REX American Resources Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 27, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the REX American Resources Second Quarter 2024 Conference Call. As a reminder, today's call is being recorded. And at this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. I would now like to turn the call over to Mr.

Operator

Doug Bruggeman, Chief Financial Officer of REX American. Please go ahead.

Speaker 1

Good morning and thank you for joining REX American Resources Q2 2024 Conference Call. We'll get to our presentation and comments momentarily as well as your questions. But first, I will review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contain 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.

Speaker 1

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 the company's filing 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'd now like to turn the call over to our Executive Chairman, Stuart Rose.

Speaker 2

Good morning and thank you again to everyone for joining us. During the Q2, REX American Resources made excellent progress in the three goals for the remainder of the year that I laid out in our last call. As a reminder, these were the continued profitable operations to complete the construction phase of our One Earth carbon capture and compression facility and to complete the capacity expansion of our One Earth Energy ethanol production facility to 175,000,000 gallons per year and move toward the planned further permitting of the facility to 200,000,000 gallons. To the first goal, we were entirely successful. REX had very profitable operations relative to the prior year's comparable quarter.

Speaker 2

Our team produced strong gross margin in the 2nd quarter, improved by 37 percent over the Q1 and by nearly 8% over Q2 2023. Net income per share also improved more than 20% over the Q1 of 2024 and more than 35% over Q2 2023. While we have our eyes on the future, we continue to emphasize our core business of ethanol production, which has allowed us to accomplish 3 goals as well as produce consistent industry leading results for our shareholders. The success of this core business has allowed us to grow without burdening the company with any debt. Our team executes at a high level every day and I want to say thank you to them for their efforts this quarter.

Speaker 2

On the second goal to complete construction, the capture and compression portion of our One Earth Energy CCS project in Gibson City, Illinois. We continue to make progress. Zafar will discuss this project in detail later in the call. Our third goal to complete construction of the One Earth ethanol production capacity expansion to 175,000,000 gallons per year to prepare for further permitting production levels of 200,000,000 gallons per year is on track for the Q1 of 2025. This expansion will further improve our ability to realize strong returns.

Speaker 2

We are very excited for the expansion and what it means for our business. We are making progress on all of our goals and in preparing REX American to have success both now and over the long term. I'd now like to turn things over to our CEO, Zafar Rizvi, to give further our 1 Earth Energy CCS and ethanol production capacity expansion projects.

Speaker 3

Thanks, Stuart. Our carbon capture and sequestration project in Gibson City, Illinois continued to progress. You can see updated picture of the carbon capture and compression portion of the facility in our Q2 investor presentation, which was posted to our website this morning. Due to regulatory action by the state of Illinois, which is in July imposed a moratorium on the construction of CO2 pipelines, we have adjusted our construction schedule for the initial portion of the project. We believe this is the most prudent fire from both on operational and financial prospects.

Speaker 3

Operationally completing the capture and compression facility later than the year will mean a shorter period between completion of the construction and testing of the portion of the facility, which will require utility interconnection that is planned to be completed by the end of the Q1 of 2025. From a budgetary perspective, taking a more measured approach to construction allow us to more closely monitor our spending without incurring potential extra cost to meet the accelerated deadline. Given the new permitting reality, we are confident that pursuing the several ongoing portion of this project in this way is the right path. While pipeline permitting in Illinois is being worked out, our Class 6 injection well permit application with U. S.

Speaker 3

EPA is still in process. And we anticipate a draft permit being issued by 2024 under year end. On the time line currently estimated by the EPA itself, we would then anticipate final approval of the project in the Q2 of 2025. As a reminder, as of last quarter, REX had squared easement for enough of the subsurface area to allow us the capacity to sequester all of our carbon emission on the 1 Earth Energy plant for the next 15 years and also squared easement from our neighbor farmers for well number 12, which will allow us to completely avoid the use of eminent domain in eventual construction of our carbon delivery pipeline. The expansion of our 1 Earth Energy ethanol facility 175,000,000 gallons per year of production is on track for completion in the Q1 of 2025.

