Earnings Call Transcript - REX Q1 2023

Operator, Operator

Greetings, and thank you for standing by. Welcome to the REX American Resources Fiscal 2023 First Quarter Conference Call. During your presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. And now I'd like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Doug Bruggeman, CFO

Good morning, and thank you for joining REX American Resources’ fiscal 2023 first quarter conference call. We will get to our presentation and comments shortly, along with the question-and-answer session, but first, I will go over the safe harbor disclosure. Today’s call includes forward-looking statements that involve risks and uncertainties, as defined by the Private Securities Litigation Reform Act of 1995. These statements reflect the company’s current expectations and beliefs but are not guarantees of future performance. Therefore, actual results may differ materially from expectations. The risks and uncertainties related to these forward-looking statements are outlined 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 does not assume any obligation to publicly update or revise any forward-looking statements. Joining me on the call today are Stuart Rose, Executive Chairman of the Board, and Zafar Rizvi, Chief Executive Officer. Sales for the first quarter increased by 9.5% due to higher volume for ethanol, dried distiller grains, and corn oil. Ethanol sales for the quarter were based on 71.5 million gallons this year compared to 64.5 million last year. The higher volumes were partially offset by lower ethanol selling prices, as the price per gallon decreased from $2.28 to $2.21. We reported a gross profit of $15 million this year, up from $11.9 million last year. Meanwhile, SG&A expenses rose from $5.2 million to $10.6 million in the first quarter. There was an adjustment between these two items as we now classify freight costs paid to an outlined vendor as SG&A expenses, which totaled $5.1 million this year. In the prior year, many contracts required the buyer to cover these fees, which were then deducted from the ethanol price. We had income of $1.5 million from our unconsolidated equity investment in this year’s first quarter versus $2 million in the prior year. Interest and other income rose to $2.8 million compared to $174,000 in the prior year, benefiting from higher interest rates on our cash and short-term investments. We recorded a tax provision of $2 million this year versus $1.8 million last year. This resulted in net income attributable to REX shareholders of $5.2 million for both this year and the previous year’s first quarter. Net income per share attributable to REX shareholders was $0.30 this year compared to $0.29 last year. Stuart, I will now turn the call over to you.

Stuart Rose, Executive Chairman

Thank you, Doug. Our business showed improvement at the end of the quarter and is continuing to improve. We are currently experiencing earnings per share that exceed our first quarter figures, and we are optimistic that this trend will persist. The progress we've made since the start of the first quarter has been significant. We have $270 million in consolidated cash and short-term investments. With this cash, although our reported tax rate is higher due to carried forward tax credits, our cash flow is improving thanks to both earnings and a lower effective tax rate compared to the stated GAAP rate. As Doug mentioned, we are benefiting from higher interest rates, with our $270 million earning more than in the first quarter. We are also actively working on carbon capture initiatives at One Earth plant and with Summit, which Zafar will discuss further. While there are no guarantees, we are making strides and hope that this will become a major asset for our company. We also maintain our buyback plan, which has proven beneficial during stock dips, helping to stabilize it. In addition to our work in ethanol, we are pursuing opportunities in carbon capture. While Zafar will provide the latest updates, we remain open to new prospects and currently have the cash to capitalize on potential opportunities. I will now hand the call over to Zafar Rizvi, our Chief Executive Officer.

