REX American Resources Corp (REX) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Rex American Resources Fiscal 2020 Fourth 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 2020 Fourth 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. I'll first review our financial performance and then turn the call over to Stuart Rose for his comments.

Sales for the quarter increased approximately 4.2%, primarily reflecting higher year-over-year production in the ethanol segment and increased distillers grain pricing. Sales were based upon 67.7 million gallons this year versus 65.9 million in the prior year fourth quarter. Gross profit for the ethanol and byproduct segment increased for the fourth quarter from $8.1 million to $8.3 million, primarily due to improved distillers and corn oil pricing. The refined coal segment had a similar fourth quarter loss of $1.4 million for this year versus $1.5 million for the prior year.

SG&A decreased for the fourth quarter from $5.6 million to $4.4 million, largely due to lower ethanol freight charges recorded in selling, general and administration due to certain contract terms. The company recorded income from its unconsolidated equity investment of $332,000 for the fourth quarter of this year versus $1 million in the prior year.

We recognized a tax benefit of $1.8 million in this year's fourth quarter versus a benefit of $3.4 million in the prior year's fourth quarter. The refined coal segment contributed a benefit of $1.7 million this year versus $1.5 million in the prior year fourth quarter for the tax benefit.

The above factors led to net income for the fourth quarter of fiscal 2020 of $3.5 million compared to $4.4 million in the prior year while diluted earnings per share decreased from $0.70 to $0.59.

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

Thank you, Doug. Going forward, ethanol now is currently profitable, and we're up against the period last year -- a COVID-related closure period last year.

In terms of corn and ethanol prices, they're both up as virtually all commodities are up. And crush spreads remain challenging. DDG is up with the price of corn. The new Biden administration appears to have appointees that are favorable to the ethanol industry, but RIN pricing is still -- RIN pricing, although up right now, we are still waiting to see how they will treat RIN pricing.

In terms of the COVID, the COVID news is, with the opening of different states, it should help driving, which should improve demand for our product, especially versus last year.

In terms of refined coal, it remains profitable on an after-tax basis. We plan on ending that operation by year-end this year.

In terms of going forward with our cash, we have about $180 million in consolidated cash and equivalents, no debt. Our plans are to continue to explore investing in carbon capture. We've made progress there and have spent a fair amount of time on working on that project. We also are looking -- continue to look for high-quality ethanol plants. The ethanol plants, we would hope to find if we -- should we find ones to buy would be, in our opinion, something that has the best -- has good technology, good locations, good people.

At this point, I'll turn it over to Zafar Rizvi, who'll talk a little bit more about our carbon capture business and our ethanol business. Thank you.

Thank you, Stuart. As I mentioned in the last 3 calls, 2020 started in a challenging environment. Due to the COVID pandemic, we temporarily shut down our plants during the first and part of the second quarter, and we struggled to find corn for our NuGen facility. We saw a decrease in the fuel demand, and that negatively impacted the ethanol industry.

During the third quarter, condition improved. We received a steady flow of corn at both of our majority-owned as well as minority-owned locations. This resulted in improved crush margin and a very profitable third quarter. This improved condition continued through the beginning of the fourth quarter. Later, we began to see a decline in the crush margin, in addition to the price of ethanol fail to keep up with increase in corn price, farmers lost interest in selling their phone because they were receiving direct payment from the federal government under the CARES Act.

When China stepped up its corn product -- start up its corn purchases that led to the higher corn prices. Behind these factors, we experienced political uncertainty and trade disputes. In addition, the EPA continue to consider and grant small refinery exemption from RFS compliance year.

We expect the crush margin in the near future to continue to be under pressure, but we also expect it to improve once the threat of COVID-19 decline with the progress in vaccination and people begin to drive more again.

The March 9 report of the USDA showed that carryout stayed at 1.5 billion bushel with the export at 2.6 billion bushel. The estimated corn yield is 172 bushels per acre, and ethanol plants are expected to consume approximately 5 billion bushels in 2021 crop year.

Export of the distiller grain in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019. We saw considerable improvements in export during the last quarter of the year.

