Earnings Call Transcript - REX Q1 2022

Operator, Operator

Greetings, and welcome to the REX American Resources Fiscal 2022 First 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 call over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Douglas Bruggeman, CFO

Good morning, and thank you for joining REX American Resources fiscal 2022 first 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 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 for his comments. Sales for the first quarter increased by 18%, as we experienced higher pricing for ethanol distiller grains and corn oil. Ethanol sales for the quarter were based upon 64.5 million gallons this year versus 70 million gallons last year. We reported gross profit of $11.9 million this year versus a gross profit of $19.5 million in the prior year. For the current year quarter through selling prices were offset by higher corn and natural gas pricing. Ethanol pricing improved by 27%, dried distilled grain improved by 5%, and corn oil pricing improved by 91% for this year's quarter over the prior year first quarter. Corn cost increased by 27% and natural gas pricing increased by 86% for this year's quarter compared again to the prior year first quarter, as inflationary pressures and the impact on commodity pricing from the Ukraine and Russia conflict continued. Gross profit comparison between years was also impacted by lower sales prices on certain ethanol contracts in the current year when the purchaser paid the freight. SG&A decreased for the first quarter to $5.2 million from $9.9 million in prior year. Again, this primarily represents decreased outgoing freight cost charged to SG&A in the current year based upon certain ethanol contracts. We had income of $2 million from our unconsolidated equity investments in this year's first quarter versus $570,000 in the prior year. The discontinued operations reflected in the prior year numbers are from the refined coal business as we ended those operations on November 18th, 2021. There was no impact in the current year. We reported a tax provision from continuing operations of $1.8 million for this year versus the provision of $2.2 million in the prior year. These factors led to net income attributable to REX shareholders from continuing operations of $5.2 million for this year's first quarter versus $7.3 million in the prior year. Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.87 for this year's first quarter versus the $1.30 in the prior year. Stuart, I'll turn the call over to you.

Stuart Rose, Executive Chairman

Thank you, Doug. Going forward, the ethanol operations for the current quarter are currently running significantly ahead of last year's corresponding quarter. We will be aided by a one-time government payment related to COVID relief and some improvement in ethanol profits quarter-to-date. Currently, we have $234 million in consolidated cash, and we also have tax credits that we're able to use against pretax earnings and help our cash flow. Uses of this cash include buying back stock on dips, should the market dip or if our stock goes down significantly, we have the cash to buy in shares. We're also working very diligently on a carbon capture project. Zafar Rizvi, our CEO, will discuss this further. Looking at compatible industries that currently emit large amounts of carbon, nothing is imminent, but if we found something where we could make an industry less carbon intensive using our carbon capture holes, that would be something we would consider. We continue to look for other ethanol plants that are well located and use the same technology we use. Again, that's an industry we know very well. Today, we have nothing imminent in that area to report, but we are continually looking. I will now turn the conference call over to our CEO, Zafar Rizvi.

Zafar Rizvi, CEO

Thank you, Stuart. I will be very brief. As I mentioned in our previous quarterly call, the operating environment in the beginning of the first quarter of 2022 was very challenging. Since then we have seen some improvements, but it continues to pose challenges for a number of reasons including increased ethanol production, logistic problems, increased price of corn greater than the ethanol price, and the high price of natural gas. All of which are actively affecting the crush margin. We consider the crush margin as the price for gallons of ethanol and the price for bushel of grain divided by the realized yield. At this very early stage of the second quarter, we expect the second quarter will be profitable. On May 23rd, 2022, the company received $7.8 million as a part of the COVID relief bill passed by Congress in December 2020. In June of 2021, the USDA announced a $700 million biofuel producer program to distribute these funds to impact the producers of ethanol, biodiesel, and other renewable fuels. As I mentioned in our previous calls, we are also evaluating several other projects that would increase production efficiency, save energy, and reduce water consumption. Some of these projects are capital intensive and require substantial analysis before they can be implemented. All these projects are at a very early stage and may not materialize. Let me provide a few details about the carbon sequestration project. As I mentioned in previous calls, we are working with the University of Illinois on drilling a carbon sequestration well. The first test well at One Earth Energy was successfully drilled to a total depth of around 7,100 feet in which almost 2,000 feet of Mount Simon sandstone was encountered. The geological models are predicting the movement of the CO2 injection into the subsurface is making progress. Additionally, we will be performing a water injection test at the well itself this week to evaluate the expected movement of CO2 as well as expected plume area and storage capacity under the subsurface area. These simulation models are helping to complete the Class 6 permit application. As we predict the behavior of the CO2 when it is injected, we expect to file the Class 6 permit by the end of June or early July. The simulation model results are currently at a preliminary stage and much more work is still required. However, the data indicates that all the CO2 produced by the One Earth Energy facility, and more, can be injected and stored at the potential sequestration site. We will continue to evaluate this further as we make progress and decide the injection well location. Once again, this is a highly technical and time-consuming project, and it will take time to make material progress. The 3D seismic testing was completed in the middle of February. We are still in the process of evaluating and modeling the 3D data. That's one of the reasons we are trying to ensure that the well location is at the proper location, which can accommodate maximum carbon storage. As I mentioned in a previous call, almost 16,000 nodes were placed at different points, and 116 million points of data were collected, and that's still being analyzed. I want to reiterate that this project is still at a very preliminary stage; it requires significant time and effort in modeling and analysis. We cannot yet predict the result of the simulation models and whether we will be successful or not. In summary, as Stuart mentioned, we are very pleased to announce, once again, a profitable quarter in a very difficult environment and progress with our carbon sequestration project. We appreciate and thank our colleagues for their hard work in achieving these results. I will give the floor back to Stuart Rose for additional comments. Thank you, Stuart.

