REX American Resources Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 30, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the REX American Resources Fiscal 2023 Third Quarter Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. I I would now like to turn the conference over to Mr. Doug Bruggeman, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Good morning and thank you for joining REX American Resources fiscal 2023 3rd quarter conference call. We'll get to our presentation Certainty uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements reflect the company's current 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 ks 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.

Speaker 1

I'll first review our financial performance and then turn the call over to Stuart for his comments. We are very pleased to report these record net income and earnings per share quarter results. Sales for the 3rd quarter increased slightly compared for the prior year. Ethanol sales for the quarter were based upon 73,200,000 gallons this year versus 60 We reported a $30,000,000 increase in 3rd quarter gross profit to $39,300,000 this year versus $9,300,000 in the prior year as we benefited from lower corn and natural gas pricing over the prior year Q3. SG and A increased for the 3rd quarter from $5,800,000 to $7,600,000 primarily due to As mentioned in the Q2, the company made a change in the method of accounting to begin In order to improve the comparability of gross profit and SG and A reported, the company has applied a retrospective application of its new accounting policy.

Speaker 1

This change only impacts cost of goods sold in selling, general and administrative expense and has no impact on the earnings reported. We had income of $4,700,000 from our unconsolidated equity investment in this year's Q3 versus $661,000 in the Prior year primarily reflecting improved industry operating conditions for this time period. We reported interest and other income of $4,900,000 versus $2,000,000 in the prior year. The increase primarily reflects increased interest rates as well as $862,000 from COVID relief grants received from the USDA during this quarter. Income before income taxes and non controlling interest was $41,300,000 for the 3rd quarter compared with $6,100,000 in the comparable year ago period.

Speaker 1

We reported a tax provision of $9,600,000 versus a provision of $1,200,000 in the prior year. These factors led to net income attributable to REX shareholders of $26,100,000 for this year versus $3,200,000 in the prior year's Q3. Net income per share attributable to REX shareholders was an all time record, dollars 1.49 for this year's Q3 versus $0.18 in the prior year. Stuart, I now turn the call over to you.

Speaker 2

Thank you, Doug. Going forward, the business has continued to be And we expect our Q4 to be significantly better than last year's corresponding quarter. We're working hard on our Carbon capture project and also making and also are increasing the capacity of our One Earth plant. Will discuss the ethanol business and carbon capture business in his segment. We have cash of $332,000,000 consolidated cash on our balance sheet $332,000,000 We're earning interest on that, which should be significantly better or we hope it to be significantly better than last Sure.

Speaker 2

The ethanol plants expansion will use some of that cash. The Carbon Capture Project will also use some of that cash. Jim Zafar will discuss this on his part of the call. We're always looking for other ethanol carbon capture businesses Other entities that could benefit from our expertise, so far we have nothing imminent on the acquisition front. We have our buyback still available.

Speaker 2

We buyback on dips and currently we are not purchasing any shares. I'll now turn the conference call over to Zafar Risti.

Speaker 3

Thank you, Stuart. Good morning and thank you for joining us today for the Q3 earnings call. As Stuart and Doug previously mentioned, our team successfully capitalized the opportunity in the commodity market and were able to achieve the best We have seen some decline in the cash margin in the Q4 compared to the Q3, but we believe we still According to the EIA November 29 report, ethanol stock and production dropped during the week. We have also seen natural gas price drop considerably, which has a positive impact on our financial results. The November 9, 2023 USDA report shows an for the year 2023 2024.

Speaker 3

We are pleased that corn yield in Marion, South Dakota this year is estimated at 152 bushels per acre compared to 132 bushels last year. As you remember that we had the last Also approximately 580,000 acres, 12% more acres were corn were planted this quarter compared to last year. The corn in Gibson City, Illinois are less stable at 203 bushels per acre compared to 214 bushels per acre last year, But almost 400,000 more acres were planted and an increase of 4% were more were planted this year compared to last year. Looking ahead, the drop in the ethanol and DDG export could negatively affect future results This continued throughout the next year. Ethanol export through September 2023 were approximately 1,000,000,000 gallons compared to 1,100,000,000 gallons in 2022 during the same period.

