Earnings Call Transcript - REX Q2 2020

Operator, Operator

Welcome to the REX American Resources Fiscal 2020 Second 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 second quarter conference call. We'll get to our presentation and comments momentarily, as well as your questions and answers. 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.

Stuart Rose, CEO

Thank you, Doug. Going forward, ethanol is currently profitable with our plants open. The ethanol prices are up over last quarter. Corn appears to be plentiful with hopefully a good harvest in sight. The only negative that I see at this current time is that there are 98 refineries that have applied for RIN exemptions. If they were all granted exemptions, that would have an impact on our business. Furthermore, if the government does not follow the law, RINs could have an impact on our business.

Zafar Rizvi, CEO

Thank you, Stuart. Good morning, and thank you for joining us today for the second quarter 2020 earnings call. As we all know, the 2020 fiscal year started in a challenging environment, including a decline in crude and ethanol demand prices, the COVID-19 pandemic, and shutdowns of businesses along with stay-at-home orders issued by the government. This led to a decrease in fuel demand and negatively impacted the ethanol industry. Several ethanol facilities across the country were shut down, including both of our majority-owned plants. As I mentioned in the first quarter call, that challenging environment led to our decision to shut down the NuGen plant on March 17 and One Earth on March 31. By April 2020, we had idled both of our majority-owned plants. We did experience some improvements in business activity in late May as COVID-19 shutdown orders relaxed, which created an increase in demand for gasoline and ethanol. As the demand for ethanol increased, it led to the reopening of One Earth Energy in late May and NuGen Energy in late June. Since One Earth Energy's second quarter ended on June 30 and NuGen's second quarter ended on July 31, the second quarter financial results reflect approximately one month of production activities for each location. We also went through the usual startup production problems, but those issues are behind us now. We have seen further improvements so far in the third quarter, a steady flow of corn at both of our majority-owned locations, and improved crush margins. We believe this could lead to a profitable third quarter provided economic conditions, crush margins, and availability of corn continue to improve, and the COVID-19 threat is further reduced.

Stuart Rose, CEO

Thanks, Zafar. In conclusion, it looks like the worst is behind us. The ethanol business is currently profitable. We have great plants and great locations, among the best in the industry. Most importantly, we have great people, and that’s the biggest factor that has allowed us to navigate this difficult time and become profitable again. 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 proceed with your question.

Jordan Levy, Analyst

Morning, Stuart, Doug, and Zafar. Just to start off, on the industry as a whole, I’m curious to get your thoughts on how you view the discipline of the overall ethanol industry here in the US? We’ve seen a nice bounce back in production and demand for ethanol and, subsequently, gasoline fronts. Given that we could see more volatility, what sorts of things can you guys do at the corporate level to buffer or better position yourself to go through that volatility compared to your peers?

Stuart Rose, CEO

Well, there's very little discipline in the ethanol industry. When it's profitable, everyone produces like crazy, and there's no real discipline. Plants never go away permanently; maybe one or two do, but virtually none ever completely close down for the long-term. Even if they’re very inefficient, they seem to come back. So there's very, very little discipline. What we do and where we think we excel is that we try to be the low-cost producer in the industry. We work really hard at that. Depending on the price of corn, we have among the most efficient plants in the industry, and that has allowed us to outperform the industry over the years. Many other companies have, if you look at their retained earnings on their income statement, they have negative retained earnings. We, of course, have made money virtually every year. This year is particularly difficult for reasons none of us expected. But we believe that as long as we're the low-cost producer, we’ll always be okay. So far, that's worked well for us. I hope that answers your question.

Jordan Levy, Analyst

Absolutely, it does. I think you showed your ability to handle low costs and drive costs down this quarter as well. Along the same lines, you discussed ethanol investments and looking for the right price. Is there a market signal you would look for to feel comfortable expanding your ethanol footprint, or is it just about getting the right plant at the right price?

