REX American Resources Q2 2024 Earnings Call Transcript

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August 30, 2023

There are 8 speakers on the call.

Operator

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

Speaker 1

Good morning and thank you for joining REX American Resources fiscal 2023 Second 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 and Securities Litigation Reform Act of 1995. Such forward looking statements reflect the company's current 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 ks and 10 Q.

Speaker 1

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 for his comments. Sales for the Q2 decreased by 11.8%, primarily due to lower unit pricing across all products as well as slightly lower ethanol gallons sold year over year. Ethanol sales for the quarter were based upon 69,100,000 gallons this year versus 71,400,000 in the prior year.

Speaker 1

We reported gross profit of $18,400,000 this year versus gross profit of $14,100,000 in the prior year as we benefited from lower corn and natural gas pricing over the prior year's Q2. SG and A increased for the 2nd quarter from $700,000 to $8,600,000 This increase is primarily related to stock incentive executive compensation expense upon issuance during the quarter. As highlighted in the press release in the Q2, the company made a change in the method of accounting to begin classifying shipping and handling costs As cost of sales rather than within selling, general and administrative expense as historically presented, 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. I'd like to point out this change only impacts cost of goods sold in quarter versus $3,600,000 in the prior year as the prior year number included approximately $1,600,000 of income for our share of their COVID relief grants received from the USDA in the prior year.

Speaker 1

We reported interest and other income of $3,300,000 versus 8 point $2,000,000 in the prior year. The prior year included approximately $7,800,000 from the aforementioned USDA COVID-nineteen relief grants received by our In the current year, the company has continued to benefit from higher interest rates on our cash and short term investments. These items led to income before income taxes and non controlling interest of $16,100,000 compared with $19,200,000 in the comparable year ago period. However, excluding the benefit of the COVID-nineteen relief grants received in Quarter 2 of last year, income before income taxes, non controlling interest increased 64.3 percent to $16,100,000 in quarter 2 of the current year versus $9,800,000 in the prior year. We reported a tax provision of $3,800,000 for this year versus a provision of $4,300,000 in the prior year.

Speaker 1

This led to net income attributable to our shareholders of $9,100,000 for this year versus $11,200,000 in the prior year's Q2. Net income per share attributable to REX shareholders was $0.52 for this year versus $0.63 in the prior year. I'll now turn the call over to Stuart for his comments.

Speaker 2

Thank you, Doug. Earnings right now are running at a rate in the 3rd Quarter that is expected to be significantly better than last year's Q3 or excuse me, significantly better than last year's

Speaker 3

Quarter

Speaker 2

or than the quarter that we're currently in and significantly better than the Q3 that we're about to go into. So far, we'll discuss this further. Our cash balance is approximately $284,000,000 Uses include Short term investments, which we expect during the Q3 to earn a higher rate in the Q3 than the Q2. Ethanol Expansion, which Zafar Risvi, our CEO, will just we'll talk about later. Stock buybacks Continue, but only on dips.

Speaker 2

We have not had dips recently. So at the moment, we have not bought back stock or not buying back But we'll buy back if we see dips. We're also biggest use will also be the carbon capture Operation that is well on the way, which again Zafar will talk about later. We also have hopes, If possible to use our carbon capture operation, not just for our operation, but for others that may come along eventually That could also be a use of our cash. I'll now turn the call over to Zafar Rizvi, who will talk about more about our ethanol operation and our carbon capture Sure, operation.

Speaker 2

Thank you.

Speaker 4

Good morning, everyone. Thank you, Stuart. As I mentioned in the previous call, We saw improvements in the early stage of the 2nd quarter, which led to the quarter profit than In this Q1 2023, we are pleased with our team. They produced better results than in the previous quarter and even better than last year's 2nd quarter after considering the total $9,400,000 impact of the COVID-nineteen grants. According to the EIA August 23, both ethanol stock and production dropped during the week ending August 18.

