REX American Resources Corp (REX) 2021 Q1 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2021 First Quarter Conference Call. (Operator Instructions)

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 2021 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 in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's report 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.

Before going over the financial performance, I would like to mention an additional disclosure in our press release. After mailing the proxy material, we noted that a reference to broker non votes and shareholder absentation counting against the proposal to amend the articles of incorporation so as to allow potential issuance of preferred stock by the company had been erroneously deleted from the proxy.

Effective this morning, the supplement to the proxy material was filed with the SEC. We included a reference in this morning's press release, we posted on our website, and we will do a mailing to all stockholders of record, bringing this supplement to shareholders' attention. We apologize for this error but are taking prompt action to remedy and notify all shareholders.

Sales for the quarter increased substantially by 97%, primarily due to higher production levels as we had idled our NuGen plant during the first quarter of last year due to the impact of the pandemic amongst other factors.

Ethanol sales for the quarter were based upon 70 million gallons this year versus 48.3 million last year. We also benefited from a significant increase in average selling prices in the ethanol and byproducts segment.

We reported gross profit of $19.5 million for the ethanol and byproducts segment versus a gross loss of $8.2 million 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 shipping cost.

Our refined coal segment had a gross loss of $1.7 million for the first quarter of fiscal 2021 versus $1.1 million for the prior year based upon increased volume. These losses are offset by a tax benefit of $2.2 million and $959,000 for the first quarter of fiscal 2021 and 2020, respectively, recorded from the Section 45 credits and tax benefits from operating losses.

SG&A increased for the first quarter to $10 million from $4.6 million in the prior year with the primary increase reflecting, again, the increased shipping cost related to certain ethanol contracts. We had income of $570,000 from our unconsolidated equity investment in this year's first quarter versus a loss of $477,000 in the prior year, reflecting the improved ethanol industry conditions.

Interest and other income decreased to approximately $43,000 from $669,000 in the prior year, primarily reflecting lower interest rates. We recorded a tax provision of $29,000 for the first quarter of this year versus a benefit of $5.3 million in the prior year. Fluctuations in rates are largely caused by levels of refined coal production and credits versus income during the period. All of these factors led to net income attributable to REX shareholders of $7.8 million in this year's first quarter versus a net loss of $7.6 million in the prior year.

I'd now like to turn the call over to Stuart Rose, Executive Chairman of the Board. Stuart, are you there?

Sorry, going forward, second quarter-to-date continues to be profitable, similar to first quarter. Ethanol prices, RIN prices and DDG prices and corn oil prices have been strong, been offset by higher corn prices, natural gas prices, Zafar Rizvi, our CEO, will discuss this further in the call when he discusses the ethanol segment.

In refined coal area, production this quarter-to-date is exceeding last year's quarter by a large margin. This is mostly, I believe, due to reopening, causing higher utility use and also higher natural gas prices, which is changing the utility we work with, we think, over to more coal.

This business ends in the middle of November, but the credits can be carried forward for 20 years, and we believe we will benefit from these credits with higher cash flows for years to come.

Quarter end, REX had approximately consolidated $193 million in cash and no debt. Uses of cash include looking for opportunities in the ethanol business. It must be a good plant, good locations and most importantly, a good price. We've explored these. And so far, we have found no -- we explored a few opportunities, but nothing is imminent. We're looking at other opportunities in alternative energy that would fit our business skills. So far, again, nothing imminent. Stock buybacks on dips are authorized although again we buy stock on dips.

We're also working on a serious carbon capture project, which Zafar Rizvi will discuss further in this call.

I'll now turn the call over to Zafar Rizvi.

Thank you, Stuart. As I mentioned in the previous calls, 2020 started and ended with a challenging environment. But the operating environment, 2021 is beginning to improve as production continued to increase. According to report from EIA, the ethanol output last week was 55.7% ahead of the same week last year. But the 2021 production remained 3.64% lower than the -- lower when compared with pre-pandemic to a similar week in 2019.

The ethanol inventory is little changed and the remained at its lowest level since 2016, according to the EIA -- last week EIA reports. But today's report -- today's EIA report shows production and stock both dropped and same time, gasoline demand is increasing. This improved condition helped in the first quarter and resulted in a profitable quarter. We are beginning to see some decline in the gross margin due to a number of factors, including the cash price of corn, China's increase in corn purchases, decline in the price of distiller dried grain. But on the other hand, increasing the price of the non-food-grade corn oil.