Speaker 3

Final testing and commissioning depends on the completion of the electric interconnection from our local utility. After necessary emission certification from the increased production levels, we then expect to begin the planned further permitting of the 1 ARC ethanol facility to allow it to produce 200,000,000 gallons per year. This additional permitting is the only step necessary to allow for the expanded capacity to 200,000,000 gallons as no additional construction or capital spending is expected. This 25,000,000 and eventual 50,000,000 gallon per year expansion in production capacity added on to our current highly efficient and profitable facility, we expect will enable us to expand our already standout profitability in our core ethanol business line. As of quarter end, we have invested approximately $91,000,000 into the 1 Earth Carbon Capture Project and associated ethanol production capacity expansion.

Speaker 3

Pending for the carbon capture and sequestration projects stood at $49,100,000 as of 2nd quarter end. While expenditure on the ethanol expansion stood at $41,700,000 as of the same date. This is compared to total combined budget amount of 165 to $175,000,000 for both the CCS project and ethanol production expansion at Gibson City. I would now like to hand the call to our CFO, Doug Bruggeman to discuss our operational and financial results. Doug?

Speaker 1

Thanks, Zafar. I'll begin with our operational results. REX ethanol sales volume during the Q2 2024 were 65,100,000 gallons, a reduction of approximately 6% versus Q2 2023 sales volume of 69,100,000 gallons. Average selling price for our consolidated ethanol volumes was $1.79 per gallon for the Q2 compared to $2.42 per gallon in the Q2 of 2023. Dry distillers grain sales volume during the Q2 of 2024 totaled 132,850 tons, a 6% decrease over Q2 2023 volumes.

Speaker 1

Average selling price for DDGs were $164.45 per ton for the Q2 2024 compared to $226.48 per ton in the Q2 of 2023. Modified distiller grain sales volumes were 17,650 tons in the Q2 2024 compared with approximately 10,600 tons in the Q2 of 2023. Average selling price for modified distiller grain was $63.61 per ton for the 2nd quarter. The average selling price for the modified distillery grain in the Q2 of 2023 was approximately $103 Corn oil sales volumes in the Q2 of 2024 were approximately £20,200,000 compared to £20,700,000 sold in the Q2 of 2023. The average selling price for REX's corn oil product was $0.43 per pound for the Q2 2024 compared to $0.55 per pound in the Q2 of 2023.

Speaker 1

Gross profit for the Q2 2024 was $19,800,000 versus gross profit of approximately $18,400,000 for the Q2 of 2023. The 8% increase in gross profit was achieved despite lower average selling prices for all products, which was more than offset by lower corn and natural gas input prices. Our selling, general and administrative expenses decreased to $6,400,000 for the Q2 of 2024 versus $8,600,000 in the Q2 of 2023. The decrease was primarily due to the expensing of executive stock grants in the prior year, which did not recur this year. Interest and other income totaled $4,400,000 in the Q2 of 2024 compared with approximately $3,300,000 for the Q2 of 2023.

Speaker 1

This reflects higher balances and better earnings on our cash and short term investments. Income before taxes and non controlling interest for the Q2 of 2024 was approximately $19,500,000 an increase of more than 21% over the Q2 of 2023. Net income attributable to REX shareholders for the Q2 was $12,400,000 compared to $9,100,000 in the Q2 of 2023. On a per share diluted basis for the Q2 of 2024, this amounts to $0.70 per share of net income compared to $0.52 per share in the Q2 of 2023. We ended the 2nd quarter with total cash, cash equivalents and short term investments of $346,000,000 compared with $378,700,000 as of January 31, 2024.

Speaker 1

The uses of cash during the first half were primarily related to our ongoing construction projects at the One Earth Energy facility. REX American also entered the quarter without any bank debt. I'd now like to turn the call back to Zafar.