Speaker 4

We have also seen natural gas price dropped considerably, which has a positive impact on our financial results. The August 11, 2023, USDA report shows an expected output of 15,100,000,000 bushels of corn, 2nd highest on its record and 175.1 bushels per acre yield for the year 2023 2024, we are pleased with the early forecast of corn. Yields in the Marion South Dakota this year 145 bushels per acre compared to 132 bushels last year Also approximately 458,000 more acres of corn were planted this crop year compared to last year. We expect own yield in the Gibson City, Illinois area to be less favorable, which is a 2 0 1 bushels per acre This year compared to 214 bushels per acre last year, but almost 700,000 more acres were planted this year compared to last year. Looking ahead, the drop in ethanol and DDG export could negatively affect future results If this continue, ethanol export through June 2023 was 705,000,000 gallons compared to 828,000,000 gallons in 2022.

Speaker 4

During the same period, ethanol export have dropped 15% Since 2022, DDG export dropped DDG export through June 2023 were 5,100,000 metric ton compared to 5,700,000 metric ton, a decrease of approximately 584 metric 4,584,000 metric tons compared to the same period 2022. Considering all these factors, if we continue to Let me provide an update on our carbon sequestration project and One Earth Ethanol Energy Plant Expansion. As I mentioned in our previous call, we are pleased to publish the inaugural Sustainability Report early in the year highlighting what we have accomplished while addressing the sustainability Economy and our source of responsibilities at large. We believe our carbon capture project will further advance our sustainability goals and financial impact that improves company performance for our shareholders. We have budgeted Approximately $165,000,000 to build a carbon capture, compassion and storage facility, the Expansion of the ONR synergy plant to 200,000,000 gallon annually and other projects related to reducing carbon intensity.

Speaker 4

We plan to build 1 we plan to build a 1 R Synergy sequestration carbon capture and storage facility in Gibson City. The contract to build the capture and compression facilities have been signed and long lead items was ordered previously. We expect facility construction will start in the middle of September. The delivery of all modular compression equipment for the The facility is scheduled to be delivered by February 2024. The construction of the facility is expected to be completed by July 31, 2024, at which time testing of the facility will commence.

Speaker 4

We continue to complete the paperwork of different government permits and requirements of agencies While we are waiting for the EPA approved Class 6 permit for carbon injection, we answered 2 inquiries of the EPA regarding Plastics permits, this is highly technical, very time consuming project and it depends on several local states and federal agencies approval. Unfortunately, we cannot predict when we will receive all these permits from different local states and federal governments and any delays in constructions. In other update, our NewGen ethanol facilities Partnered with Summit Carbon Solutions, a developer of the world's largest carbon pipeline, an addition Big River Resources entered and agreement with Navigator, another carbon pipeline company. We are pleased about the big Milestone we have reached so far and hope different government agencies will complete their approval this year or early next year. Regarding the 1 Earth Energy Plant expansion, we have plans to increase ethanol production to 200,000,000 gallons a year.

Speaker 4

We have received an EPA permit to produce 175,000,000 gallon per year for this facility. We must achieve 175,000,000 gallon a year production, which is expected late last late next year before we can apply for a 200,000,000 gallon a year production permit, because this is a 2 step process. We have to achieve 175 and before we apply 200,000,000 gallons. So this but the facility will be capable of producing 200,000,000 gallons from the day 1. The plant's current capacity is approximately 150,000,000 gallon a year.

Speaker 4

We also continue to evaluate other projects that would improve Energy efficiency and reduced carbon intensity, the Clean Fuel Production Credit Section 45 which is related to a reduced Fuel carbon intensity score could provide as much as dollar a gallon depending on the carbon intensity of the ethanol produced and sold. If we successfully achieve these goals, we will be prepared to provide low carbon ethanol and bioproducts with the social impact on reducing carbon in the atmosphere and the financial impact that improved the company's performance for our shareholders. In summary, we are pleased to announce a profitable quarter, actually the 12th consecutive profitable quarter, Gallant to maximize 45 gs benefits and signed carbon uptake agreement with the pipeline companies at NewGen and Big River. Once again, we could not achieve these milestones without the hard work and dedication of our colleagues. We are very appreciative Their efforts on achieving these positive goals.

