Earnings Call Transcript - REX Q1 2021

Operator, Operator

Greetings. And welcome to the REX American Resources Fiscal 2021 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 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 2021 first quarter conference call. We will get to our presentation and comments momentarily, as well as your question-and-answer session, but first I will 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.

Stuart Rose, Chairman

Going forward, the second quarter to date remains profitable, much like the first quarter, driven by strong prices for ethanol, wind, DDG, and corn oil. This has been somewhat offset by rising corn and natural gas prices. Zafar Rizvi, our CEO, will elaborate on this when discussing the ethanol segment. In the refined coal sector, production this quarter to date significantly exceeds last year's figures, primarily due to the reopening and increased utility usage along with higher natural gas prices. This reflects changes with the utilities we collaborate with, and we anticipate further insights during the call. This business segment concludes in mid-November, but the credits earned can be carried forward for 20 years, which we believe will result in higher cash flows in the future. At the end of the quarter, REX had around $193 million in consolidated cash and no debt. Our cash uses include seeking opportunities within the ethanol sector, ensuring they align with strong plans, prime locations, and favorable pricing. To date, we have not identified any suitable opportunities after exploration. Additionally, we are considering other ventures in alternative energy that align with our competencies, but as of now, there is nothing imminent. Stock buybacks on dips are authorized, and we do buy stock when prices decrease. We are also making progress on a significant carbon capture project, which Zafar Rizvi will discuss further during his remarks.

Zafar Rizvi, CEO

Thank you, Stuart. As I mentioned in a previous call, 2020 started and ended with a challenging environment. But the operating environment 2021 is beginning to improve as production continued to increase. According to a report from EIA, the ethanol output last week was 55.7% ahead of the same week last year. But the 2021 production remains 3.64% lower when compared with the pre-pandemic similar week in 2019. The ethanol inventories little change and remain at their lowest levels since 2016 according to the EIA report. But today’s EIA report shows production and stock both dropped and at the same time gasoline demand is increasing. These improved conditions helped in the first quarter and resulted in a profitable quarter. We are beginning to see some decline in the crush margin due to a number of factors including the cash price of corn, China’s increase in corn purchases, decline in the price of distiller dried grain, but on the other hand, the increasing price of non-food grade corn oil. We expect the crush margin will continue to be under pressure in the near future. However, we expect to see improvement as the consumption of gasoline increases with people feeling more comfortable driving greater distances as COVID-19 vaccination rates rise. We are pleased the 10th District U.S. Circuit Court of Appeals granted EPA's request to cancel three small refinery exemptions, but over 70 requests for waiver are still under EPA review from RFS compliance year 2011 to 2020. We hope EPA follows the law and rejects all the requests. The May 12th EPA report shows that the May 12th USDA report indicates a disappointing 2021 stock carryout of 1.275 billion bushels for the year. However, 2022 corn prices are expected to increase, with projected 2021 and 2022 corn stocks increasing to 1.507 billion bushels and corn production forecasted to rise 6% to approximately 15 billion bushels. The estimated corn yield for 2021, 2022 is expected to be 179.5 bushels per acre. Exports are projected at 2.45 billion bushels. There was a decrease in the export of distiller dried grains and ethanol in the first quarter of 2021. Exports of distiller dried grain totaled approximately 2.6 million tons, compared to 2.73 million tons in 2020. We exported 399.3 million gallons of ethanol, compared to 485.4 million gallons in 2020. We are pleased China started to import ethanol and distiller dried grains.

Stuart Rose, Chairman

Thank you, Zafar. In conclusion, we have outperformed most ethanol companies in the country this quarter. All closed plants struggled at the beginning of the pandemic, and people tend to think they are all the same. Now, as the better plants come online, they are performing well. The underperforming plants may have new ideas, hopes, and dreams, but fundamentally, they remain underperforming. Anything that someone else might try at a high price will not yield the same profits that a well-run plant can generate. We are working very hard on a carbon capture project, which Zafar just described. This is a genuine carbon capture project. Many people are announcing carbon capture projects, but we are the ones actually working on a legitimate hole in the ground, which we believe is crucial for effective carbon capture, rather than just coordinating a group of people to contribute their carbon.

Operator, Operator

Our first question is coming from the line of Jordan Levy with Truist Securities. Please go ahead.

Jordan Levy, Analyst

Good morning all and really nice quarter against the clearly challenging backdrop. Just wanted to…

Stuart Rose, Chairman

Hi, Jordan.