Speaker 3

Thank you, Doug. I would now like to give some color around how we see market progressing through the remainder of the year. For the Q3, we are off to a strong start and we expect to see the same corn market drivers that were supportive to this point in the year continue to play out. With this, we expect to see the result of the Q3 exceeds those of the Q2 of this year. Additionally, we believe increase in ethanol per export, which on a volume basis was 36.5 percent higher through June than at the same point last year according to the USDA, have had a positive impact across the industry.

Speaker 3

As far as own inputs, at the current time, we are looking toward harvest and what is expected to be a bumper crop. For corn in the Midwest, crop conditions near our 2 consolidated plants are expected to be strong. We are anticipating the robust harvest coupled with the current corn in the farm inventories will lead to a continued favorable corn input price. Above all, we are focused on profitability over product pricing or production numbers. As evidenced by our improved gross margin performance this quarter despite lower ethanol pricing and volumes sold, it is this focus and the people in our plants who live it every day that continue to make us the successful, profitable company we are.

Speaker 3

Now I would like to open things up to the questions. Operator?

Operator

Thank you. We will now be conducting a question and answer Our first question comes from the line of Jordan Levy with Truist Securities. Please proceed with your question.

Speaker 4

Good morning, all and thanks for all the updates. I just wanted to talk first on the carbon capture sequestration side of things. You guys did a good job calling out in the press release kind of the various external forces that you have to think through when you're going through this process. But maybe just help us think about in the event and in the timeframe that assuming you do get the permit approval that you need, can you just talk to the timeline around the build out of the pipeline and then any remaining necessary equipment at that point?

Speaker 3

This far? Yes. I think if you look at that information which we provided, the EPA permit is expected to be in sometime in Q2 of 2025. But on the meantime, our construction is in a full swing. We are already taking care of it carbon sequestration facility, which will be approximately by the end of this year depending on the utility connection, interconnection with to provide that utility to the FCCS and also to ethanol facility.

Speaker 3

So once we have this utility received and then construction of the One Earth Energy ethanol facility is completed, we're going to concentrate on ethanol facility to be start as soon as possible. As you know, One Earth Energy has produced over the last 15 years, I can say with confidence, not a single year they lost that money. And that location is very important to us and that facility will produce much better profit moving forward once we complete that facility. And the second, we will certainly continue to do construction work and try to reach as soon as possible when we'll receive all these permits and then ICC permit and other permits as we received and construction will be completed. And once the electric connection is connected, we will start the testing.

Speaker 3

So I will say sometime, probably, once we receive the permit from EPA, we will start the construction of the well. So we will say probably sometime August or September next year, we should be in operation. But that's just expected to depending on all of those permits we receive. Otherwise, we are waiting for all those permits. So but it depends on the permits.

Speaker 3

But facilities will be there.

Speaker 2

Jordan, to further answer your question, the biggest delay is in receiving permits. We call it a pipeline, but it's really just a 3, 4 mile connector, the pipe itself. But we have to wait for Illinois to give us a permit on that, which is not easy. But building the pipeline and building the hole itself are not nearly as time consuming as waiting for these permits. And that's I think was your question is once we get the permits, how long will it take?

Speaker 2

That will not be nearly as long as waiting for the permits and so far give you a pretty good time schedule of that. Yes,

Speaker 4

absolutely. No, I appreciate all those details and certainly you all have been done an impressive job with how much you've been able to get done on your own and now just waiting on the pipelines. And maybe just a clarifying question, once you on the The

Speaker 2

pipeline may not be the there's more than the pipeline. We're also waiting on the EPA, which is

Speaker 3

Yes, EPA permits. Yes, exactly.

Speaker 2

And a lot of local permits too. There's lots of permits involved there.

Speaker 3

Right. But I think the main thing, which I really wanted to emphasize is ethanol facility itself does not need any pipeline. And we are in a full swing on the construction of the ethanol facilities from $150,000,000 to $175,000,000 and then move toward to 200,000,000 gallon facility. And that should be completed by the Q1 of 2025 depending on our utility providing the electric connections. So once that facility is completed, we will be able to produce ethanol at that kind of rate.