We expect the crush margin will continue to be under pressure in the near future. However, we expect to see improvements as the consumption of gasoline increased with people more comfortable driving greater distance as COVID-19 vaccination rises.

We are pleased that the Tenth U.S. Circuit Court of appeal granted EPA request to cancel 3 small refineries exemption, but over 70 requests for -- waiver requests are still under EPA review from RFS compliance year 2011 to 2020. We hope EPA follows the law and rejects all the requests.

The May 12 USDA report shows a disappointing 2021 stock carryout of 1.275 billion bushels for the year. However, 2022 corn prices are expected to increase to -- start on -- I'm sorry, '21, '22, corn stocks are expected to increase 1.507 billion and corn production is forecast to rise 6% to approximately 15 billion bushels. The estimated corn yield for '21, '22 is expected to be 179.5 bushel per acre export or projected 2.45 billion bushels.

There was a decrease in the export of distillers grains -- DDG grains and ethanol in the first quarter of 2021 exports of distillers dried grain totaled approximately 2.6 million tons compared to 2.73 million tons in 2020. We exported 399.3 million gallons of ethanol compared to 485.4 million gallons in 2020. We are pleased China started to import ethanol and distiller dried grains.

I would like to share the progress, as Stuart mentioned about the carbon sequestration project I discussed in our previous calls. We are working with the University of Illinois to drill a carbon sequestration test well. The university has completed its pre-drilling site -- geological site assessment. The first stage of preparing the Class VI permit application has begun using existing information and U.S. EPA has begun -- has been notified.

The 2D seismic lining location has been identified and seismic contract has been selected. We expect the seismic surveys to be begun early to mid-June. The planning, site selection and design of the well are all in progress. The university is working on permit requirements for the well. It will be permitted as a test monitoring well and then we expect it will be converted into a Class VI monitoring well.

A pre-study of the capture of CO2 and the design of the facility is underway. We expect to start drilling in the well in early September, 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. These simulation models will determine how much CO2 can be injected at the location, at what rate, and eventually distribution in the subsurface.

As I mentioned in previous calls, this project is still at a primary stage, and we cannot predict yet that we will be successful. Our target ultimately is to achieve net zero emission.

In summary, we are very pleased to announce profitable quarter and today the second quarter is also expected to be profitable. We are very appreciative and thankful for the hard work of our colleagues to achieve these results.

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

Thank you, Zafar. In conclusion, we've outperformed most ethanol companies in the country this quarter. All closed plants did badly at the beginning of the pandemic, and people seem to think they were all equal. Now as the good plants come online, the good plants do well. The bad plants might have new ideas, new hopes, new dreams. But at the core, they remain bad plants and anything that someone else might do if they start off with a high price for the ethanol, producing the ethanol will not carry forward into the type of profits that a good plant can generate.

We're working very hard on a carbon capture project, which Zafar just described. Again, this is a real carbon capture project. There's -- a lot of people are announcing carbon capture projects. We're the one that's actually working on a hole in the ground, which we think is the key to the carbon capture, not just assembling a bunch of people that will give you their carbon. It's not hard to find people that want to get rid of carbon, everyone does. But the key is putting it and doing it right into a hole where it will stay in a hole. And that's what we're working on, and we believe we're way ahead of just about everyone in the country in that area.

The keys to our business is pretty simple. We have good locations. We have very good Fagen/ICM plants. And really the biggest key to our success is our people. We've tried to get the best people, the people that care the most. And our CEO, as you just heard, he's a detailed man. He looks after -- Zafar Rizvi looks after every detail in this business and has the interest of the shareholders in mind and we think that's a big advantage, along with having the best people in the industry -- what we feel are the best people in the industry.

I'll now leave it open to questions.

(Operator Instructions) Our first question is coming from the line of Jordan Levy with Truist Securities.

Really nice quarter against a fairly challenging backdrop. Just wanted to -- first, if we could just talk carbon capture, maybe the farthest, Stuart. Knowing kind of where you are in the process and it's still early stage, just wanted to get a reminder of what the initial thesis is behind the project and why the area is at an attractive place to explore that option? And what's driving kind of looking into that just to give us a reminder on that?