Speaker 4

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

Speaker 2

Thank you, Zafar. In conclusion, our results again this quarter outperformed most of the industry, especially the other public companies. Going forward during the next quarter, again, we expect to do significantly better in the Q3 of this year than we did in the Q3 of last If our results keep going along as they have gone along so far during this quarter, we feel we have the best ethanol Plants in the among the best ethanol plants in the industry, location is good. The crops look like they'll be pretty good and pretty good to real good This year, we were a little worried about that earlier, but things seem to have gotten better. And the biggest thing we have as far as I said earlier is We feel we have the best people working for us in the ethanol industry and these are the same people that will be working for us and for our shareholders In the carbon capture industry and if we can do what we did in ethanol and carbon capture, we hope to have a much, much larger, much,

Operator

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

Speaker 5

Good morning, all, and thanks for the update. Hi, George. Hey, Stuart. Really exciting update and a nice Quarter. And just thinking about the carbon capture side of things, maybe for Zafar.

Speaker 5

There's clearly been a lot of Class 6 permits that been submitted for approval, but you all talked to moving forward with construction starting in September and that sort of I think it's fair to say that you all as a team tend to be pretty conservative with how you approach investment opportunities. So maybe just give us A little bit on how you're thinking about potential for approval and the timeline there on the EPA, knowing that you kind of have the timeline and You've ordered some of the long lead time equipment there.

Speaker 4

I think what as I mentioned that we have 2 inquiries from EPA. So it's almost 9 months since we applied for the permit. Generally speaking, it takes about somewhere 6 months 18 months. So we expect that we will have the permit before the end of 2024. And earlier, since we have not many inquiries for our conversation with EPA, we understand And so far we have no inquiries, but if we don't start our construction and we don't do all these things, so then The people who have not started already, they will be at least 2 to 3 years behind because lot of these lead It takes some close to 18 months to 2 year before you receive.

Speaker 4

So some of these we have started earlier. And then part of the thing is we are also expanding our plant to 200,000,000 gallon. And once we expanded that 200,000,000 gallon, if If there is any delay, we will be still working on several other projects, which can reduce our carbon intensity score For our ethanol plant, so we will still benefit from 45 Z, but we may not be benefit as much as we like to have on carbon sequestration. So delay can delay that, but we still will benefit partly in early stage of 2025 from our carbon intensity We're working on different other projects.

Speaker 2

Absolutely. Jordan, to answer your question a little further, a lot of people of Johnny come late later applying. We've worked on this with the University of Illinois, with the University of Illinois getting a government grant. We've been working on this for We believe where we are and we're so far behind that both the permitting process and the work they've done on their Jack said they can't even they're not even close to being at the same level that we are. And it's a lot of people are just putting these projects Talking about it, they're not there's they may or may not happen and they may or may not be real.

Speaker 2

They don't even know yet If the EPA is and we don't know for sure that the EPA is going to approve us, but we do know that we've been working on it the right Way and doing it for a long, long time with U. S. Government grant to the University of Illinois, which has been working on it Which has already done a carbon capture project with Archer Daniels. So we have a lot going for us And a lot of these others just think you can throw in a permit application and get a well. It doesn't work that way.

Speaker 2

It's a very, very complicated process. And we're way, way along in that process.

Speaker 5

Yes, absolutely seems that way and certainly impressive The work that you've all been able to do on that front. Maybe on a somewhat separate issue, the 165,000,000 You all talked about being budgeted for carbon capture and plant expansion. Maybe if you could just help break us break that down for us in terms of what That all constitutes and any sort of incremental CapEx that might be required for any additional initiatives.

Speaker 4

I think We have not really disclosed. This is basically a budget we estimate, but we have not disclosed how much will be for carbon sequestration and how much Total budget, we estimate $165,000,000 that include the subsurface area, the well and pipeline about 4 to 5 miles and then construction of the facility and then included that From production from 150,000,000 to 200,000,000 gallon. So that's all inclusive, 165

Speaker 5

Okay. That's great. And just to clarify Zafar, you mentioned this being kind of 2 step process on the planned expansion, but the $165,000,000 would include the expansion to $200,000,000 even if you have to show you can run $175,000,000 first.

Speaker 4

That's right. Exactly. So yes, the plant will be designed, which we already designed and some of the fermentation tanks already been built. So which we design is going to will be capable of producing 200,000,000 gallon. The day 1 when It will be in expansion will be completed, but the EPA required to from 150 We have to show them to stack testing and other testing to see we are $175,000,000 and then immediately after that, they do the testing to make sure we are Applying with that, then we apply for $200,000,000 So even in 2024 when we apply and For the $200,000,000 and we received in 2025, that will apply for the whole year that we can produce $200,000,000 gallon.