Speaker 3

And also, as you know, our core business is very important to us and we have produced great result on our core business. And One Earth Energy is the star student of all of our facilities and we hope that that will continue to produce that profit as it's produced from the last 15 years.

Speaker 2

One other thing that Jupar is not mentioning, Jordan, is we hope that with the and we are it's our hope and our plans that the construction to expand our plants will also lower our CI score. We have not been told how to measure CI score exactly by the federal government. But we but depending on how they measure it, we hope that that in itself will lower our CI score, the construction.

Speaker 4

Yes. That's actually a good segue to my follow-up question, which is just going to be Stuart Zafar. Your thoughts going into the election with kind of some of the main guidance items still outstanding for as it relates to CCUS and ethanol. Just wanted to get your high level thoughts there.

Speaker 2

My opinion is it's a bipartisan CC carbon capture was a bipartisan issue and I don't think that one party or the other will affect the current law. What happens if there are some proposals out there to extend certain things and that may be affected by one party or the other. I think it's a good thing the Democrats nominated a Minnesota person for Vice President. He certainly is from a farm state, from an ethanol state and understands the issue. But otherwise, I don't think that it really one party or the other is really taking a firm stand on expanding the CCS tax credit amounts that are out there.

Speaker 4

Absolutely. Thank you all so much and nice job with the continued strong results.

Speaker 2

Thank you, Jordan.

Operator

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Speaker 2

Hi Pavel.

Operator

Yes.

Speaker 5

Thanks for taking the question. So even with our I suppose particularly with the slowdown in carbon capture construction, you are going to be stockpiling even more cash on the balance sheet beyond the sizable amount that you already have. What is the kind of allocation? What's the current priority for using the $350,000,000 of cash that you already have and even more that you're going to be putting on?

Speaker 2

Well, 1st priority is the carbon capture and expansion of the Gibson City plant. 2nd priority is possibly looking at expansion of our South Dakota plant. That's a possibility, especially if we can lower our carbon capture score and get some tax credits. That would be a possibility. We're always looking for acquisitions.

Speaker 2

We've looked at a couple this year. They weren't for us, but you never know what's going to come up. We would consider stuff related to the tax credits and related to energy outside of ethanol, but nothing's come along that we think is better than ethanol. So we stuck to our field. And the last thing that we've been really good at over the years and you never know where the stock market is, we didn't buy shares this quarter.

Speaker 2

But over the years, we're probably the buyback kings in percentage of shares bought back. And we're really, really and we know what we're doing there. And we buy on dips, which is important. We don't just buy because to lower the share count. We don't buy at the stock highs.

Speaker 2

We buy low to protect our shareholders when the stock's down. And that's been very, very success. That's been very successful strategy for us. And that's still there. We still have buyback authorization, but we have not used it.

Speaker 2

We did not use it in the last quarter.

Speaker 5

What's the latest on your thinking about sustainable aviation fuel?

Speaker 3

I think for that we have to have low carbon at fuel produced. We believe that we certainly will need carbon sequestration for that location. And also as you know, there's no clear guideline for 45z at this time. So once the 45z clearly guideline is issued, then we can certainly can look into it. But at this time, we certainly believe that we need to further reduce our CI score so that we can qualify for 45 gs tax credit and then move toward to SAF.

Speaker 5

Got it. Thank you very much.

Speaker 2

Thanks, Pavel. Thank you.

Operator

Thank you. Our next question comes from the line of Chris Suttay with Singular Research. Please proceed with your question.

Speaker 6

Hi, I have a question on capital expenditures. How are you doing compared to your budgeted amount for capital expenditures?

Speaker 2

So far?

Speaker 3

I think we at this time, we are right on track.

Speaker 6

Are you seeing any possible need for more to spend more there?

Speaker 3

No, not at this time. But as you know, it depends on inflation factor in the future. But at this time, we do not see any major increase. The main things we have seen is delay in receiving a lot of equipments and components of electric components that is causing some delay of our completion of these facilities, but we are overall on right on budget.

