REX American Resources Corp (REX) 2022 Q3 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2022 Third Quarter Conference Call. (Operator Instructions)

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

Good morning, and thank you for joining REX American Resources Fiscal 2022 Third 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, Chief Executive Officer. I'll review our financial performance and then turn the call over to Stuart for his comments.

Sales for the third quarter increased by 8.5% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 66.3 million gallons this year versus 69 million gallons last year. We reported gross profit of $11.3 million this year versus a gross profit of $25.2 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 8%, dry distiller grain and corn oil pricing both improved by 25% for this year's quarter over the prior year third quarter.

Corn cost increased by 17%, and natural gas pricing increased by 56% for this year's quarter compared to the prior year as inflationary pressures and the impact on commodity pricing from Ukraine-Russia conflict continued. Corn pricing was also impacted by higher corn basis based upon reduced availability of corn as we approach the harvest season.

Gross profit comparison between years benefited slightly from fewer ethanol contracts sold net of freight in the current year, which leads to higher sales. SG&A increased for the third quarter to $7.9 million from $6.3 million in the prior year. The increase was primarily due to an increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year, which we classify as SG&A cost.

We had income of $661,000 from our unconsolidated equity investment in this year's third quarter versus income of $349,000 in the prior year. The company's interest and other income in the current year increased dramatically to $2 million versus $35,000 in the previous year, primarily reflecting increased yields on our cash.

The discontinued operations reflected in the prior year numbers are from the refined coal business as we entered those operations on November 18, 2021. There was no impact in the current year.

We reported a tax provision from continuing operations of $1.2 million for this year versus a provision of $4.3 million in the prior year, primarily reflecting the lower level of income in the current year. These factors led to net income attributable to REX shareholders from continuing operations of $3.2 million for this year's third quarter versus $13.3 million in the prior year.

Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.18 for this year's third quarter versus $0.85 in the prior year. I would again like to point out all outstanding shares for all periods have been retroactively adjusted to reflect the 3-for-1 stock split, which was effective on August 5, 2022.

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

Thank you, Doug. Going forward -- currently -- in the current quarter we remain profitable, but crush spreads are still challenging, which our CEO, Zafar Rizvi, will discuss in his segment. We've made significant progress in carbon capture, which again will be discussed by Zafar Rizvi in his segment.

In terms of our cash, we have approximately $290 million in cash. Very little or no debt. We continue to look for investments in ethanol companies, although nothing is imminent. We're also making major investments in carbon capture, which will be discussed later in the call.

We also now can earn meaningful interest on our cash, and with $290 million, we expect our interest income to go up during the current quarter and during the following quarters. We buy back stock on dips. We bought back approximately 250,000 shares in the quarter. We have Board authorization for another 875,000 shares.

Zafar Rizvi will now discuss our ethanol and carbon capture operation. Thank you.

Thanks, Stuart. Good morning, everyone. As I mentioned in our previous quarterly calls, challenging logistic problems caused by issues with the railroad and availability of corn, that was slowdown in our production. The availability of corn in South Dakota due to draught last year and again this year resulted in a decrease in corn yield, which led to an increase in the price of corn greater than the ethanol price. On top of that, the high price of natural gas is also negatively affecting the profit margin in the ethanol industries.

As Doug mentioned earlier, that USDA November corn report shows the corn yield dropped 26% in Nebraska and 10% in South Dakota. Nebraska about 2.9 million bushels were dropped and in South Dakota, 78 million bushels were dropped compared to last year. In South Dakota, where our NuGen plant is located, and while -- but it increased 13% in Illinois, while our -- where our One Earth Energy plant is located. Sorry for that.

The USDA also reported corn production increase in Illinois, North Dakota and [Minneapolis], and production dropped in all other corn-producing states. The worst affected states are nearly all Western states: Nebraska, Kansas, South Dakota and Texas. The November USDA report shows an expected output of 13.93 billion bushels the 2022-'23 crop year compared to approximately 15 billion bushels in the '21-'22 crop year, a decrease of 8%.

On the bright side, ethanol and DDG export have increased compared to last year through September 2022 at the -- and the nonfood corn oil price continue to increase, and it is expected to increase even more. Ethanol exports of September '22 -- 2022 totaled 1.12 billion gallons compared to 873 million gallons for the same period last year, a 27% increase.