Stuart Rose, CEO

I think we would definitely look to see if we're better off buying our own plants. Our plants are valued at very low prices by the market. We have $30 a share in cash. If we're better off buying back our shares or what we call buying back our plants for our shareholders, we would definitely consider that trigger. However, we wouldn’t want to overpay unless it was for a plant that was significantly better than ours. We certainly wouldn’t want to pay more than what our plants are selling for on the market.

Jordan Levy, Analyst

That makes a lot of sense. Absolutely. If I could, just one more question. You've mentioned the ability to realize more value from some of the by-products that some of your peers are looking into. We've seen a couple of players in the ethanol industry discuss high-protein from the DDG stream and that sort of investment. Can you share your thoughts on the potential for that investment, as well as the upside and downside of pursuing something like that?

Stuart Rose, CEO

Well, there are two areas we’re observing: the high-protein market and sanitizer production. We prefer to see others succeed in these areas before making investments ourselves, but both are on our radar. We're watching this very closely. Corn oil is a good example; we weren't the first in corn oil but got in fairly early, and it became a good by-product for us. Zafar, do you want to add anything?

Zafar Rizvi, CEO

Yeah. The only thing I will add is that the protein market is not mature enough yet, and we believe it will take a bit longer to become mature. Once it does mature, we will evaluate the investment of $40 million to $50 million. We will also assess how quickly the return on investment is realized. As more people are shifting to this protein market, it will reduce the supply of the DDG market, which could hopefully result in a higher price for DDG since that will not be available as much.

Jordan Levy, Analyst

Right. That makes total sense. If I could just squeeze in one more question. Looking at crush margins and where they are now as we move into the back half of the year, things have improved, as you've mentioned, and the plants are back online. How do you see the rest of the year playing out in terms of production at the plants or directionally on volumes from both your operated and non-operated entities?

Zafar Rizvi, CEO

Yeah. As I mentioned earlier, we expect the third quarter to be profitable. We certainly see improvements compared to the last six months. If these conditions continue, and there’s no further COVID-19 threat or issues with corn availability, we believe we will remain profitable through the year.

Jordan Levy, Analyst

Great. I really appreciate the answers, guys.

Stuart Rose, CEO

Thank you. Thanks.

Operator, Operator

Our next question comes from a line of Chris Sakai of Singular Research. Please proceed with your question.

Chris Sakai, Analyst

Hi everyone. I have a question regarding globally and your sales globally. Which countries are you currently seeing increased demand for ethanol, and which countries have not and why? How has the pandemic affected these countries?

Zafar Rizvi, CEO

As I mentioned previously, I think exports have dropped to 731 million gallons compared to last year's 764 million. Brazil is still a top importer; last year it was about 210 million gallons versus this year's 177 million, and Canada has also seen a drop. Brazil, Canada, India, and South Korea were the top four importing countries last year in 2019, and they remain the same this year, but ethanol exports have dropped. This decline can be attributed in part to plant shutdowns during March, April, and May, resulting in insufficient production to export. Therefore, these factors significantly impacted both our ability to produce and export.

Stuart Rose, CEO

One thing I'll add is that the driving habits due to COVID-19 have affected ethanol demand worldwide. People aren't using as many gallons of gasoline or ethanol for driving as they were before, especially in the second quarter.

Chris Sakai, Analyst

Right. So would it be fair to assume that as driving increases, so does the demand for ethanol and your sales?

Stuart Rose, CEO

In the US, that’s a fair hope—that if driving increases, so will ethanol demand. However, we’re still up against last year’s figures. I don’t have the latest driving figures, but an important aspect is that the wholesale price of gasoline is fairly low due to reduced demand, making it challenging for us on the export front.

Chris Sakai, Analyst

Okay. Thanks for that. Appreciate it.

Stuart Rose, CEO

Thank you. Thanks for the question.

Operator, Operator

There are no further questions registered at this time.

Stuart Rose, CEO

If that's it, I’d like to thank everyone for attending our call, and I’ll talk to you in a few months. Thank you very much. Goodbye.

Operator, Operator

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