Speaker 6

Okay, thanks. And then have you seen any weather related issues over the last quarter?

Speaker 3

No, we have not seen any major weather related issue. There was some issue in South Dakota area where there was a heavy rain and there was some railroad track was washed out for few days, but not a major problem.

Speaker 2

We are expecting very good crops this year.

Speaker 3

Correct. Yes, the crops is very expected very good, not only in Illinois. Illinois is expecting the bumper crops, which will be record crops this year. And the same time, South Dakota is 73% to excellent to good crops, which is also near record crops for that area.

Speaker 6

Okay, great. Thanks.

Speaker 2

Thank you, Chris.

Operator

Thank you. Our next question comes from

Speaker 6

the line of Jordan Levine with Tuohy Securities. Please proceed with your question.

Speaker 4

Hey guys, just a follow-up for me. Zafar, I think you mentioned or Stuart, maybe it was you on Pavel's question, the potential for a NuGen expansion at some point in the future. Maybe just talk to what you'd need to see whether it relates to Summit or something else there in order to kind of warrant that investment?

Speaker 2

At this time, Summit, it would the investment would not be because of the Summit pipeline. It may be later, but at this time, South Dakota has, in my opinion, this is my opinion, some eminent domain issues. And so if we were to invest in the next year, it would not. So being in the Summit pipeline will be an advantage, we hope someday. But we would just do it because it would be more efficient to have a larger plant.

Speaker 2

And if the corn supports it, we would consider it. So that's the biggest issue is always corn, whether a bigger plant would raise the corn prices. So we have to be very careful on that. The third thing is we do not have the 45 Z regulations. But if we can lower our CI score below 50, there are some tax credits involved.

Speaker 2

So simultaneously, as we did in One Earth, we will if we do invest to make and expand that plant, we will make sure that we're doing it to bring our CI score or try our best to bring our CI score down at the same time. Again, we don't know the regulations. They have not come out of what even defines your CI score, but that would be the bigger goal is just bring it down and maybe get it below 50 without the pipeline. And then when the pipeline comes in, we would probably qualify for and if it and when it does start capturing our CI2, we will qualify for 45Q or 45Z.

Speaker 4

Thank you, Stuart.

Operator

Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to Stuart Rose for closing remarks.

Speaker 2

All right. I'd like to thank everyone for listening. Again, corn crops are good right now. As far as I said, we're running at a rate currently better than the Q2. Things seem to be going moving along with our carbon capture project.

Speaker 2

We have great plants, great locations. But the biggest thing that we have and the reason we're doing, we're ahead of most people in carbon capture and doing better than virtually everyone in ethanol as we feel we have the best people in the industry. And that includes our CEO and it includes the people that work for him all the way down the line. And we have very, very good people. And that's really what separates us.

Speaker 2

Again, thank you for listening and we'll talk to everyone next quarter. Bye.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

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Key Takeaways

  • REX delivered a 37% sequential and 8% year-over-year gross margin improvement in Q2 2024, driving net income per share of $0.70, up 35% from Q2 2023, while remaining debt-free.
  • Construction of the One Earth carbon capture and compression facility in Gibson City is substantially complete, though pipeline permitting faces delay from an Illinois moratorium; the EPA Class VI injection well permit is anticipated by mid-2025.
  • The One Earth ethanol plant expansion to 175 million gallons annual capacity remains on track for Q1 2025, with planned permitting to reach 200 million gallons per year requiring no further capital spend.
  • Despite a 6% drop in ethanol sales volume and lower commodity prices, Q2 gross profit rose to $19.8 million—driven by reduced corn and natural gas costs—resulting in $12.4 million net income and $346 million cash on hand.
  • Management expects a strong Q3 backed by a predicted Midwest bumper corn crop and higher ethanol exports, emphasizing profitability over production volumes.
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Earnings Conference Call
REX American Resources Q2 2025
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