Despite all these issues and difficulties as long as we continue to source corn at a reasonable price and railroad efficiency and logistic improves at this early -- very early stage, as Stuart mentioned, we expect that the fourth quarter could be profitable.

Let me now share the progress of our carbon sequestration project. These are the bullet points. The first test well at One Earth Energy was successfully drilled in total depth of around 7,100 feet. The 3D seismic testing and water movement tests are completed, and we are very pleased with the results. Several other tests and modeling were performed to verify maximum injection pressure, reservoir quality, rock core analysis, expected movement of the CO2 plume. The test results show that location is a very good target for carbon sequestration.

The design of the compressor facility is complete. The contract to build the compressor part of the facility have been signed, and long lead time equipment has been ordered. The pipeline to injection well operator identification number has been received. The work on pipeline FEED study is expected to be finished by January 2023.

The Class VI permit for 3 injection wells with a capacity to store 90 million tons of carbon have been completed and submitted. We continue to complete several other documents required by different government agencies, but most documents that require a lead time are completed or expected to be completed very soon.

Once again, this is a highly technical and time-consuming project. It has required considerable time to make progress, but we are pleased that we have started -- what we started 4 years ago now has achieved some big milestone. As I also 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 at our plants. We believe the completion of some of these projects will lead to a greater benefit under the Inflation Reduction Act passed by Congress.

The Section 45Q cash payment for the carbon sequestration increased to $85 per metric ton from $50 per metric ton. The clean fuel production credit Section 45Z, which is related to the reduced carbon intensity score, could provide a much better return than 45Q.

In summary, we are very pleased to announce once again a profitable quarter in a very, very difficult environment as well as very good progress with our carbon sequestration projects. Hitting these carbon sequestration milestone and achieving a ninth consecutive quarter of positive income cannot be accomplished without the hard work and dedication of our colleagues. We are very appreciative of their efforts on achieving these positive results.

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

Thank you, Zafar. In conclusion, the ethanol business remains steady, and we believe our potential carbon capture business has been helped significantly by government legislation, along with great progress by Zafar Rizvi and his team.

We continue to consider -- we continue to believe that we have the best plants among the best plants in the industry. Our locations are good, especially the one that is right in the middle of what we consider the best carbon capture area of the country. But more importantly, we truly believe, as Zafar said, we have among the best employees in the industry.

Most companies in the industry were -- many, many companies were not profitable. We had a profitable quarter, and we continue to consider our employees to be among the -- we consider that the real reason why we're doing better than most is we consider our employees to be the best. And that I think separates us in ethanol, and I think you'll see, and we hope that it will continue and will separate us in carbon capture.

I'll now leave the podium open to questions.

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

Really nice execution again this quarter. Maybe I'll start out, you're clearly making good progress on the CCS side. If I think about that project moving forward along with the clean fuel credit and the IRA that starts, I think, in 2025. Maybe could you just help us think about how those 2 items might play together as we get into some of the out years, assuming CCS progresses and what that means for the business?

Zafar?

Yes. Jordan, with 45Z and 45Q, 45Q is a direct payment up to $85 per ton, and 45Z is a tax credit, which you received if you reduce the carbon intensity, which is the line right now, if you -- most ethanol plants have approximately 70 CI score, what we call is carbon intensity [plan].

And then there is a line which is 50 -- if you reduce anything below the 50, you get some per gallon basis tax credit on each gallon you produce. So there is a formula to look at it, carbon -- we are not a -- just want to make sure we are not tax expert, but this is what I understand.

So the carbon -- when they do the carbon sequestration, you reduce approximately 30 points for CI score. And then there is about 18 points is for the land use that also reduce because we are -- whatever land use will happen, we further reduce that 18 points. So if you started 170 and then you reduce by almost 48 points, and then you can reduce your further CI score. If you are able to achieve a 0, which is not that difficult, not that easy, but there also have to be made lot of changes in the process and other things, which has to be accomplished.

As I mentioned, we were working on a lot of these things previously from the last couple of years to reduce our further CI score. So we are already working on that thing. If we -- for example, if we are able to achieve 0, but I'm not saying that we will be or we will not be, then it's almost equal to $1 a gallon of your ethanol production. So if we are producing 150 million gallon and we reduce CI score to 0, we can have almost per gallon basis $1 a gallon that may be in one location, can be as much as $150 million. But we are not expert, but that's what we understand at this time.