Stuart Rose, Executive Chairman

Thank you, Zafar. In conclusion, again, we made money in a quarter when most of the public companies in the industry reported a loss. In our company, we are a well-run ethanol company that makes money and consistently over the years has made money in ethanol. We also have great hopes for the future in carbon capture, and we feel our carbon capture is far more advanced than almost everyone else trying to break into this industry. More importantly, like I said, we make money now for our shareholders. We're not just relying on dreams and hopes; we have a real operating company in the ethanol business. We have a few key factors contributing to that. We have good plans, good locations, but most importantly, and the biggest factor that separates us from the rest of the industry, is our people. They are important to us, and again, we believe we have the finest people in the industry, which is really why we continue to outperform the industry. I'll now leave the forum open to questions.

Operator, Operator

Thank you. Our first question is from Jordan Levy with Truist Securities. Please proceed with your question.

Jordan Levy, Analyst

Good morning, all.

Stuart Rose, Executive Chairman

Hi, Jordan.

Jordan Levy, Analyst

It was a strong quarter for us, particularly considering the challenging environment, which reflects well on how effectively the team has managed the company. I want to commend everyone for their efforts. Now, turning to the carbon capture topic, Stuart, you mentioned exploring other carbon-intensive industries or ethanol facilities that might benefit from carbon capture. How do you view the potential for acquiring such assets compared to forming supply agreements with third parties that would also gain from carbon capture? I'm interested in your perspective on this.

Stuart Rose, Executive Chairman

I'll take that first and then pass it to Zafar. I believe having the capacity for carbon capture is crucial, and that's where we're focusing our efforts. There are many ethanol plants, ammonia plants, and electric utilities currently releasing carbon. If we have the capacity, we can capture carbon from various sectors, not just ethanol. The key is securing that capacity for carbon capture, which is a complex challenge. As Zafar mentioned, we have millions of data points involved in obtaining the Series 6 permit, which can be quite difficult. We believe this is the most critical factor. While he works on that, we're exploring different industries that produce significant carbon emissions, aiming to establish a large carbon capture facility that can reduce the carbon footprint for our region and the nation. That's our objective. I'll hand it over to Zafar for any additional comments.

Zafar Rizvi, CEO

I think the only thing I should add is that you are exactly right: the well is the most important aspect. If you don't have the well, you can have the carbon, but you won't be able to perform carbon sequestration. To get the EPA Class 6 permit, it takes around six to 18 months after you apply for the permit. As you know, we have been working on this project for almost two years. We have reached a stage now where we are ready to file the EPA permit. It requires significant time, and further, once we apply, depending on the EPA's requirements, it will take another six to 18 months. So, it’s quite a long process. Certainly, we will have our own well. We already have a location at One Earth Energy, which is producing the carbon. As Stuart mentioned, we will look beyond that to capture carbon from other locations or our own future business to store that carbon as well. Most importantly, we are situated at the Mount Simon, which is considered the best location in the Illinois area, and we believe it's the right place to operate independently at this time, while we can adjust in the future depending on how the situation evolves.

Jordan Levy, Analyst

That's great color. Thanks both of you. And maybe a follow-up on a different topic, on the corn oil side of things. Obviously, we've seen a lot of price increases in that product, as we've seen with all whole products in the ag space. Especially corn oil, some of that's probably driven from the renewable diesel sector and the interrelationship with grain prices. Just curious how the demand you’re seeing on that versus how you've historically seen it?