Speaker 3

DDG export Through September 2023, it was approximately 8000000 metric tons compared to approximately 8 point 5,000,000 metric tons, a decrease of approximately 428,000 metric tons compared to the Last year, as I mentioned previously. Let me give you some update about carbon, our carbon project. As I mentioned in our previous calls, we believe our carbon capture and sequestration project will further advance our We have budgeted approximately $165,000,000 to build the carbon capture comparison and storage facility, The construction of the carpenters and compression facility has started All modular compression equipment for the facility is scheduled to be delivered by early next year. The construction of the facility is expected to be completed by the end of Q2, at which time testing of the facility will begin. We continue to complete the paperwork of different government agencies, while we wait the EPA approval of the Class 6 permit for carbon injection and for the Illinois Commerce Commission's approval to construct a 7.2 miles carbon pipeline.

Speaker 3

All these performance and approvals depend on several local, state, federal agencies. Unfortunately, we cannot predict When we will receive these permits from these various agencies. In other updates, 2 other carbon pipeline companies recently withdrew their Pipeline application. De Graver Resources has entered into an agreement with Navigator, which withdrew their carbon pipeline We are pleased about the big milestone we have reached so far and hope Different government agencies will complete their approvals early next year. We will also continue to evaluate other projects that would improve our Energy efficiencies, reduced carbon intensity.

Speaker 3

If we successfully achieve our goals, we will be prepared to provide low carbon company's performance for our shareholders. In summary, we are pleased to announce the most profitable quarter in our history and we believe our 4th quarter is and a plan to increase ethanol production of 1 ARC Energy ultimately to 200,000,000 gallons to maximize 45 gs tax Once again, we could not achieve these milestones without the hard work and dedication of our colleagues. We are very appreciative of their efforts in achieving these positive results. I will give back the floor to Stuart Rose for additional comments. Stuart?

Speaker 2

In conclusion, we completed the best quarter in our 39 year history as a public company. We drastically Outperformed the industry. As Elon Musk said, we don't as he said yesterday, for people who are listening to his He has no patents or his patents are all open patents. We have no super patent or anything like But we better execute than our competitors and our people are the real reason for that. We feel we have the best people in the industry.

Speaker 2

We feel that they know what they're doing. In carbon capture, For example, everyone else has these big pie in the sky projects. We've focused on a project that we believe is very doable. And at the moment, I believe we're in the lead in the ethanol business in our carbon capture project To head up any other carbon capture project that I know of in the ethanol business, other than our ADM, which was done long ago. So we're again going to show we believe that execution is way more important than anything else.

Speaker 2

We feel we're better at that than anyone else. As I said earlier, we feel we know we have good plants. We know we have good locations, but the most important thing we have is good people. And our people are just terrific and they get all the credit for this quarter. It's just a terrific job and they deserve it.

Speaker 2

I'll now leave the forum open for questions.

Operator

Thank you. Our first question comes from Jordan Levine with Truist Securities. Please proceed.

Speaker 4

Hey guys, it's Henry on for Jordan here. Congrats firstly on the quarter. To start off, I know you mentioned the 2Q date before. I was wondering if you have any more color around some of the different benchmarks both on the construction side and then from the EPA around the CCS build that we should be looking for over the next 12 months to 18 months.

Speaker 3

I'll take that. As far as concern about the EPA, I think it's under Technical review, they have and we have no idea how long that technical review will take. But As far as construction of the facility is already started, as I mentioned previously, and the modular unit, Which will be arriving in February and we believe that our facility will be up completed by July 31 or earlier.

Speaker 2

That does not mean we'll be in business July 31st. It may take a little longer because Still may be waiting for permits. Yes. I think the construction

Speaker 3

of the facility will be completed, but we cannot Operator, unless we receive the EPA permit and pipeline permit, which I mentioned earlier. But As far as concerned, the compressor facility will be completed.

Speaker 4

Thank you. And then just looking ahead to Next year, how are you guys looking at the ethanol landscape shaping up kind of compared to this year? And have you guys had started having conversations With any of the nearby operators on potential carbon offtake given kind of where you're at, your advanced timeline for your current carbon capture projects?

