Earnings Call Transcript - REX Q4 2022

Operator, Operator

Greetings and welcome to the REX American Resources Fiscal 2022 Fourth Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will have a question-and-answer session. I would now like to turn the conference over to Mr. Doug Bruggeman, Chief Financial Officer. Please go ahead.

Doug Bruggeman, CFO

Good morning. And thank you for joining REX American Resources’ fiscal 2022 fourth 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 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 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 will first review our financial performance and then turn the call over to Stuart for his comments. Sales for the fourth quarter declined by 5.6% as we experienced lower volume for ethanol and distillers grain. Ethanol sales for the quarter were based on 63.7 million gallons this year versus 69.9 million last year, as we experienced some weather-related disruptions to our operations during the quarter. We reported gross profit of $14.9 million for this year’s fourth quarter versus a gross profit of $38.8 million in the prior year. In the current year quarter, we experienced lower ethanol pricing, as well as higher corn and natural gas pricing. Corn costs increased by 22% and natural gas pricing increased by 12% for this year’s quarter compared to the prior year, as inflationary pressures and the impact of commodity pricing from the Ukraine-Russia conflict continued. We continue to experience higher basis pricing for corn near the NuGen facility based on a poor corn harvest and reduced corn availability in that local area. SG&A increased for the fourth quarter to $6.7 million from $6 million in the prior year. The increase is primarily due to an increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year, which we classify as SG&A costs. We had income of $2.5 million from our unconsolidated equity investment in this year’s fourth quarter versus income of $3.9 million in the prior year. The company’s interest and other income in the current year increased dramatically to $2.6 million versus $13,000 in the previous year, primarily reflecting increased yields on our cash. The discontinued operations reflecting the prior year numbers are from the refined coal business as we ended those operations on November 18, 2021. There was no impact in the current year. We reported a tax provision from continuing operations of $2.2 million for this year versus the provision of $10.7 million in the prior year, primarily reflecting the lower level of income in the current year. These factors led to net income attributable to REX shareholders from continuing operations of $8.2 million for this year’s fourth quarter versus $21.3 million in the prior year. Total net income per share attributable to REX shareholders from continuing operations was $0.47 for this year’s fourth quarter versus $1.19 in the prior year. Again, I will point out all share numbers reflect the 3-for-1 stock split, which was effective August 5, 2022. Stuart, I will now turn the call over to you.

Stuart Rose, Executive Chairman

Thank you, Doug. Looking ahead, ethanol is currently operating at approximately breakeven year-to-date. Zafar will provide further details on that. We have around $280 million in cash at the end of the year, and our cash usage in the next couple of years includes carbon capture, which Zafar will also discuss. At the moment, we're investing that cash in interest-bearing accounts, primarily treasuries and money market accounts, and we trust that the banks we are working with are very secure. We consider them top-quality banks and feel confident that our cash is well-invested. We are earning reasonable interest on that cash compared to many companies with debt. We have very little to no debt, which we believe makes our cash investment strategy effective at this time. We will look to buy back shares during dips. We have plans to expand our ethanol plants, which Zafar Rizvi will address, and we are continuously exploring opportunities to acquire additional ethanol plants. While we currently have nothing imminent, we would certainly consider a strong ethanol plant if the opportunity arises. I will now hand the call over to Zafar Rizvi, our Chief Executive Officer. Thank you.

