REX American Resources Corp (REX) 2021 Q4 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2021 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 2021 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 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 fourth quarter increased by 68% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 69.9 million gallons this year versus 67.7 million last year.

We reported gross profit of $38.7 million from continuing operations versus a gross profit of $8.3 million in the prior year. For the current year quarter, improved selling prices were offset somewhat by higher corn and natural gas pricing. Ethanol pricing improved by 74%, dried distiller grain improved by 19% and corn oil pricing improved by 122% for this year's quarter over the prior year fourth quarter. Corn cost increased by 44% and natural gas pricing increased by 80% for this year's quarter.

SG&A increased for the fourth quarter to $6 million from $4.2 million in the prior year. This primarily represents increased incentive compensation based upon higher earnings in the current year.

We had income of $3.9 million from our unconsolidated equity investment in this year's fourth quarter versus income of $332,000 in the prior year, again representing strong fourth quarter industry fundamentals.

Interest and other income decreased to approximately $13,000 versus $415,000 in the prior year, primarily reflecting lower interest rates. We expect to begin to see some improvement in this area in the current year as rates increase on short-term investments.

As mentioned in the last quarter, the refined coal operation is now classified as discontinued operations and its results and historical results are now reflected on one line on the income statement including the tax benefits from this business. We reported $159,000 of net income reportable to REX shareholders from discontinued operations in the fourth quarter as we ended operations on November 18, 2021.

We reported a tax provision from continuing operations of $10.7 million for the fourth quarter of this year versus a benefit of $102,000 in the prior year. Tax provisions and rates will be impacted from time to time based upon levels of income, permanent tax items and uncertain tax position adjustments. These factors led to net income attributable to REX shareholders from continuing operations of $21.3 million for this year's fourth quarter versus $3.3 million in the prior year.

Our net income per share from continuing operations attributable to REX shareholders was $3.58 for this year's fourth quarter versus $0.56 in the prior year. Total net income per share attributable to REX shareholders was $3.61 for this year's fourth quarter versus $0.59 in the prior year. Stuart, I'll now turn the call over to you.

Thank you, Doug. We had a very good fiscal 2021, but now business has become a little bit -- I'd say, much tougher. We're projecting for this quarter possible losses tied to higher corn and gas prices, and ethanol price is not rising as fast, cutting into our crush margins.

Corn could be an issue for the rest of the year, especially relating to Ukraine along with normal seasonal issues. RINs could be an issue next year. It will be up to the EPA to decide what that RIN level is. It won't be legislative anymore. So a lot will depend on what happens with the EPA chief. And that could affect this year's RINs as sometimes they allow the current year RINs to be spread out.

Another issue that we're having is logistical issues, inflation. Labor shortages could be issue. So we have a number of things that we are worried about. On the positive side, our product is American-made. We need more U.S. We're going to need more U.S. fuel as the rest of the world does not seem to be willing to help us as much as we would like in that area. And we are more green fuels and oil, and it can be -- and the -- it could be used up to 15%. So we're hopeful -- our blending rate could go up. We are hopeful blending rate would go up to 15% and that, of course, would increase demand.

We now have over $250 million on a consolidated basis -- $250 million cash on a consolidated basis. In terms of uses of cash, we will be talking to you. So far, we've been talking to you about carbon capture. We'll also talk to you more about our ethanol plants and what we expect to happen there.

We also, in terms of spending the cash, are looking for other ethanol plants that are successful. We have not found anything in our price range as of this time. There's ancillary businesses in ethanol like high protein, a number of different techniques to make that high protein, no one to date has shown great earnings. So we're waiting to see who's the most successful and before we decide whether or not to get into that business. But again, other people are looking at it.

We also are looking at other industries that might fit our skills, especially commodity-driven industries where we might be able to potentially turn them more green. We continue to buy back our stock on dips. And last year, we bought some as the stock dipped significantly. We have the cash available to buy more.

We have exited the refined coal business but we still carry forward a large amount of tax credits which can be used to lower our taxes paid and increase our cash flow.

I'll now turn the call over to Zafar who will talk more about the ethanol business and the carbon capture business. Zafar?