Zafar Rizvi, CEO

Thank you, Stuart. Good morning, everyone. As I mentioned in our previous call, at the early stage of the quarter, we were facing a challenging operating environment. But later in the quarter, we saw improvements that resulted in a profitable first quarter. On the other hand, drought has created a strong corn basis, particularly at the Marion South Dakota location. We are pleased with our availability of corn in the Gibson City, Illinois area because of the growth in domestic export from Illinois, and the corn basis is beginning to sell. According to the EIA May 24th report, ethanol stock and production has dropped during the last few weeks due to planned shutdowns of ethanol facilities and increased blending because of higher consumption of gasoline. We have also seen natural gas prices drop considerably, which has a positive impact on the financial results. As a result of all these factors, if we continue to source corn at a reasonable price and don't face any major logistical problems, we believe we will have better financial results in the second quarter than in the first quarter of 2023, as Stuart mentioned earlier. The May 2023 USDA report was also very positive. It is expected to show 15.26 billion bushels and 181.5 bushels per acre and if this happens, and we see that this realizes, it could have a very positive impact on future earnings, but as we all know, we have a long way to go yet. Ethanol export dropped this quarter. First quarter 2023 was 354 million gallons compared to 394 million gallons for the same period last year. DDG export through March 2023 was 2.4 million metric tons compared to 2.88 million metric tons, a decrease of approximately 400,000 metric tons compared to the same period of 2022. Let me provide you an update on the carbon sequestration project and sustainability report. We are very pleased to announce our inaugural sustainability report highlighting what we have accomplished while addressing sustainability, economy, and our social responsibilities at large. We are delighted to partner with Summit Carbon Solutions, part of the world's largest carbon pipeline for the NuGen facility in South Dakota. Our goal to reduce greenhouse gas emissions aligns perfectly with Summit Carbon Solutions' expertise. At the One Earth sequestration location in Gibson City, we continued to complete the paperwork for different government permits and requirements of the agency, while we are waiting for the EPA to approve the Class VI permit for carbon injection. This is a highly technical, very time-consuming project and it depends on several local, state, and federal agencies’ approvals. Those decisions are beyond our control, which has meant we have been moving forward a bit slower than we would like to. However, we are pleased about the big milestones we have reached so far. We submitted the Class VI permit for three wells, ordered long lead equipment, and expect to build a modular compressor plant, which will be delivered by the end of 2023 with construction around the modular unit scheduled to start in 2024. We are also in the process, as I mentioned previously, of evaluating whether to increase the ethanol capacity at One Earth Energy in Gibson City, Illinois, to 200 million gallons a year instead of 175 million, as I mentioned in the previous call. The current capacity is approximately 150 million gallons a year. The clean fuel production credit Section 45Z, which is related to reducing fuel carbon intensity score, could provide as much as dollar a gallon depending on the carbon intensity of the ethanol produced and sold. That could continue to enhance the strong position of our company. We also continue to evaluate other projects that would improve energy efficiency and reduce carbon intensity. We believe the completion of this project will lead to greater benefits under the Inflation Reduction Act passed by Congress. In summary, we are pleased to announce a profitable quarter, good progress on our carbon sequestration project, a plan to increase ethanol production at One Earth Energy to 200 million gallons to maximize the 45Z benefit, and the NuGen facility assigned a carbon offtake agreement with Summit Carbon Solutions. If we continue to make progress, we will be ready to provide low carbon ethanol and by-products with the social impact of reducing carbon in the atmosphere and the financial impact that empowers a company that improves company performance for our shareholders. Once again, we could not achieve this milestone without the hard work and dedication of our colleagues. We are very appreciative of their efforts in achieving these positive results. I will now give the floor back to Stuart Rose for additional comments. Thanks, Stuart.

Stuart Rose, Executive Chairman

Thanks, Zafar. In conclusion, we have great plans. As shown by our numbers, we drastically outperformed the other public companies in the industry. Great locations, including a great carbon capture possible location in Illinois, which will be our own project, and we also now have a partnership with Summit for our South Dakota plant. We have great opportunities going forward, but the most important thing, and I talk about it all the time, is we have the best people in ethanol. We're leveraging those great people to take advantage of the opportunities in carbon capture. If things go right, hopefully we can accomplish great things in carbon capture. The best business in the world is a business that can be socially responsible and also have great returns for our shareholders, and that's our goal. We work towards that; Zafar and his team work towards that every day. I'll now leave the floor open to questions.

Operator, Operator

Thank you. And we have a question from Jordan Levy with Truist Securities. Please go ahead; your line is now open.