Jordan Levy, Analyst

... first, if we can just talk carbon capture maybe Zafar or Stuart, knowing kind of where you are in the process and still early stage. Just wanted to get a reminder of what the initial thesis is behind the project and why the area is attractive to explore that option and what’s driving kind of looking into that just to give us a reminder on that?

Stuart Rose, Chairman

Zafar?

Zafar Rizvi, CEO

I believe, as you are aware, One Earth Energy is situated right at Mount Simon. We have previously conducted 2D seismic testing and found that our location not only allows us to produce CO2, but we can also perform carbon sequestration at the same site while being able to transport CO2 from other locations through our pipeline. Our aim is to serve most ethanol facilities in Illinois, along with our other facilities generating CO2, and bring it to our site. We have secured the land and completed the necessary surveys. Currently, we are setting up the facility and assessing its operation, including CO2 compression and the distance we can transport it for carbon sequestration. In simpler terms, we possess an ideal and tested location, as demonstrated by ADM's successful efforts in the region. We have access to the CO2 supply, an optimal site, and sufficient funds to reach our objectives.

Jordan Levy, Analyst

Perfect.

Stuart Rose, Chairman

To add to what Zafar said, a lot of people…

Jordan Levy, Analyst

And there are…

Stuart Rose, Chairman

To build on what Zafar mentioned, many believe that simply drilling any hole in the ground will suffice to store CO2, but that's entirely misguided. This is a serious and complex undertaking, which is why very few are currently engaged in it. The drilling process is not to be underestimated; it poses significant challenges. As Zafar pointed out, we've dedicated a substantial amount of effort to this for an extended period. While others may announce plans to capture carbon, making such announcements is much easier than actually locating a suitable site where CO2 can be securely stored. We've pinpointed a region near one of our facilities where we're diligently working to ensure that, if a project moves forward, it will be legitimate and effective in keeping CO2 underground. We believe we are ahead of nearly everyone else in this sector.

Jordan Levy, Analyst

That’s great. Thank you for that. And just as a follow up on a more of the capital allocation side, you’ve all been pretty consistent in share buybacks. Just curious, you had some really strong free cash flow this quarter and knowing the ethanol volatility, but also where your cash position is. Just curious how you all have thought about dividends and the potential for either kind of fixed dividend or as we have seen in some other sectors some have started to do some variable dividend payout structure? Just curious how you think about that versus share buybacks?

Stuart Rose, Chairman

The dividends is always a Board decision, but my own personal opinion is we are a small company and you can either do dividends or share buybacks. The share buybacks have the advantage of putting a floor on or at least hoping to put a floor on the stock when there are dips and reducing the share count, which increases the earnings per share when we do report earnings and that’s been our way of distributing or giving back to our shareholders some money. Again, we are not a huge company. We are generating a lot of cash. We are fairly, for our size, a fairly rich company. We do have a lot of cash, but we have uses for that cash. One of the uses, as I said in my call, was to do buybacks and support the stock when there are dips in the stock. We have done that for a number of years and it’s worked pretty well for us over the years. So I imagine the Board will keep with this plan. Hope that answers your question.

Jordan Levy, Analyst

Of course. If I could just ask one last quick question, Stuart, you mentioned that you are always exploring attractive opportunities, but nothing is imminent. I'm curious about how you're viewing other alternative energy options. Are there specific aspects of that market that you find appealing or that align with your business strategy?

Stuart Rose, Chairman

We have primarily focused on the ethanol sector and have examined various opportunities closely, but factors such as location, plant compatibility, or pricing have often held us back. However, that could change at any moment, and we are actively searching. When it comes to other energy sources, we consistently evaluate options like wind and solar. For us, the most promising prospects are those connected to the ethanol business, specifically carbon capture. While it won’t be cheap, we will benefit from substantial tax credits associated with this sector, which we know how to capitalize on based on our past experiences. Currently, this is where our attention lies, particularly under Zafar's leadership, as we work to grow our company. I believe this is essential not just for us but also for the country and the global community. We are optimistic about this venture, and if executed well, it has the potential to be highly profitable for us.

Jordan Levy, Analyst

Makes a ton of sense. Thank you all.

Stuart Rose, Chairman

Thank you.

Operator, Operator

There are no further questions. I will turn the call back over to you.

Stuart Rose, Chairman

Okay. We would like to thank everyone for listening to our call and we will look forward to talking to you next quarter. Thank you very much. Bye.

Operator, Operator

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