Thank you, Stuart. Good morning. As I mentioned in our previous quarterly calls, the operating environment in the fourth quarter improved, and we are very pleased with the results of the fourth quarter and the fiscal year.

Since last month, as Stuart mentioned, it has become very challenging due to several reasons, including an increase in ethanol production and stock, challenging logistic problems and an increase in the price of corn greater than the ethanol price, which are negatively affecting the crush margin. As a result, the first quarter of 2022 may not be profitable if this trend continue into the second quarter or maybe longer, which could adversely affect production and net income.

We also plan to shut down for the regular maintenance and safety checkups during the month of April. We are also -- as Stuart mentioned again earlier, we are also evaluating several other projects, which could help to increase production, efficiency, energy saving as well as reduce water consumption and further enhance safety. Some of these projects are capital intensive and require much analysis before any can be implemented. All of these projects are in a very early stage and may not materialize.

Let me share the progress of our carbon sequestration project. As I mentioned in several previous calls, we are working with the University of Illinois in drilling a carbon sequestration well. The first well at One Earth Energy was successfully drilled to a depth of around 7,100 feet, in which almost 2,000 feet of Mount Simon stone was encountered.

The geological model has been established and is being used as a basis for simulation to predict the movement of the CO2 injection into the subsurface. Additionally, we will be performing additional testing at the well itself over the next several months. These simulation models will help to make progress on the completion of the Class VI permit application, which we have started. The completion of the application process will continue as we began to receive more information from simulation models to predict the behavior of the CO2 when it is injected.

These simulations are currently at a very preliminary stage and a lot of more work is required, but the data include -- indicate all the CO2 produced by the One Earth Energy facility can be injected and stored at the potential site.

We will continue to evaluate further as we make progress. This is a highly technical and time-consuming project, and it will take time to make material progress. The 3D seismic testing was completed in the middle of the February, almost 16,000 nodes were placed at different points, 160 million points of data have been collected and being analyzed.

Our FEED study of the capture of CO2 and the design of the facility is completed -- are completed. The bidding process will start after the completion of engineering. As I have mentioned in a previous call, this project is still at very preliminary stage. It required a lot of time-consuming modeling and analysis. We cannot yet predict the result of the simulation models and where they will be -- whether we will be successful or not.

In summary, as Stuart mentioned, we are very pleased to announce once again a profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues on achieving these results.

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

Thank you, Zafar. In conclusion, we had a great 2021, but we are very cautious on 2022. But we believe and continue to believe we have great plants, great locations, and most importantly, great people. And we believe with this combination, as we have done in the past, we'll continue to greatly outperform our competitors, the bulk of our competitors well into the future.

I'll now leave the forum open for questions.

(Operator Instructions) We have a question from Bertrand Donnes with Truist.

On the carbon capture topic, right now, obviously, the focus is on the test wells and the reservoir modeling. Are there any things you might consider working on simultaneously like initial infrastructure planning or maybe talking about third parties that might accelerate the time line if the tests are successful?

We are working with several different people at the -- for the -- as I mentioned previously, the design of the facility is completed and engineering work is now in process of completing. And then we will be able to put -- after the engineering, put for the biddings, and then we will start that. But I think we want to make sure is -- that the well is completed. And now we are in the process of filing V6 permit and all those things. When you start to do these things, there is required a lot of modelings, simulations and other things because without that data information, we cannot complete the permit -- EPA V6 permit.

So that permit, while we are trying to complete that permit, on the same time, we are working on the facilities, and I think we have a team which is working with several different people. And then we would like to [excel] the project, but I think there is -- sometimes, nothing we can do unless we have more data.

That makes total sense. And then maybe jumping topics. In the prepared remarks, I think you mentioned that you're not seeing anything in your price range for ethanol facilities. But could you just talk about what you're seeing in the M&A market given the volatility in crush spreads? Are sellers pulling away? Are they looking -- or bid-ask just too wide?

I haven't seen any plants for sale this year that weren't for sale previous. I haven't seen -- during the fourth quarter, I think prices probably went up significantly because really good plants had a really good fourth quarter. But I'm not seeing those prices -- I haven't seen anything, to be honest, come on the market since last year. And we did make a run at plants last year and get very close and thought we -- anyway, we -- but we did not get them. So maybe something will come this year. But as of now, I have not seen anything that would fit what we're looking for in our price range.