Speaker 4

So even we received in February or March for 200,000,000 gallon, so that will be 200,000,000 gallon for 2025.

Speaker 5

Got it. Thank you all so much. I'll hop back in the queue.

Speaker 2

The $165,000,000 also as Savar pointed out includes A lot of improvements we're making to lower our CO2 intensity, which it's technical, but it makes a big difference in 45C calculations and we are working very hard. He is working and our company is working very hard And reducing our CO2 score.

Speaker 5

Awesome. Thanks so much.

Speaker 4

Thank you.

Operator

Our next question comes from Pavel Molchanov with Raymond James. Please proceed.

Speaker 4

Hi, Tolga.

Speaker 6

Thanks for taking the question. You touched on What you've seen in terms of corn purchasing, I guess if we zoom out for a moment, corn is now the Keep as it's been since the pre COVID era. And I'm curious if you think this Kind of $4 a bushel number is sustainable.

Speaker 4

It's hard to say. I think it's all depend Ultimately, the production and then also depends how quickly the harvest comes. And So and then if the harvest the final results could be different than what we see now. And as you know, there's some heat waves going on, but we believe that not going to be major impact because the cone is already denting. But we really cannot predict what will be the price will be in the future, but it's all the matter of supply and demand And export.

Speaker 4

And then as you know, Ukraine and so many international events can change that Price of the corn, we have seen that Brazil has producing a dumper crops, but even then their crops is the price is coming very close to the U. S. Cone crops, since we have corn price since the corn price has dropped. So this is Really depend on several international matters. It's hard to say, Pavel, at this stage.

Speaker 6

Okay. Maybe in terms of what you guys can control and I've asked you this question before multiple times. Are you seeing any opportunistic M and A kind of potential In terms of getting your capacity expanded through some asset acquisitions?

Speaker 2

Not currently. We have in the past and we've tried hard to get them. But currently, we I don't I have not seen anything. In fact, I think people are doing better now and the best time to buy a company at the prices we want to pay So when things aren't so good, things in the industry are certainly become much better in the last Couple of months. So I think our attention properly is on carbon capture and maybe other uses of our We have 3 potential carbon capture projects.

Speaker 2

One of them we hope to be ready pretty quick in the next couple of years, but we have 2 others that we've applied with the EPA. I think our potential of growth is to find uses for those carbon capture projects, whether it's our own uses or taking someone else's And that's probably more than mergers of other ethanol companies. I think that It's probably a better focus of our time at this point in time.

Speaker 4

I will add that I think, Babal, if you look at it originally, was 100,000,000 gallons and we have grown that our consumption from 250,000,000 The both location from $100,000,000 to $150,000,000 Now we are growing organically from $150,000,000 to $200,000,000 So we certainly are Growing our ethanol production over the year. And then the most important thing is we know these plants. We know how there's what is cones of availability are from that area and we think it's much better to grow organically than To acquisition of some other location and find out that location was not as good as we had our own plants.

Speaker 6

Got it. Thanks very much guys.

Speaker 4

Thank you, Pavel.

Operator

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

Speaker 3

Yes, hi. Can you talk about Thanks, Chris. Yes, the price of natural gas And how that's affecting your profitability?

Speaker 4

I think the natural gas price has considerably dropped over the last year. At this time, it was trading Close to $6 to $7 now it's about $4 $3 or less, suddenly it's a major impact on P and L because that's the 2nd highest expense we have. So certainly it's helping and we believe that this will At least this year, the natural price will continue to be same or little bit Better, but we cannot predict what happened in the winter season in January, February, March and that depends a little bit different But through December, we feel much better. The prices will stay Same or little close to this pricing which we have now.

Speaker 3

Have you thought about potentially hedging this price and locking in these prices for the future?

Speaker 4

We do consider that there is a lowest price we consider. We do buy those prices For our ethanol facilities, we do not leave everything open. But certainly, November, January, February, March, we Look at it, see if it's feasible at this stage or not, but through December, we have purchased some of those Natural gas throughout the year.

Speaker 3

Okay, sounds good. And then Can you talk about demand for ethanol, globally? Which countries are demanding it more?

