.

We don't -- we do have our speculative project, which is a big one, one of the biggest.

And we hope to be huge in carbon capture, but we also watch our money, our shareholders' money like our own money and we try to use it and not just make announcements and throw money at different projects.

We like to make sure that we're using it in a wise way.

And consistently, we've done that, which has allowed us, I think, over the years to way outperform almost everyone in the industry.

Yes.

Absolutely agreed.

And then just the last one for me, maybe, Zafar, for you on the carbon capture project.

You mentioned kind of preparing the site for the test well this fall and how -- that will take some time to get the results in and then monitor it.

I'm just curious when we think about timing, the major kind of milestones we should be looking for to track the progress on that project.

Is it early next year, we might have an initial sense of what this looks like?

And then kind of what the steps after that might be after the test well, assuming things go well?

I think the test well, we seem to -- at this stage, at least, we think that it will be -- test well will be dig this year.

And then it takes, as I said, 6 to 8 weeks.

And after the test well is completed, then we will be doing a lot of stimulation and looking at how the subsurface is reacting to it.

The main purpose is to really also not to -- just to decide, look at the location and decide how much carbon this can store each well because if this well can hold about 2 million ton a year, it can hold only 1 million ton a year.

So that will be give a little bit color on that, how much we can really bring the carbon from different -- several other different locations or other ethanol facilities, which we have nonbinding agreement.

So that will determine actually that how much storage we have.

And then we can decide in the same area that do we need to take another well, that will be not also carbon sequestration well, it will not be a test well or something.

So those are the really reason we wanted to make sure the test well is -- can define the area and confirm what seismic testing and other area is saying that how much ton it can hold.

So I think by next year, by this June, we will have pretty good idea where exactly we stand with this location.

Our next question comes from Graham Price with Raymond James.

I guess, first off, I was wondering when you expect the EPA to relate -- to release the 2021 biofuel blending volumes mandates and maybe just wanted to gauge your expectations there?

Personally, I have no idea.

They were supposed to do it long ago.

I don't know what they're waiting for.

I don't get it.

But that's -- Zafar, do you have any more clarity on when it may come out?

I don't really know.

I think you're right, Stuart.

It's already -- White House have to approve it.

And so we don't know when they will approve it.

There's so many uncertainties and things are going on at the White House right now.

They have a few issues right now that I don't know that this is top of their agenda, but it should be top of the EPA's agenda, but they may not be able to run it by -- and who knows what's going on there, but it is disappointing to be honest with you.

We, at least, need -- would like to know what we're shooting that for this year.

It makes no sense.

I mean there's reports out there, the EPA is ready to send their recommendations to the White House, but there's no clarity on how long that will take.

But from what I've read, and I'm sure you've read the same thing, yes, there's some speculation that the EPA is going to propose reducing the number of RINs for 2021 versus 2020.

Yes.

But I think, Doug -- this is for -- But I think they're not sure that it's going to be a biodiesel or ethanol.

So that's really not clear because biodiesel is not producing as much as required.

So there is rumors, it may be a biodiesel RINs that need to be reduced either ethanol.

So it's not very clear what happened at this stage.

Got it.

Understood.

That's definitely helpful.

And then I guess sticking with the EPA as we look at, at least the near-term potential for fuel shortages in the wake of Hurricane Ida, we've seen that there have been some requests from the EPA to allow more ethanol to be sold in Louisiana and some of the other states impacted by the storm.

Just wanted to see what your views are on that situation.

We're always in favor of more ethanol, but I think there'll probably be a lot less driving in Louisiana so who knows what -- I don't think that's going to hit.

On an overall basis, I would not look at that as being any permanent nature change.

Yes, it's a short-term change.

I think it's not a long term.

So I think the short term, it may -- demand may increase and then depends on really how long they continue that.

So -- but as we all know, ethanol is a clean fuel, and we encourage people to use that as much as they can.

(Operator Instructions) And our next question is from Chris Sakai with Singular Research.

Just, I guess -- I think as Stuart mentioned that the -- you're looking at some acquisitions, but didn't make any this quarter.

Wanted to see why?

What were the main reasons there?

I said this year and the main reason was we were outbid, so simple as that.