Speaker 3

I'm sorry, could you repeat that question again? I wasn't I'm not sure what exactly you're

Speaker 4

Just a quick one on kind of the ethanol landscape, how you're seeing that shaping up for next year. And then just anything you have on If you have begun having them with nearby operators for a potential carbon optic given where you're at with the CCS build out.

Speaker 3

I think as far as concerned, ethanol looking forward, as I mentioned that we are in a commodity business. I think it's very hard to predict more than even a Couple of months or 3 months. So at this stage, I really cannot predict What happened with the commodity market and it's changed every single day or every month. And but we When we're going to see any opportunity, we will be there to materialize that. So I really cannot predict What happened next year?

Speaker 3

But I can as I mentioned, the Q4, certainly we believe that there It will be much better than last year same Q4. But as far as concerned about the carbon, I think once we complete the facilities, that We'll be probably by the end of 2025. At that time, we will see exactly that if there is other source Of the carbon is available from anybody else. Otherwise, our expansion of the ethanol facility will be Still will be a very feasible project with using 45z and even 45q, The tunnel investment is much higher than we expect.

Speaker 2

Thank you. One thing on your question, I think you should you Probably realize you've been following us for a long time. Jafar and his team have proven quarter after quarter after Order that they know the commodity business and are really good at it. Other people with all their futures contracts and the big floors of commodity traders and everything have drastically underperformed what Zafar and his team have done. And there's no reason if it's happened in the past, there's no guarantees it's going to happen in the future.

Speaker 2

But when you look at that team and what they have done, I think you have to say that we know this business and that we're better again, as I said in my call, better executing than everyone else. And again on the carbon capture, we hope to have a completed with permits by the end of next This year, which would be with 45z, a huge, huge addition potentially to earnings per share. So we'll see What happens and that's the thing that we are putting so far and his team is putting in the growth area the most efforts into. And again, if he does that like if they do that like they've done ethanol business, we're in really good shape.

Speaker 3

Yes. And I add to that since we are increasing our production to 200,000,000 gallons. So Every reduction from 0.52 reduction every gallon is $0.02 a gallon. So if we and the carbon sequestration is approximately somewhere $0.05 to 35 points. So if we are able to reduce our carbon footprint, our intensity And as we are working on several other project, so we can generate with a 200,000,000 gallon ethanol facility over 3 years, somewhere $500,000,000 to $600,000,000 tax credit.

Speaker 2

Again, that would be the most we can generate. So that's right. We don't want people putting that in their numbers, but that's what we're working so hard And if we even get to half of that, that's all increase in earnings per share. So that's We have a big bogey out there and we're going to work hard to get as much of it as we can.

Speaker 3

Yes. That's the reason we are allocating $165,000,000 It's a major investment and certainly is the risk, but we believe the return is Much better and much higher.

Speaker 4

Thank you, guys.

Operator

Our next question comes from Chris Sakai with Singular Research. Please proceed.

Speaker 5

Hi, good morning. Just a question on where are you seeing the most demand for ethanol?

Speaker 3

Where we see the most demand in ethanol in you mean export side?

Speaker 2

Right.

Speaker 3

I think the mostly right now we have seen Canada and we have recently see the United Kingdom, South Korea, Colombia, so those are the top 5. We have seen some India also. So Certainly, lot of these countries are importing. So Canada is always on number 1.

Speaker 5

Okay, great. How are you guys seeing The price of corn and dried distillers grain and modified distillers grains heading into the next quarter?

Speaker 3

I think the phone is generally speaking, as you can see, that's trading about $4 Yesterday, it was $4.49 and today is some increase. So I think that as I mentioned previously in the South Dakota area, certainly we have seen some minus basis and we have Seeing some bases in overall in Illinois has gone up a little bit. We have seen bases in Minneapolis and Some other part where it was not as good production as it compared to last year is plus Basis, but otherwise most of the area is the minus basis.

Speaker 5

And what about the Price of natural gas as we head into the winter.