Unidentified Analyst, Analyst

Hey, good morning, guys. It's Mou on for Jordan. Thanks for taking my questions. Well, congrats on the solid results. Can you talk about how the corn pricing is tracking recently? And what is your visibility into the summer-fall season for pricing, presumably it's a better harvest year? How should we think about that? Thanks.

Stuart Rose, Executive Chairman

I'm sorry, could you repeat that again? I just didn't hear it properly.

Unidentified Analyst, Analyst

Oh yes. So can you maybe talk about the corn pricing? How should we think about the pricing trending into the summer months? Thank you.

Zafar Rizvi, CEO

Okay. As I mentioned, corn prices are continuing to strengthen, and even in Illinois, they are exporting to other western states, including some to Nebraska and Kansas. It seems prices are likely to increase, but on the other hand, we have seen China canceling some orders, which is the reason for the price drop, but the basis is still very strong. We have observed somewhere around $0.65 to $0.90 plus basis. Does that answer your question?

Unidentified Analyst, Analyst

Okay. Thanks. Yes, I appreciate the color.

Doug Bruggeman, CFO

It’s going to be challenging, but Zafar and his team have done an excellent job securing corn at a price that allows ethanol plants to remain profitable. If we experience a good rainy season, especially after last year’s drought in South Dakota, we could return to normal pricing and typically adjust the basis. Currently, we are significantly above the normal basis. Are there any other questions?

Operator, Operator

We do have a question from Robert Maltbie with Singular Research. Please go ahead; your line is open.

Unidentified Analyst, Analyst

Hey, guys. Great quarter. I'm Sami for Chris, who can't be with us at the moment. We had an overflow from our conference, and it's good to see so much interest in the small and micro-cap space. We had about 500 investors on the call, so he's a bit tied up, and here I am with his notes to follow-up. Congrats on the quarter; it's good to see small cap stocks moving as well here, in a market dominated by big caps. So congrats on that. My questions are two-fold. One, could you elaborate a bit more on the opportunity and the carbon capture as per earnings accretion, as well as revenue growth over the longer term, and how much of a contributor do you believe that will be? And the second part is, if I understand correctly, you still have about $15 a share in cash. At what point would you consider a large dividend or some type of return of capital to shareholders of that cash? Thank you.

Zafar Rizvi, CEO

Thanks for the questions, Robert. First, in terms of carbon capture, we have hope, but there's no guarantees. It allows for $85 a ton in direct pay from the government, and 45Z could be $1 a gallon. Our plant, the one we are doing independent of Summit, will produce about 200 million gallons after expansion. You can do the arithmetic, but there are no guarantees of anything. This is a couple of years, maybe a year and a half to two years off at the earliest, so we don't want you to project numbers too aggressively. There is great potential there. In terms of the cash and what we do, and you have followed us for a long time. We probably are the kings of using our cash for buybacks. I don't think any company on the New York Stock Exchange has bought back a larger percent of their stock. When you are a small-cap stock and generate cash like we do, you typically have two choices: pay a dividend or buy back stock. It's always been my opinion that buying back stock is a smarter move because it reduces the number of shares outstanding and has the potential, if we are making money, to significantly increase earnings per share, whereas a dividend just goes out and doesn't have the potential to increase earnings per share. So that's our chosen method, and that's what we prefer to do with our cash. Any other questions?

Operator, Operator

We have a question from David Locke with Old Mammoth Investments. Please go ahead; your line is open.

David Locke, Analyst

Hey, guys. Good morning. How are you?

Zafar Rizvi, CEO

Good morning.

Doug Bruggeman, CFO

Good. Thank you.

David Locke, Analyst

So a couple of completely unrelated questions. The first one is, have you guys given any guidance for how much capital you're going to need for the plant expansion and for the carbon capture project?

Zafar Rizvi, CEO

As I mentioned previously and just now in my prepared remarks, we are still evaluating that. We are trying to expand from $150 million to $200 million instead of $175 million, and as we gather information from different sources, we realize that it might be better to consider $175 million to $200 million. We are still analyzing and budgeting those numbers. At this time, I really cannot pin it down.