Zafar Rizvi, CEO

I think, certainly, we have seen a lot of corn oil demand at this time. We literally receive calls almost every day or every week about higher demand; notably, the reason is the corn oil price is continuously rising. Corn oil is almost trading close to soybean oil. That's certainly one of the positive aspects of this business currently, and as you can see, corn is trading today about $7.60, which does not compare to last few weeks when it was around $8.15. Natural gas is trading at $9.20, and ethanol is at $2.75. When you consider all these factors, it’s clear that while we have seen a decrease in the price of DDG lately, we are facing multiple challenges. However, we are taking it one step at a time and ensuring that we successfully navigate these hurdles.

Jordan Levy, Analyst

Great. I'll leave it there. Thanks so much for all the details.

Operator, Operator

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

Pavel Molchanov, Analyst

Thanks for taking the question. It's been a little while since I've been on one of your calls. I think this is your first call since the war began. I thought I would just ask an open-ended question. How has the war affected the ethanol market from a top-line perspective or from a cost of goods perspective, or both?

Zafar Rizvi, CEO

I think if you look at the corn price recently, it certainly has risen due to Ukraine producing approximately 1.3 billion bushels a year, and they export almost 1 billion bushels. Therefore, they are unable to export as much as they usually do. However, other countries like Argentina and Brazil are compensating for that by exporting more than the United States. We were undoubtedly concerned initially that if all the export goes from the United States, we would have a difficult time carrying over to 2022-2023. Additionally, the USDA has recently announced a decrease in the corn production forecast, primarily due to the situations in Ukraine and the USA. We have also noticed weaknesses in China and the European Union. On the bright side, however, there are significant bumper crops in Argentina and Brazil. So, there is certainly an impact, especially on natural gas, as it's expected that liquid natural gas will be exported to European countries or others. Therefore, there is a considerable pressure on the ethanol industry due to these commodities.

Pavel Molchanov, Analyst

Yeah. I appreciate that perspective. Let me zoom in on the EPA allowing higher blending levels this summer. How do you anticipate that having a practical impact in the United States?

Stuart Rose, Executive Chairman

I'll answer that one. It really doesn't make much difference at all. It's a small amount overall and mostly just discussion. Most gas stations, whether in the East or West, don't even offer E15 because it hasn't been implemented on a permanent basis, so there's no motivation to integrate E15 nationwide. We believe it was more talk than actual support for the industry. There might be very slight assistance if a few pumps use E15 instead of E10, but this situation is quite similar to what the Trump administration did regarding E15, and it’s not really benefiting us at all. The substantial help we received, for which we are very thankful, was the USDA payment. That's real money, and it matters. That was great. Zafar, would you like to add anything?

Zafar Rizvi, CEO

Yeah. I think you are exactly right, because unless the EPA allows us to sell E15 all year round, no one will be willing to invest in it for eight or nine months and then have to shut down their pumps and start over again. This uncertainty is certainly creating a problem. We need the Biden administration to allow us to sell E15 all year round, just like any other brand. That’s the only way we can potentially increase demand for ethanol; otherwise, it’s going to remain a problem.

Pavel Molchanov, Analyst

Alright. And then just last question. What's the latest on exports to China? This has been our recurring conversation for what seems like four years now?

Zafar Rizvi, CEO

Exports to China are not as significant as we expect. Even in the March numbers, we have not seen any exports to China. The U.S. government and China need to find a way to lift some tariffs. The Biden administration suggests they may lift tariffs on certain goods imported from China to address inflation, which is one of the reasons for the current inflation. Contrary to some politicians' beliefs, the tax is borne by citizens. When a tariff is imposed, the prices of goods rise, and consumers pay that cost. This is a major factor contributing to the inflation we are experiencing; many imports that used to be cheaper from China and other countries have become more expensive due to tariffs. Therefore, these tariffs need to be removed. Additionally, China should also lift their own tariffs. We need fair trade.

Stuart Rose, Executive Chairman

Thank you, Pavel.

Operator, Operator

Mr. Rose, there are no further questions at this time. I'll turn the call back to you for closing remarks.

Stuart Rose, Executive Chairman

Okay. Thank you very much. We'd like to thank everyone for listening, and we look forward to speaking with you again at the end of the next quarter. Thank you. Bye.

Zafar Rizvi, CEO

Bye-Bye.

Operator, Operator

This concludes the conference, and we thank you for your participation. You may disconnect your lines.