Earnings Call Transcript - REX Q4 2020

Operator, Operator

Greetings, and welcome to the REX American Resources’ Fiscal 2020 Fourth 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 would now 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 2020 fourth quarter conference call. We’ll get to our presentation and comments momentarily as well as your question-and-answer session. But first, I’ll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today’s conference call contains forward-looking statements that involve risk and uncertainties within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company’s current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today’s news announcement and in the company’s filings with the Securities and Exchange Commission, including the company’s reports on Form 10-K and 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I have joining me on the call today, Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer. I’ll first review our financial performance and then turn the call over to Stuart Rose for his comments. Sales for the quarter increased approximately 4.2%, primarily reflecting higher year-over-year production in the ethanol segment and increased distillers grain pricing. Sales were based upon 67.7 million gallons this year versus 65.9 million in the prior year fourth quarter. Gross profit for the ethanol and byproduct segment increased for the fourth quarter from $8.1 million to $8.3 million, primarily due to improved distillers and corn oil pricing. The refined coal segment had a similar fourth quarter loss of $1.4 million for this year versus a $1.5 million for the prior year. SG&A decreased for the fourth quarter from $5.6 million to $4.4 million, largely due to lower ethanol freight charges recorded in selling, general and administration due to certain contract terms. The company recorded income from its unconsolidated equity investment of $332,000 for the fourth quarter of this year versus $1 million in the prior year. We recognized a tax benefit of $1.8 million in this year’s fourth quarter versus a benefit of $3.4 million in the prior year’s fourth quarter. The refined coal segment contributed a benefit of $1.7 million this year versus $1.5 million in the prior year fourth quarter for the tax benefit. The above factors led to net income for the fourth quarter of fiscal 2020 of $3.5 million compared to $4.4 million in the prior year, while diluted earnings per share decreased from $0.70 to $0.59. Stuart, I’ll now turn the call over to you.

Stuart Rose, Executive Chairman

Thank you, Doug. Going forward, ethanol is currently profitable, and we’re up against a period last year, during the COVID-related closure. In terms of corn and ethanol prices, they are both up as virtually all commodities are rising, and crush spreads remain challenging. DDG is up with the price of corn. The new administration appears to have appointees that are favorable to the ethanol industry. RIN pricing is still – although RIN pricing is up right now, we are still waiting to see how they will treat RIN pricing. In terms of COVID, the news about the opening of different states should help driving, which should improve demand for our product, especially versus last year. In terms of refined coal, it remains profitable on an after-tax basis. We plan on ending that operation by the end of this year. In terms of our cash, we have about $180 million in consolidated cash and equivalents and no debt. Our plants are continuing to explore investing in carbon capture; we’ve made progress there and have spent a fair amount of time working on that project. We also are looking – continue to search for high-quality ethanol plants. The ethanol plants we hope to find, if we should find ones to buy, would ideally be ones with good technology, good locations, and good people. At this point, I will turn it over to Zafar Rizvi, who will discuss our carbon capture business and our ethanol business further. Thank you.

Zafar Rizvi, CEO

Thank you, Stuart. As I mentioned in the last three calls, 2020 started in a challenging environment due to the COVID-19 pandemic. We temporarily shut down our plants during the first and part of the second quarter and struggled to find corn for our NuGen facility. We saw a decrease in fuel demand, which negatively impacted the ethanol industry. During the third quarter, conditions improved. We received a steady flow of corn at both our majority-owned and minority-owned locations. This resulted in improved crush margins and a very profitable third quarter. These improved conditions continued through the beginning of the fourth quarter. Later, we began to see a decline in the crush margin, in addition to ethanol prices failing to keep up with the increase in corn prices. Farmers lost interest in selling their corn because they were receiving a direct payment from the federal government under the CARES Act. When China increased its corn purchases, that led to higher corn prices. Behind these factors, we experienced political uncertainty and trade disputes. In addition, the EPA continues to consider and grant small refinery exemptions from RFS compliance this year. We expect the crush margin in the near future to continue to be under pressure, but we also expect it to improve once the threat of COVID-19 declines with the progress in vaccination and people begin to drive more again. A March 9 report from the USDA showed that carry-out stayed at 1.5 billion bushels with exports at 2.6 billion bushels. The estimated corn yield is 172 bushels per acre and ethanol plants are expected to consume approximately 5 billion bushels in the 2021 crop year. Export of distiller grain in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019. We've seen considerable improvements in exports during the last quarter of the year. In January 2021, Mexico, South Korea, and Indonesia were the top three importers. Ethanol exports during 2020 totaled 1.3 billion gallons compared to 1.46 billion gallons in 2019. January 2021 exports totaled 164.7 million gallons compared to 151.3 million gallons in January. India, China, and Canada were the top three importers, with India now skyrocketing compared to generally being Brazil or Canada. We see some improvements coming from India as well. Let me update you on the carbon sequestration project. As I discussed in our previous calls, we are working with the University of Illinois to drill a carbon sequestration test well to determine suitability for an injection well at our One Earth Energy facility. The University of Illinois is in the process of evaluating a permit application determining a 2D seismic survey to select a test well location and contracting a front-end engineering and design (FEED) study of the CO2 capture system. The data will be analyzed to ensure the location is suitable for the test characterization well. The University expects to start drilling a test well once the drilling permit is granted and the design is completed. We expect to start drilling the characterization well in early September. It will take approximately six weeks to drill and another several weeks for testing. Extensive modeling and computer simulations will predict the behavior of the CO2 when injected. These simulation models will determine how much CO2 can be injected at the location and at what rate, as well as its eventual distribution in the subsurface area. This project is still at a preliminary stage, and we cannot predict yet that we will be successful. Our target is to achieve net-zero emissions. In summary, we are pleased to announce a profitable quarter and year in spite of a very difficult environment for the ethanol industry and other businesses last year. We are very appreciative and thankful for the hard work of our colleagues during this pandemic to achieve these results. Now I will give back the floor to Stuart Rose for his further comments. Thank you, Stuart.