And I'm certainly no tax expert either, but that's a great explanation. Maybe just to clarify, did you -- on the land use side of that, did you mention that you're working on something to get that 18-point reduction? Or is that just (inaudible) relation of it?

No. When we have accomplished the carbon sequestration, because if we take the carbon all and put it in the ground, under that formula we get approximately 30 points for the carbon sequestration we did, an 18 point, which is now -- ethanol has been used. They've used always that when they compare their -- our CI score, they always add 18 points for the land use. So that land use will be automatically will also get a reduction with the carbon sequestration. So that's where it adds up. That's what I understand. .

So you're basically -- you're getting nearly a 50-point reduction just on the carbon capture?

Yes...

None of these numbers that Zafar is saying include what we potentially the higher selling price of zero carbon or low carbon ethanol, which -- it's another -- we're not -- we don't want anyone to put that in their numbers, but that's a real possibility also. .

Exactly. So as I said, Jordan, generally, there is a 70 -- normally, 70 to 72 generally ethanol plants have CI score, which they call it. So if you take it 30 point reduction for the carbon sequestration and 18 point reduction for the land, that's 48, so to 70 minus 48. So you can see that it's come approximately 22. So the line started with the 50 that you have to have minimum 50 and then go down. So that's where the comparison is done. So it is there a formal which we understand that it will be used.

Got it. Got it. That's helpful. Next, there's been some headlines on RVOs coming out in the next day or whatever. Just curious your thoughts if we assume mandates for ethanol are roughly held flat over the next 3 years or so.

I think we are -- as we are hearing, it's approximately is still going to be staying 15 billion for ethanol, which -- they may increase the overall to 21 billion, but we understand that it's probably going to stay 15 billion for the ethanol, but we're not sure up until it's released.

One thing that would be important, and we don't know -- so far the Biden administration has held firm is no waivers. They have the ability to give waivers wherever they feel like giving them and they have in the -- administrations have in the past. And Biden has been pretty good at very little or no waivers. So if it's no waivers, it's actually a decent increase.

Yes. And hopefully, this export continues to increase. As I said, this year, we can see that we are way ahead compared to last year. And if exports continue to increase, that will also help us.

Got it. That's helpful. Lastly, jumping around a bit here, but just to go back to CCS. Zafar, maybe can you just -- you went over it in your prepared remarks, but just so we have it separated out. Can you just talk to kind of the next steps as we move into early next year? I know you mentioned that you've -- most of the long-term items you've been working on in the detailed plans, but maybe just break out what we should be looking for as you move into 1Q, 2Q next year.

Yes, Jordan, as I have mentioned, there's a lot of still work to do because there's a lot of government agencies' permits we are still in process of applying. Those permits doesn't take that long compared to Class VI permit, that would take from 6 months to 18 months, but other permits, which is required by the Illinois, it's required by the federal government and other things, so we are working on those progress.

And then we are -- we cannot start injection well, start even digging the injection well up till the time we received EPA permit. So we are in the process of looking at to starting the bid, already to be prepared for as soon as we receive permit from EPA, we should be prepared to start injection well.

So there's going to be -- a lot of work will be happening in next year. But our goal is, hopefully, but this certainly, as Doug said forward-looking statement, that we complete this project by the end of '24. But this could take longer, but that's what we are trying to achieve.

Got you. And just because you filed for 3 permits, I would assume that you're thinking about some third-party volumes there, too?

I think at this stage -- at that stage, probably that's what we're thinking because we do not have enough capacity for our ethanol facility. But we know there is a lot of demand for the well is going to be in the future. And so we just wanted to make sure there's going to be 2 extra well will be available. We don't have to start digging them right away as we -- they will be started as needed basis, but we will have already a permit for the EPA to achieve those. So that if we wanted to start it, we can start it any time.

Our next question comes from Chris Sakai with Singular Research.

Can you talk more about, is REX experiencing any logistical challenges with rail?

I think the main concern which we have is, as you can see, the recently going on there is strike, and you can hear it from the strike and all around that during the 2019, '20, '21, and the railroad laid off a lot of people and then certainly these drivers and all those things, demand increased, but there is not enough manpower. We see sometimes that power is already there, or power made it to the plants to pull, but there's no driver.

And they are supposed to pull it on [fair] on Monday, they are not there up to Saturday, Sunday. So as these things delayed further to pick up those railcars, other containers are not available sometime, and that delay cause our -- there's limited storage, although we have increased a lot of our storage compared to other ethanol facilities.