Zafar?

Yes. I think, as you know, One Earth Energy, as I mentioned in previous few calls, we are right at the Mount Simon's, and we have done 2D seismic testing previously, and we discovered that with the location, which we are at One Earth Energy, not only can produce CO2 at the same location, we can also at the same time do the carbon sequestration for our own location. And also, we can also bring from other locations through the pipeline. Our goal is to look at it to cover most Illinois ethanol facilities, our other ethanol -- our other facilities, who's producing CO2 to bring that to that location.

So we already have the land. We already done the surveys. We are now in the process of setting up the facility at -- we have some -- people were last week. And we are trying to look at that how the facility will operate and how we can compress CO2 and then how far we can take it to local area where we can do the carbon sequestration.

So I think in a simple word, we have the best location and a proven location around that area, as you know, ADM is already has done very successfully in those areas. So we have supply of the CO2, and we have the location. And we also have the funds to make sure that we can achieve our goals.

To add to what Zafar just said, a lot of people think you can just put any hole in the ground and it will stay -- and the CO2 will stay in the ground, and that's a complete joke. It's a very serious business. It's the reason why it's very, very few people doing it right now because it's a serious complicated business. And the hole is not something to be just taken lightly. It's a very, very difficult part of the process.

And like Zafar said, we have been working very hard at it for a long period of time, and people announcing that they're going to capture the carbon that's really easy to announce, but it's a lot harder to find a legitimate hole where it will stay in the ground. We have identified an area close to of one of our plants where we are working hard to make sure that if we do have a project, it will be a legitimate project, the carbon -- the CO2 will stay in the ground. And again, we think we're ahead of virtually everyone in this business.

That's great. And just as a follow-up on more of the capital allocation side, you all have been pretty consistent in share buybacks. Just curious, you had some really strong free cash flow this quarter and knowing the ethanol of volatility but also where your cash position is. Just curious how you all have thought about dividends and the potential for either kind of a fixed dividend or as we've seen in some other sectors, some have started to kind of do some variable dividend payout structure. Just curious how you think about that versus share buybacks?

The dividend is always a Board decision. But my own personal opinion is we're a small company, and you can either do dividends or share buybacks. The share buybacks have the advantage of putting a floor or at least hoping to put a floor on the stock when there are dips and reducing the share count, which increases the earnings per share when we do report earnings and that's been our way of giving back to our shareholders some money.

Again, we're not a huge company. We're generating a lot of cash. We're fairly -- for our size, a fairly rich company. We do have a lot of cash, but we have uses for that cash. One of the uses, as I said in my call, was to do buybacks and support the stock when someone -- when there are dips in the stock. We've done that for a number of years, and it's worked pretty well for us over the years. So I imagine the Board will keep with this plan. I hope that answers your question.

Yes, absolutely. If I could just sneak one last quick one in. Stuart, you mentioned you guys are always looking at kind of attractive opportunities and nothing imminent. I'm just curious how you're looking at -- you mentioned other alternative energy potential. I'm just curious if there are certain aspects within that, that you think are attractive or fit with the business that you'd look at versus some that are less attractive?

Well, we've mostly looked at the ethanol business, and we've looked at some very closely, but either the location didn't work out, the plant didn't work out or the price is too high. So -- but if -- but that could change at any time. They know we're out there looking.

In terms of other energy, there's always the usual wind and solar. We've looked at that over the years. We -- but -- and to us, the best opportunities are businesses that relate to the ethanol business. And to us, the best opportunity in the ethanol business is carbon capture, and it's not going to be an inexpensive situation.

We'll receive very good tax credits from that business, which we know how to monetize, have done in the past, and we plan to do that in this case. But it could be a very, very large business. And at the moment, that's what we're first focusing on in terms of expanding our company. And it's, in my opinion, something that we need to do, not just for us but for the country and for the world at large. So we're very hopeful for that business, and that's probably the most important thing we can be doing right now, and it could be very profitable for us, if we do it right.

(Operator Instructions) There are no further questions. I'll turn the call back over to you.

Okay. We'd like to thank everyone for listening to our call, and we look forward to talking to you next 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 line.