David Locke, Analyst

Okay. And then the second question is: Do you have any opinion or thoughts on sustainable aviation fuel and if that's something that REX could participate in, or to what extent might that just soak up some demand or supply of U.S. ethanol production?

Doug Bruggeman, CFO

I think I can say that we are always looking for new opportunities. We have done some research, and we are in the process of talking to some different companies and trying to learn more about sustainable aviation fuel. That's one of the reasons that once the 45Z and carbon sequestration developments progress, by the time those are in place, the technology will have been developed, and we will have a 200 million gallon plant at One Earth Energy and about 150 at NuGen. As I understand from my research, it's approximately two gallons of ethanol to produce one gallon of sustainable aviation fuel. So we are trying to evaluate all those things and looking at the return on investment and analyzing how much investment it will take to convert those, so at this stage, we have no immediate plans, but we are certainly doing extensive research on it.

David Locke, Analyst

Okay. And then…

Doug Bruggeman, CFO

I can tell you we're laser-focused on carbon capture. We don’t want to take our eye off the ball. There's a lot of money to be made there; if we can do it, there are no guarantees, but if we can, there is a huge amount of potential income in that area. Whereas for sustainable aviation fuel, we don't see anyone being successful so far. We are interested in it, but we want to see someone else make money first before we jump into it.

David Locke, Analyst

Right. But would you agree that you could essentially sort of passively participate in that market to the extent that it develops, just because it should use a substantial amount of ethanol as a feedstock?

Doug Bruggeman, CFO

Absolutely. If someone is successful, these companies are not big ethanol players that are developing sustainable aviation fuel, so they're going to need a source of ethanol. We will sell our ethanol to whoever pays the highest price. We have every chance to benefit from that if someone is successful.

David Locke, Analyst

Yes.

Doug Bruggeman, CFO

Just to reiterate, our contracts for selling ethanol are very flexible. We might go a month or two out, but we don’t have year-long commitments. So we would be a perfect supplier to them if they find success.

David Locke, Analyst

And then just on capital allocation, you guys regularly talk about how you're always looking around for plants that might be for sale. I'm assuming that it is much cheaper to expand capacity at existing plants than it is to buy someone's existing plant at this point in terms of just increasing the overall footprint of your company?

Doug Bruggeman, CFO

Yes, we've come close to buying plants before and have tried very hard to buy plants before, but today I don't know of any really good plants that can be purchased at a reasonable price. So I think what you're saying is exactly right. It's much cheaper in today's market to try to expand capacity, and that's what Zafar is doing.

David Locke, Analyst

Okay. And is there anybody out there that's thinking of building a greenfield plant, or is everything just kind of 25 million gallons here and another 25 million gallons there?

Stuart Rose, Executive Chairman

We know of no one, but there could be. Zafar, do you know if anyone is considering it at this time?

Zafar Rizvi, CEO

I'm not really aware of that.

Doug Bruggeman, CFO

It's been a challenging market for several years, and we believe we've performed significantly better than the industry. However, the industry hasn't been as favorable for most other participants. Many are focusing on alternative revenue streams from ethanol rather than investing in new ethanol plants. While we are not ruling out the possibility of opening new plants in the future, we currently have no plans, and I'm unsure if anyone else does either.

Zafar Rizvi, CEO

Yes. Also, I think we are concentrating on making sure we reduce our carbon intensity score. As I mentioned, we are looking at several other projects. Our goal is to further reduce our carbon intensity score as low as practically possible. That also needs some investment, and we prefer to spend our money on those projects, which will be more beneficial for 45Z and carbon sequestration with a quick return on investment.

David Locke, Analyst

Okay, perfect. Hey, thanks for your time, and good job with the quarter, gentlemen.

Doug Bruggeman, CFO

Thank you. Thanks for the call.

Operator, Operator

And there are no further questions at this time. I will turn the call back to Stuart Rose.

Stuart Rose, Executive Chairman

Thank you. We'd like to thank everyone for being on the call, and we'll talk to you at the end of next quarter. Thank you very much. Bye.

Operator, Operator

That does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.