We -- as I said earlier, a good -- try to be very, very good stewards of our stockholders' money.

And we were -- we did not get what we were looking for.

And so we move on, that's all.

We -- in truth, we're better off buying our own shares in the price that we've seen of acquisitions out there, we can buy our own shares cheaper.

So that's how we choose to go.

We will not spend more than we think we need to spend for an acquisition and there have been a couple, but we did not get them and so be it.

I think in the long run, our strategy has worked, and that's how we'll continue to do it.

Okay.

All right.

And then I guess, internationally, where are the best countries that are demanding ethanol?

Where is the best countries.

I think as you can see that basically, this year, we have seen Canada and other countries, its -- more ethanol is shipped.

But compared to Canada and South Korea and Peru and Mexico, I think China has received this -- some of them this year, but the problem is that Brazil was completely off this year compared to last year.

And ethanol export this year was 664 million compared to last year, 31 million.

And Brazil actually, it imported only 30.6 million compared to last year, 177 million.

And in 2019, almost 211 million.

So Brazil was not there at this year compared to last several previous years.

Did you mention China there?

How is it going with China?

Yes, China did import this year, some of them close to -- I can see -- China imported close to 100 million gallons this year.

Let me confirm that.

I think I had somewhere -- let me look at it.

I'll get back to you about it.

Okay.

And then as far as the rest of the year goes, I mean do you have any idea as far as crush spreads go?

As I mentioned, I think that in this business, you really -- it's a commodity business.

It depends on week-to-week, sometime month-to-month.

As I mentioned that in -- previously in my prepared remarks that certainly, the crush spread is under pressure at this time.

So getting back to you, China, yes, China imported almost 100 million gallons this year.

So that's what correct information.

Our next question is from Jarrod Edelen with South Dakota Investment Office.

I wanted to get a little more color around the dynamic of the drought that's going on this year.

And in your corn consuming areas, if you have a sense of -- if there's going to be any future acute shortages as occurred in the past for you guys, especially in the NuGen and One Earth facilities?

I think let's look at the one at a time.

I think One Earth Energy facility, if you look at this year, the corn yield for 2021-'22 is expected to be 174.6 million bushel and also approximately 2 million acres were planted more this year compared to last year, but we expect record yield expected in Illinois.

Illinois in One Earth Energy area is a lot of rain and consistently a lot of rain, and it's expected to be really good crops since Illinois, Indiana and Ohio is the top -- it's expected to be a top yield.

But yield in Minnesota, as you were asking, in the North Dakota and South Dakota are expected to be lower than last year due to drought in the area.

But the one thing which is we see a little bit positive, particularly for South Dakota, this year, in South Dakota, approximately 1 million more acres were planted compared to last year.

So even if the yield -- it goes down a little bit, we still think that overall -- perhaps it will be almost better than last year if the yields stay as it is now expected.

And we have ran approximately 3- to 5-inch last couple of weeks in that area.

So overall NuGen area is not as bad as we have seen.

North or South Dakota or West -- Northwest of South Dakota and the North Dakota.

So those area is certainly pretty bad, but NuGen area is not as bad as compared to other area.

So -- but overall, it is not as good as last year, but the only thing it can be even helpful, we have more acres planted this year than last year.

Wonderful.

And could you touch a little more on some of the byproducts, mainly dry DDG and modified DDG as well as corn oil and how impactful the price increases have been to your profitability?

I think that we have seen, as I mentioned earlier, that we have seen the corn oil prices really seem to be going much higher than expected.

If you look at even our -- we will be -- soon complete details or even in the press release, you can see that the corn oil price is above average.

In July, it was $0.47 compared to last year, it was $0.25.

And 6 months is $0.41.

So what we have seen recently even as higher as $0.60 to $0.65, even $0.60 a pound DDG price has come down and it was trading previously closed to 100% to 110% of the corn value, but now we have seen somewhere 85% to 90% of the corn value.

Mr. Rose, I'll turn the call back to you.

There are no further questions at this time.

Great.

Thank you so much.

I'd like to thank everyone for listening, and we look forward to talking to you in our next conference call.

Thank you very much.

Bye.

Thank you.

Bye-bye.

That does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.