Zafar Rizvi, CEO

Thank you, Stuart. Good morning, everyone. As I mentioned in our previous quarterly call, we continue to face a challenging operating environment throughout the year due to several factors that have affected the availability of corn, creating a strong basis, as Doug just mentioned, particularly at the Marian location. In addition, ethanol production exceeds demand, which continues to negatively affect the crush margin. The high price of natural gas during the last quarter and year also negatively affected the profit margin. On a positive note, we have seen natural gas prices drop considerably recently. According to the EIA, yesterday’s weekly report shows ethanol production dropped below 1 million barrels a day, a ten-week low, retreating 17,000 barrels a day week-to-week. But the corn basis is still strong and expected to become positive for the harvest. We are pleased with the availability of corn in Gibson City, Illinois. However, due to growth in domestic exports from the state, the corn basis is beginning to strengthen. We have seen weakness in the price of corn oil and DDG, but these are still selling above cost. Despite drought, the recent slowdown in exports, the decline in the crush margin, and other economic headwinds, we continue to source corn at a reasonable price and don’t face any major logistical issues or shortages of corn at this early stage of the first quarter of 2023. We expect to breakeven or be slightly profitable at this time, as Stuart just mentioned. Let me give you some progress on our carbon sequestration project. These are the bullet points: the university successfully drilled a test well to a total depth of around 7,100 feet, in which almost 2,000 feet of our Mount Simon sandstone was encountered. Completed geological models are predicting the movement of CO2 injection into the subsurface. The rock core analysis performed indicates very good reservoir quality. We have completed water injection tests at the well itself to evaluate the expected movement of CO2, as well as the expected plume area; testing indicates a very suitable storage for carbon sequestration. The 2D and 3D systemic testing was completed and indicates very good storage. Several other tests and modeling were performed to verify maximum injection pressure, reservoir quality, rock core analysis, and expected movement of the CO2 plume. These test results show this location is a very good target for carbon sequestration. The design of the compressor facility is complete, the contract to build the compressor part of the facility has been signed, and long lead time equipment has been ordered. The pipeline hazard material identification number has been received, and the Class VI permit for three injection wells with the capacity to store 90 million tons of carbon has been completed and submitted. Work on the pipeline FEED studies is expected to be finished by early April 2020. All major lead equipment orders for the compressor facility have been engineered and sized, and the contract to build the facility has been signed. We are currently working on a front-end engineering design study for a short pipeline to deliver carbon from our carbon sequestration facility. We expect a prebuilt modular plant will be delivered by the end of December 2023, and then the building will be structured around the modular plant. Once again, this is a highly technical, very early-stage, and time-consuming project. It has required considerable time to make progress. We cannot predict we will be successful, but we are pleased to report that what we started four years ago has now achieved some significant milestones. As I also mentioned in our previous call, we are evaluating several other projects that will increase production efficiency, improve energy efficiency to reduce carbon intensity, as well as reduce water consumption at our plant. We believe we will be able to complete most of these projects soon. Completion of these projects will lead to greater benefits under the Inflation Reduction Act passed by Congress and will contribute to decreased costs of production. As Stuart just mentioned, we decided to increase the ethanol production capacity at One Earth Energy in Gibson City, Illinois, from 150 million gallons to 175 million gallons. The clean fuel production credit Section 45Z, which is related to reduced fuel carbon intensity score, could provide as much as $1 a gallon depending on the carbon intensity of ethanol produced and sold. The Section 45 cash payment for carbon sequestration increased to $85 per metric ton, which we plan to switch to after the expiration of 45Z. This will continue to enhance the strong position of our company. In summary, we are pleased to announce once again a profitable quarter in a very, very difficult environment, as well as good progress in our carbon sequestration project. We plan to increase ethanol production capacity to maximize the benefits of the Inflation Reduction Act, specifically Section 45Z and 45Q once 45Z expires. If we can achieve what we are planning, we will be ready to provide low-carbon ethanol and by-products while reducing carbon in the atmosphere. We could not hit these carbon sequestration milestones or embark on projects to decrease carbon intensity and achieve a tenth consecutive quarter of positive income without the hard work and dedication of our colleagues. We are very appreciative of their efforts to achieve these positive results. I will give the floor back to Stuart for further comments. Thank you, Stuart.

Stuart Rose, Executive Chairman

Thanks, Zafar. In conclusion, we have outperformed most of the industry competitors again. We believe we have the best plants, great locations, and great potential in carbon capture, which we think will be our future. Most importantly, and the biggest difference between us and the rest of the industry, as Zafar mentioned, is our people. We feel we have the best people in the industry, and in the end, that’s what separates us from the competition. A lot of competitors can have hopes and dreams, but if you don’t have good people to implement them, they tend to never happen. We have proven in the past that we have good people and can run very, very good ethanol plants, and we plan and hope to do that in carbon capture, viewing that as our future. I will now leave the call open to questions.