But there is a point reach which you have, your tanks are completely full, then you have to slow down the project or your storages are all full. You can't really overflow the ethanol from the tanks and then you have to slow down and wait for the rail cars to come back before you load it again. So that certainly caused the problem of production. That certainly has caused the problem of shipment. And unfortunately, that's the consistent continued problem at this stage.

Okay. And as we head into winter, can you comment on how an increase in the price of natural gas will affect profitability?

Yes. I think actually, that's really we are already analyzing it. So generally, we try to make sure that we have at least enough natural gas before we get into that plant. But you can see it's -- NYMEX is trading today, the $6.93. And last month, it was $6.35. And last year, it was $5.42. So there's $1.50 is change, and this change since that happened. And it's consistently continuously, we see the natural gas is -- although there is enough natural gas in this country, I think that basically reaction is due to the European situation, or Ukraine war again. Since that happened, that's the time this natural gas prices start going up.

And that makes really major impact. If we look at it actually in calendar year, it was about $2.08 average and 2021, it was $3.84 average. And now for this calendar years so far is a $6.64 average. So this -- and we don't know what will happen 2023. But that certainly is affecting the bottom line. As Doug mentioned, there's a 56% increase. So that takes away your 56% of the portion of the profit.

Our next question comes from Pavel Molchanov with Raymond James.

You provided some useful perspective on natural gas. Let me zoom in on corn. When we look at the futures curve, I mean it basically points to $5 to $6 a bushel practically forever. And we went through a decade pre-COVID with $3, $4. So is $6 corn in your view going to be the new normal now on a permanent basis?

I think it seems to me at this stage, at least the area where we have, CBOT probably going to continue to trade at that level. But the -- Pavel, the major problem is that area is where you have drought, which I mentioned earlier in my prepared remarks, those areas like South Dakota, Nebraska and Kansas and Texas. Texas is already the deficit corn area. But these area is certainly due to the drought. The basis are very high.

You can find somewhere bases are $0.50, $0.60 or $0.80, even though we have seen $1.20 basis for the corn base. And if the corn is going to leave some area like say, North Dakota this year has a bumper crop, last year, they didn't have that great. Minneapolis has a great crop, that area. And Illinois has great corp. So when you are shipping this corn from one area to other area by rail, the rail costs about somewhere depending on the destination.

But if you look at -- if you send it from North Dakota to Texas, it's about $1.60 to just to ship a bushel. And on top of that, they're going to be a $0.60, $.70 or maybe $0.80 on basis. So if you are delivering $1.60 plus paying $0.80 basis, so $2.40 to deliver corn in those taxes, Nebraska and other area, which is further away, is going to be very difficult for some of these ethanol facilities to continue to produce at that corn level price.

Okay. Let me turn to a regulatory topic. It seems like it's forever, we've been talking about E15 on a year-round basis, and I know there is a new bill from Senator Fischer in Nebraska to put legislative authorization on that without going through the EPA waivers. You anticipate that bill has a good chance of passing? What do you think?

I believe this time looks to be -- is a good chance of surpassing because the most -- all the players are agreed, seems like agreed, I should say. It seems like they agreed that E15 will not be a bad idea. So if that pass, I think that will be great help because if the pumps continue to supply 12 months in a year, then people will convert that. Because I have seen some several pumps in actually in Illinois, Nebraska and other area, what they call is E88, they are selling.

And you can see the price difference almost $0.15 to $0.20 sometime difference than regular price. So people are using that. So I think if these pumps can produce -- sell regular basis 12 months, I think this will catch up more and more, and that will be very -- certainly will increase another 5% ethanol demand.

Okay. And then lastly, you mentioned exports and obviously, kind of varies from quarter-to-quarter. But your general impression on the export window to China, where do things stand on that?

I think if you look at it, really, we do not see much export to China this year. Mostly -- I think we can see that mostly, it was -- Canada was the highest we produced. Canada, South Korea, Netherlands, India and the U.K., and I think India certainly is moving also rapidly to meet their own demand locally in India, and they are pushing very hard. And certainly, Brazil was not a major player this year so far. But we have seen certainly Canada and South Korea and Netherlands step up. And -- but we have not seen any major shipment to China this year.

Right. Okay. That's consistent with what we're seeing.

Mr. Rose, there are no further questions at this time. Please continue with your presentation or closing remarks.

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

Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.