January 2021, Mexico, South Korea and Indonesia were the top 3 importers in January 2021. Ethanol export during 2020 total of 1.3 billion gallons compared to 1.46 billion gallons of 2019. January 2021 export totaled 164.7 million gallons compared to 151.3 million gallon in January.

India, China and Canada were the top 3 importers. So we saw that India is certainly is on the top of the list compared to -- generally, either it's normally the Brazil or Canada. So we see some improvements coming out from India also.

Let me give you some progress in the carbon sequestration project. As I discussed in our previous calls, we are working with the University of Illinois to drill a carbon sequestration test well to determine suitability for an injection well at our One Earth Energy facility. The University of Illinois is in the process of evaluating a permit application, determined 2D seismic survey to select a test well location and contacting a front-end engineering and design, FEED study, of the CO2 capture system. The data will be analyzed in a make -- to make sure the location is suitable for test characterization well. The university expect to start drilling the test well.

Once the drilling permit is granted and the design is completed, we expect to start drilling the characterization 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 stimulation models will determine how much CO2 can be injected at the location and what rate and its eventual distribution in the subsurface area.

This project is still at a preliminary stage, and we cannot predict that yet that we will be successful. Our target is to achieve net 0 emission.

In summary, we are pleased to announce a profitable quarter and year in spite of a very difficult environment for the ethanol industry and other businesses last year. We are very appreciative and thankful for the hard work of our colleagues during this pandemic to achieve these results.

And I will give back the floor to Stuart Rose for his further comments. Thanks, Stuart.

Thank you, Zafar. In conclusion, the economy is starting to open up. We have great plants, great people, great locations. We have high hopes when the economy does open up that our business will improve as demand improves.

Most importantly and the biggest thing that we have going for us is our people. They've stuck with us through thick and thin. And they are, what we feel, makes a difference and what separates us from the rest of the industry, and we will continue to allow us to outperform the industry.

Thank you. I'll now leave it open to questions.

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

Nice quarter against a pretty challenging backdrop on the macro front. Maybe if we could just start on the carbon capture side, you kind of -- you guys provided an update on the Illinois program.

Maybe could you just talk to the potential you see? We've seen some private companies and whatnot announce projects around large-scale carbon capture pipelines and sequestration facilities. Could you just talk to how you're viewing that market potential outside of the University of Illinois project, and that's something that's of interest?

Zafar?

Yes. I think, as you know, that there is some -- going something, also is happening in North Dakota, Wyoming and some other area. But we are working with the university almost over a year. And we have the land, and we know exactly where we will be drilling. And we are evaluating all those things.

So we seem to be ahead of most of other people who are at the stage. It takes approximately 2 -- from start to end, it takes about 2 to 3 years before you're really able to really -- before you drill your first well, which is characterization well, then you test it to make sure how much it can handle the CO2 in that area. And then you have to get the permit, which is the [Class VI] permit, and then you have to have before you start injecting.

So it certainly is a long process. I can certainly can see some of those, as you mentioned, the pipelines are building. But I think -- we think we have to have a storage first. And if we don't have a storage, the pipeline can come bring the CO2 and where exactly we're going to store that.

So we -- our thinking is we should have a storage well, and then we take the next step about the pipeline. So that's the direction we are going compared to other people who are really discussing the pipeline only.

And Zafar, we think people are going backwards on this. They're doing the pipeline, which that's nice to have a pipeline, but you could always track CO2 in. And if you don't have a hole to put it in, which we think is the most important thing, it doesn't really mean anything.

So we're working on the whole first, and we -- assuming we can get that done, then we'll work on the pipeline and deal with that and deal with the delivery. But if you don't have a hole, in our opinion, you really -- if you don't have a place to store the product, you're really not even at ground. You're not even in the ball game, in our opinion.

Exactly, yes. Because the permitting process along from EPA, well, after you drilled that and you really realize that this is the proper location and from characterization well to the injection well, then you -- first, you get permission from the state and then take a permission from EPA, U.S. EPA. That takes about 6 months to -- 6 to 12 months. So I think that's why it is important to start the well first so that way, by the time we have well ready, the pipeline can come and putting it that, too.