Speaker 4

I think the ethanol demand is basically continuously Canada is on the top of the list. We have seen the last year Last month, Netherlands and UK, South Korea and Peru, these are the top five Countries which is importing from U. S, but certainly the demand ethanol export is dropped as I mentioned previously.

Speaker 3

Okay, great. Thanks for the answers.

Speaker 4

You're welcome.

Operator

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

Speaker 7

Good morning, gentlemen. How are you today?

Speaker 4

Good morning. Good. Thanks.

Speaker 7

Could I ask a quick question about just sort of what do you guys think The cost of new capacity in the industry is in terms of call it dollars per gallon of throughput. And then related to that, since it doesn't seem like there's any assets trading in the business right now and you guys have said that you haven't found What sort of the ask in terms of What holders of assets want on that same kind of metric?

Speaker 2

The cost to build would probably be in the $2.5 to $3 a gallon, but that's just off the cuff estimate. It depends on the project. And we have not I would think it would cost somewhere in that level to buy a plant if there was even one The advantage of buying a plant versus building 1, and I don't know if anyone building 1 at that price. The big advantage is that you could be in operation pretty much right away and take advantage whether it's through a pipeline or whether it's Through your own carbon capture project, but you could be in business right away to get 45C credits. So there's a big advantage if there was something for sale.

Speaker 2

But in all honesty, everyone in the industry knows all about this. There's no secrets And the prices, if you were to find something, the price would be pretty high.

Speaker 7

And In terms of like brownfield expansion of like along the lines of what you guys are doing moving one plant from $150 to $200 is that a lot Less? Or is that sort of similarly high to that $2 kind of range?

Speaker 4

It certainly is less than $2 rent because you have already lot of Equipment and other loading facilities already there and so many other facilities already exist. So it's certainly less than $2

Speaker 2

Okay.

Speaker 7

And on an unrelated topic, Can you guys spend a couple of seconds reflecting on any opportunities in ethanol In general, just if sustainable air fuel might sort of soak up some ethanol capacity going forward?

Speaker 4

Yes, I think that that's the one of the other reason, which as you can see, we have expanded our ethanol Not only to take advantage of 45 Z and then in future, if we have to pivot, we can certainly pivot to SAF and because every 2 gallon of ethanol produce approximately 1 gallon of SAF. So we have discussion with several other companies who are really believe they have technologies and this going to convert the Aethanol to SAF. So we have in discussion with those. We are certainly try to make sure What exactly is in the market? So that way if we decided to pivot at the later stage, we certainly will pivot at to SAF.

Speaker 4

But There is no proven technologies at this time, which can we feel comfortable and we'll let other people to experiment. And once we know this is successful, we certainly will get into it.

Speaker 2

It reminds me of an old saying, pioneers take the arrows and we're not Pioneers will watch and see who's successful at it. And we think someone will be successful and then we'll have the ethanol And possibly get into that business will be one of the largest producers of ethanol and we don't we believe that it will take ethanol to make the fuel. So we'll be ready if someone is ever successful with the technology. We'll see what happens.

Speaker 7

Okay. Thanks very much for your time, gentlemen.

Operator

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

Speaker 2

I just want to thank everyone for listening and we

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Key Takeaways

  • REX reported Q2 sales down 11.8% year-over-year to 69.1 million ethanol gallons sold, but gross profit rose to $18.4 million (from $14.1 million) thanks to lower corn and natural gas costs.
  • Excluding the prior-year COVID-19 relief grants, income before taxes rose 64.3% to $16.1 million, with net income of $9.1 million ($0.52 per share) versus $11.2 million ($0.63) a year ago.
  • Q3 earnings are expected to be significantly better than both last year’s Q3 and the current quarter, supported by a $284 million cash balance earmarked for higher-yield investments, ethanol capacity growth, stock buybacks on dips and carbon capture.
  • The company has budgeted ~$165 million for a carbon capture and storage facility (start of construction in September, completion by July 2024) alongside expanding its Gibson City ethanol plant, pending EPA Class VI permitting.
  • REX is expanding its 1 Earth Ethanol plant from 150 million to 200 million gallons annually (design already in place) and pursuing carbon-intensity credits under Section 45Z while exploring sustainable aviation fuel conversion partnerships.
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Earnings Conference Call
REX American Resources Q2 2024
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