Stuart Rose, Executive Chairman

Thank you, Zafar. In conclusion, the economy is starting to open up. We have great plans, great people, and great locations. We have high hopes that when the economy does open up, our business will improve as demand increases. Most importantly, the biggest asset we have going forward is our people. They’ve stuck with us through thick and thin, and they are what we feel makes a difference and separates us from the rest of the industry, allowing us to continue to outperform in the industry. Thank you. I’ll now leave it open to questions.

Operator, Operator

Thank you. Our first question comes from the line of Jordan Levy with Truist Securities. Please go ahead.

Jordan Levy, Analyst

Good morning, all, and nice quarter against a pretty challenging backdrop on the macro front. Maybe if we could just start on the carbon capture side. You provided an update on the Illinois program. Could you just talk about the potential you see? We’ve seen some private companies announce projects around large-scale carbon capture pipelines and sequestration facilities. Could you talk about how you’re viewing that market potential outside of the University of Illinois project and is that something that’s of interest?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Yes. I think, as you know, there are projects happening in North Dakota, Wyoming, and some other areas, but we have been working with the University for almost over a year. We have the land, and we know exactly where we will be drilling, and we are evaluating all those things. So we seem to be ahead of most other people at this stage. It takes approximately two to three years from start to finish before you can really drill your first well, following that with testing to ensure how much CO2 the area can handle. Then, you need to obtain the necessary permits, but we think we are well-positioned in this process compared to others who are focusing on pipelines first.

Jordan Levy, Analyst

Sure.

Stuart Rose, Executive Chairman

As Zafar stated, we think people are going backwards on this. They’re focusing on pipelines, which are nice to have, but without a storage solution to inject CO2 into, it doesn't mean much. We are prioritizing the well first. Assuming we can achieve that, we’ll then work on the pipeline and delivery aspects. If you don’t have a hole to store the product, in our opinion, you aren’t even in the game.

Jordan Levy, Analyst

Yes.

Zafar Rizvi, CEO

Because the permitting process alone from the EPA can take six to twelve months, it'll be important to start the well first, ensuring by the time we are ready the pipeline can come in. We have some non-binding agreements with ethanol facilities in Illinois who are willing to supply carbon to us. We are focused on having a storage facility first before pursuing pipeline solutions.

Jordan Levy, Analyst

No, I think that makes a lot of sense. Stuart, maybe a question for you and Zafar as well. Historically, there have been some sales and purchases on the ethanol facility side. Could you discuss how you see that market today versus a year ago?

Stuart Rose, Executive Chairman

There are plants for sale right now. Many of our competitors seem to be emphasizing other products, resulting in available plants. For us to buy one, we’d have to find something that fits our operational model, which includes having the best plants with good locations and corn supply. Those plants are becoming rarer, but they could be out there. It’s an interesting time as we take the ethanol industry seriously, especially as it moves towards a near-zero carbon footprint that we believe offers significant future potential.

Jordan Levy, Analyst

And maybe just one more, Zafar, maybe for you. You mentioned crop yields and more corn planted this year compared to last due to increased demand. Can you talk about the specific regions you supply from?

Zafar Rizvi, CEO

Yes. As you know, last year corn was planted on about 90 million acres. Reports estimate it will be flat, close to around 93.6 million acres this year, which is about a 3.1% increase from last year. Insurance values are around $4.65. With corn prices above $5, more acres will likely be planted compared to last year. However, we are observing that farmers are holding onto their corn instead of selling, which complicates the situation. Last year, finding corn was difficult at this time, then suddenly it became available very cheaply as the planting season progressed. This year, we expect an increase in acreage, and, assuming favorable weather, we anticipate a good crop.

Jordan Levy, Analyst

Great. Thanks so much for the details, guys.

Stuart Rose, Executive Chairman

Thank you, Jordan.

Operator, Operator

Our next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

Chris Sakai, Analyst

Hi, everyone. Good morning. Just I had a question on any potential weather-related production delays this last quarter? And if so, for how long?

Zafar Rizvi, CEO

There were some delays in certain areas, primarily South Dakota, North Dakota, and parts of Iowa. However, these interruptions lasted about three to four days due to the supply of natural gas but overall were not significant delays.

Chris Sakai, Analyst

Okay, great. As the economies reopen globally, where do you see the biggest country for ethanol export?

Zafar Rizvi, CEO

I think, as I mentioned earlier, India increased its imports significantly, jumping to 53.2 million gallons in January. Previously, India was only at 13.3 million gallons in January last year. So there's substantial potential in India. China also showed strong imports, purchasing 22.7 million gallons in January. Canada remains a key player, and with changes to carbon credit and tax policies, we expect growth in these markets, along with Brazil, which has seen some slowdown due to tariffs. Hopefully, the new administration will work with Brazil and address these issues.

Chris Sakai, Analyst

Okay. All right, great. Thanks.

Stuart Rose, Executive Chairman

Thank you.

Operator, Operator

There are no further questions at this time. I’ll now turn the call back over to the presenters for closing remarks.

Stuart Rose, Executive Chairman

We thank everyone for listening to our call, and we look forward to talking to you after the end of next quarter. Thank you very much.

Zafar Rizvi, CEO

Bye.

Doug Bruggeman, CFO

Thanks. Bye.

Operator, Operator

Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.