And as I mentioned previously that we have some nonbinding agreement with some of the ethanol facilities in Illinois, who are willing to also supply the carbon to us. So we looking at that way to make sure we have storage facility first before we go to the pipeline side.

No. That, I think that makes a lot of sense. Stuart, maybe a question for you, Zafar as well. Talk about, as is natural, you guys are always kind of looking at potential ethanol plants that you could expand to and depending on the quality of the plant and that sort of thing.

Could you just discuss how you see that market today versus maybe a year ago? And historically, we've seen some deals go across recently, some sales, some purchases on the ethanol facility side, but just curious how you're viewing that market.

There are plants for sale right now. A lot of our competitors seem to be emphasizing other products. So there are definitely plans for sale.

We -- for us to buy one, we'd have to find something that fits our mode of operation, which is they have the best plants, good locations, good corn supply. And those are fewer to find, but they potentially are out there. We'll see what happens.

It's an interesting time because we're probably the company that most seriously takes -- that takes the ethanol industry most seriously. And we think the ethanol industry, especially if it can become close to a 0 carbon industry has a huge future ahead of it. And that's our opinion that the people in the industry seem to be back in a way. So we're pretty excited about possibilities there, but you never know what will happen.

And maybe just one more. Zafar, maybe for you. You talked about the crop yields and how they're shaping up this year. I know that a lot more corn planted this year than last year with the increase in demand. Can you just talk to the specific regions you all supply from and how you're seeing that shape out?

I know it's early days, and I'm not sure if you can get a sense of that yet, but just curious if that's something you can comment on.

Yes. I think, as you know, the plant is -- the corn is -- last year was planted about 90 million acres. I think they are -- I just saw the report actually some future average threshold that it's going to be probably going to be close to 93.6 million corn acres will be planted. That's about 3.1% more than last year.

As you know, the insurance value is close to, I think, $4.65, approximately somewhere. So I think we see that certainly is due to insurance value and also corn prices are staying above $5 at this time and will be more acres, it will be planted this year even compared to last year.

But certainly, we have also seen farmers has enough money, and they are really keeping that in the storage and not bringing out there in selling. So we have seen the both things. And if you remember last year, this time also was very difficult to find the corn. And then suddenly after the COVID and after planting season started, the corn was available everywhere and we can buy very cheap.

So I think there is certainly -- we see farmers are or seedlings are not as we like to see. And -- but we see that this year, it will be more acreage will be planted than last year and hopefully, depending on weather, will be a good crop.

(Operator Instructions) Our next question comes from the line of Chris Sakai with Singular Research.

I just -- I had a question on any -- if you guys had any sort of weather-related production delays this last quarter? And if so, for how long?

There was some delayed in [EDA]. I think it was slowed down some of those we plant all around actually in South Dakota, North Dakota and somewhere in Iowa also. But that was for about maybe 3 to 4 days slowed down so -- but it was not more than because that was due to the supply of natural gas. But overall, it was not any delay.

Okay. Great. And as the economies reopen globally, where do you see the -- I guess, the biggest countries?

Biggest country of ethanol export, you mean?

Yes, yes.

I think as you can see, recently, as I mentioned in my prepared remarks, India was certainly almost in January. It's 53.2 million gallon India jump in. And we see always before Brazil and Canada and was even last year in January was only 13.3 million gallons. So you can see from 33 million to 53 million. I think we see a lot of potential in India. And we have seen in China lately, China in January alone, 22.7 million gallon they purchase.

And we also see Canada, our neighbor. I think as you can see, they are pushing very carbon credit. And even Supreme Court just stated the order that the Canadian government is going to charge the carbon tax, and that will stay. So I think that all of these things, we're going to see that certainly, Canada, China, India and Brazil -- Brazil is slowed down because due to some of those tariffs. Hopefully, the Biden administration work with Brazil and remove those tariffs, I think we certainly see that growing in those areas. Even some of the oil-producing companies are buying it to make sure they are due to the environmental reason.

There are no further questions at this time. I'll now turn the call back over to the presenters for closing remarks.

We thank everyone for listening to our call, and we look forward to talking to you after the end of next quarter. Thank you very much.

Bye.

Thanks. Bye.

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