(Operator Instructions)

If there are no further question -- are there any further questions? If not...

I'm sorry, sir, we do have a few more questions.

Go ahead. Good.

Our next question comes from Chris Sakai with Singular Research.

Yes. Just I had a question on if you're experiencing any weather-related issues in this quarter and recently?

I think the more is about logistic is the performance of the railroad. And as you probably heard that even Canadian Pacific has a strike, and that's also affecting and previously also, a shortage of labor for the railroad companies, and they cannot find drivers who make it. Sometimes, the drivers bring that rail and power out there, and then he goes and then the next person who's supposed to be there, he does not show up. So that's mostly related with that.

Yes. But I think weather is some effect, but it's not the major effect. Major effect is continuously about the railroad performance.

Okay. Great.

Go ahead.

Okay. And you mentioned about a tight labor market. I just wanted to get an idea about what you're seeing at REX. And are you having to increase wages because of that?

I think at our company, we always have very competitive wages, and we always paid. We always take care of our employees. And we also have bonuses systems and other systems to continue to have their incentives. As we make money, they certainly make more money and they have. Also, I can assure you, none of them is minimum pay or all those kind of numbers. So we have very competitive wages, and we always review every year and to -- pay salaries and other things to make sure they are above the market value.

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

I have a couple of questions. The first related to the -- clearly, the crush margin is contracted as corn has run up. But it looks like also the byproducts that you guys sell, corn oil and distillers grains, prices are very strong. Can you just talk about the margin impact that those have? And did they make the overall picture look pretty good or at least okay right now?

I think let me say that, certainly, there is -- recently, we have seen increase in DDG value also, which is previously, it was close to 90% to 95% of the corn value. And recently, we have seen close to 100% to 106% of the corn value. Certainly, we have seen ethanol. Not ethanol -- corn oil has -- value has increased, as Doug mentioned also in his prepared remarks.

As far as ethanol margin, as you can see, today corn is trading $2 -- $7.63 and ethanol is trading close to $2.48. So you can see that how much, there is not enough crush margins.

I think the other concern we certainly have is moving forward, as Stuart mentioned, that as you know, Ukraine produce close to 1.6 billion bushels a year. And they export about 1 billion bushels a year, they export. And we are concerned that if the export completely stopped from Ukraine and then the world moved to -- direction toward to U.S., then it could be some problem of shortage of corn.

Our monthly usages for U.S. is 1,000,245,000 bushels a year. And we're expecting our ending stock will be close to 1,000,044,000. And then if we roughly take it out, 300,000 to 400,000 exported more -- million exported more, then our stock will continuously will -- going to drop, and it may not meet the usages, which is approximately 1.2 billion bushels a month.

So those are some concerns, and that's why you can see the market is reacting. And although there is an inverse in the future and -- but presently, there is -- that other problem is the market there is -- there's no carry in the corn at this time, but there is a fear of shortage of corn if Ukraine situation did not improve.

Great. And secondly, it appears the global refined products market has tightened significantly in the last month. And can you just touch on any opportunities you guys have had to capture better margins exporting ethanol?

I think though, if you look at the export, really last year export was dropped. Compared to last year, export was 1.2 billion compared to year before, approximately 1.3 billion. And January export was 123 million that compared to -- in 2020, it was -- let me get it for you. Yes, in January, export was 124 million gallons, and that was less than last year.

So if we can see that export is consistently dropping even in month of January compared to last year in January. Last year in January, it was 165 million, and this year, it is 123 million. But we have seen recently Brazil has lifted their tariff which is 18%. If that goes away, then maybe we'll see more export activities.

Our next question comes from [Mary Rose] with Infusion Partners.

(technical difficulty)

Operator, move on.

Mr. Rose, there are no further questions at this time.

Okay. Anyway, we'd like to thank everyone for listening today. I appreciate it very, very much, and we will look forward to reporting next quarter. Thank you again for listening to the call. Bye, everyone.

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 line. Have a great day, everyone.