Speaker 3

The natural gas price has considerably dropped as I mentioned that we have seen That is less than a $5 for January, February and we have seen that about for March as low as $2.56 or 2 point So that will be a major impact as I mentioned that in my previous prepared remarks That we have seen the drop in natural gas pricing.

Speaker 2

Okay, great. Thanks.

Operator

Our next question comes from David Locke with Old Mammoth Investments. Please proceed.

Speaker 6

Hey, guys. How are you doing this morning?

Speaker 2

Good.

Speaker 6

Hey, first off, I'd really like to thank you guys for taking Questions. There are some teams out there that seem sort of afraid to take questions from their investors in a public forum. So, thanks So my first question is like the industry overall has been beset by a ton of Then has that contributed to the good financial margin environment for the last half year or so. And how have you guys managed to sidestep all of that? And relatedly, how old are your plants relative to industry average?

Speaker 2

We have some of the newest plants in the industry. They're I believe under 10 years old. Some of these older plants just should be shut down to be honest with you. The fires and all that Maybe helped us a little bit. I don't know if they had commitments where they had to buy.

Speaker 2

I'm not sure The situation where they had to buy product on the open market, on the spot market, that certainly if they did, that would help. But I think you have not and we have a number of plants, some we only own a small part of, But we have many plants and these are all newer plants. We made in the beginning, we made a decision to go with the best builder and the best plants. And I don't know of any operational problems in these plants. They're just better built.

Speaker 2

We service At semi annually, we do an extensive service on these things and they're just state of the art better plants. That's all I can So the Fagan ICM plants, when you see 100,000,000 gallon Fagan ICM plant, very seldom do you see anything Materially go wrong with those plants. There can always be a tornado or something, but the plants themselves are built terrifically. And we take in our case, we take extremely good care of those plants.

Speaker 3

Yes. I will add to that is I think the safety is our number one priority. We always review that every month the safety procedure, God Forgive, anything can happen to anybody, but we are making sure all the safety procedures are followed and drills are Happening and other very closely monitored other safety things. And as Stuart mentioned, there's a couple of Which happened, I think if you ring, there's one plant that happened in the South Dakota that was about only 70,000,000 gallon plant that shutdown for a while. ADM plants were shut down for maybe a couple of weeks or more.

Speaker 3

And so I think there is Stuart has I mentioned that there is maybe a minor impact, but I think the overall, if you look at the commodity market, That also makes difference when you have in October 2nd on corn was trading $4.88 and ethanol was Trading $2.36 So there is plenty margin at that time to look at it to make sure that this is the time to lock in and moving forward. So I think as Stuart mentioned, it all depends what when and what time you execute Execute your profit and consider that this is good enough and let's lock in and move on.

Speaker 2

Let me add Again, we believe strongly we have the best commodity trading team, not just the best plants, but I really believe we have the best commodity trading team led by Safar in the ethanol business.

Speaker 1

Our consolidated plans were built between 2,007 and 2,009, if I can just add that on. Yes.

Speaker 2

Thank you. It's a little more. Yes. Thank you, John.

Speaker 6

So, as you guys Continue to sort of like scour the M and A market, but not find anything that's worthwhile. Are you looking for plants that look like the ones that you have or is there like are there dumpster diving opportunities For you to bring your management expertise and maybe fix up one of these older ones?

Speaker 2

We don't dumpster dive, So that won't be us. We don't we're not fix up artists. I'm not saying that we couldn't do it, but we have come very close To buying plants that are similar to ours, Fagan ICM plants and that was 100,000,000 gallon and For one reason or another, it hasn't worked out, but that would be our preference and that would be what we would look for. Unfortunately or fortunately, whatever you want to say, most of those plants did really, really are doing really, really well and the price has gone Very, very much up on those plants. So I don't see anything coming imminently.

Speaker 2

But in this industry, you never know what might happen.

Speaker 6

Okay. How do you guys feel generally about the broad Supply demand environment for ethanol right now. I mean, we've been oversupplied for the better part of a decade and a half, it Although we've had sort of just consistently decent margins all year this year with some really high ones over the summer and early fall. So Like, have we finally managed to make it to balance with a little bit of increased demand and some supply coming offline?

Speaker 3

I think go ahead, Stuart. Do you want to say?

Speaker 2

I was going to say my opinion, it's a commodity and you never What will happen is there'll be one way or another we're expanding our plants. They're always if It does continue this demand that will be some expansion, and then the supply will keep up with it. But we have hopes As an industry and it may or may not happen, the government has given a lot of support to it happening of supplying things like jet fuel. We also would be have hopes of being a very, very low carbon fuel, which creates demand for our fuel In addition to what it is now across the country and we there are more and more pumps I And cars today that are manufactured today can run on 15% ethanol. So that would be a 50% increase And the gas stations make more money on 15% ethanol.

Speaker 2

So they have incentives. So there's That will increase demand. So to answer your question, it's a commodity business, but a lot of things are moving in that direction.

Speaker 6

Okay. And then my last question is on the pipeline in Illinois. Do you guys need Any eminent domain rulings to make that happen? And it seems like there have been some problems in Iowa recently with that and the clown show Vivek is sort of like actually campaigning in Iowa about that whole issue. So I'm just sort of curious what the gating items are for getting that installed?

Speaker 3

Yes, I can answer that a little bit. I think if you look at the Illinois law is line Illinois law clearly state that we can use a eminent domain. But as far as our attention, we at this At this stage, we do not believe that we have to use our main end domains because we have approximately 4 miles pipeline to Well number 1 and by the time we reach to well number 23, the last well is only 7.2 miles Fine. And so we may have some difficulties, we do not know. But as far as concerned, which We have preliminary indication which we have.

Speaker 3

We do not believe that we will be using any email and domain. But the law is still there exist. And in case of we have no choice whatsoever that maybe we consider, but that's not what our attention is at this stage.

Speaker 2

And keep in mind as Zafar just said, we're only going 4 miles and it's a lot of that 4 miles is over land, farmland Where these are we're helping the people that we're dealing with for these 4 miles are selling their corn to us. So And some of them are shareholders, I believe. So they have a big incentive to make this happen because in both cases, They're better off having us do well and they'll do well. And it's been a great partnership for many, many years as Doug said since at least 2,009. So we have done we have been they've done good for us, I believe.

Speaker 2

I know we've done good for Sam, and these are the and it's not a you're thinking when you think about these other pipelines in Iowa, they're going 100 of miles. We're going So it's not we don't think it's going to be any issue. If it is, Illinois law backs this up, but we don't believe it will be an At this

Speaker 3

time. Yes, exactly. And I think Stuart is exactly right. As you mentioned that people are going out there As you know that, that can happen. We cannot stop them.

Speaker 3

That's their opinion. And they are certainly is the same people go Almost every state in Illinois, Iowa, South Dakota and that's what the value They think they have and they but as far as we're concerned, we continue to concentrate what we have to provide and what we have to do.

Speaker 6

Okay. Thanks a bunch for the clarification and nuance on that. That's all I've got. And thanks for another excellent quarter and congratulations on kicking everybody's butt.

Speaker 2

Thanks for the questions.

Operator

Mr. Rose, there are no further questions at this time. I will now turn the call back to you.

Speaker 2

We'd like to thank everyone for listening and we look forward to talking to you at the end of the next quarter. Thank you. Bye. Thanks.

Operator

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.

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Key Takeaways

  • REX reported record net income of $26.1 million and EPS of $1.49 in Q3, up from $3.2 million and $0.18 EPS a year ago, and gross profit jumped by $30 million to $39.3 million on lower corn and natural gas prices and higher ethanol sales volumes.
  • The company ended Q3 with a robust cash balance of $332 million to deploy toward growth initiatives, including ethanol plant expansions and its carbon capture and sequestration project.
  • REX’s carbon capture and sequestration initiative is budgeted at $165 million, with modular compression equipment arriving early next year and facility construction set for completion by end of Q2, pending EPA Class VI and state pipeline approvals.
  • Management is expanding the One Earth ethanol plant to 200 million gallons to maximize §45Z low-carbon fuel tax credits, expects Q4 results to surpass last year’s quarter, and continues leveraging its proven trading team to optimize margins.
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Earnings Conference Call
REX American Resources Q3 2024
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