Operator, Operator

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

Jordan Levy, Analyst

Good morning, Stuart, Zafar, and Doug. And nice quarter against another challenging backdrop, I think, that’s worth recognizing for sure. Maybe to start out, you mentioned a plan for expanding One Earth’s capacity. Certainly, it seems like CCUS is moving forward in some initiatives this year. Maybe if you could just give us any commentary you might have around capital plans for 2023 and what we should expect there?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Jordan, as I said, we plan to expand to $175 million. We are in the process of evaluating all the costs and the return on investment. We hope to have all of those disclosed at the June quarterly call or at the shareholders meeting—what exactly the total cash will take for the ethanol facility expansion and the carbon sequestration, and we will have those numbers at that time.

Jordan Levy, Analyst

And presumably, would the expansion be throughout the course of this year?

Zafar Rizvi, CEO

Yes, exactly. I think we have already had major evaluations done. We are putting the financial models together and looking at all of that information to see the return on investment. With the expansion from 150 million to 175 million, that’s about $25 million more in ethanol production. If we look at the benefit of 45Z or if we can achieve those carbon intensity targets, which we are working on with carbon sequestration, all these projects are projected to benefit us moving forward. We are evaluating all that return on investment and preparing the packet, and hopefully we will have it by the June meeting. We might be looking at spending $275 million, but we want to ensure we do not create a deficit of corn in that area.

Jordan Levy, Analyst

Thank you for your comments and updates on carbon capture. To take a step back and consider the overall picture, could you outline where you anticipate being at the end of 2023? What projects do you expect to have completed, and what will you be focusing on at that time as you move into 2024?

Zafar Rizvi, CEO

I think most of our items, as I mentioned, we have ordered all the long lead items; some of the equipment takes as long as a year and a half to come in. So we have taken care of all those orders. The modular unit for the compressor facility will be delivered by the end of this year, and then we will have construction start around that modular unit because that will also take about six to seven months or longer to complete, due to all the piping and electrical connections needed. Our goal is to finish this project by the end of 2024. Certainly, that’s our goal, but there could be uncertainties that might delay the project, but that’s what we are aiming for.

Stuart Rose, Executive Chairman

Jordan, one other thing you should know: A lot of companies are announcing CO2 projects in the ethanol industry, but they are tapping into pipelines and are not gaining the bulk of the economic benefits. The economic benefits could be significant for the years 2026, 2027, and 2028—up to $0.5 a gallon. We expect to have a 175 million gallon plant. So whatever we receive, we will receive fully, whereas most competitors are dependent on third-party pipeline companies. We are doing our own CO2 capture and we are ensuring that all profits come to our shareholders. We are a small company with 18 million shares, and we believe this could be very significant for us.

Zafar Rizvi, CEO

Exactly. Yes. That’s the major difference between us and others. As Stuart mentioned, we were really proactive about this four years ago when there was no 45Z program in place. 45Q was $50, and now it’s $85. So all these benefits are starting to materialize.

Jordan Levy, Analyst

I think that’s great commentary. I really appreciate it. I will leave it at that. Thanks.

Stuart Rose, Executive Chairman

Thanks, Jordan.

Operator, Operator

Our next question comes from Chris Sakai with Singular Research. Please proceed.

Chris Sakai, Analyst

Hi. Good morning. Can you talk about where you see the countries of largest export for 2023?

Stuart Rose, Executive Chairman

Good morning.

Zafar Rizvi, CEO

The biggest ethanol imports currently include Canada with 502 million gallons, South Korea with 156 million, and the Netherlands with 99 million. The total export for 2020 was 1.3 billion gallons, which was 9% higher than 2021's 1.2 billion.

Chris Sakai, Analyst

Thanks. Are you seeing any increased costs in your rail due to all the recent train derailments?

Zafar Rizvi, CEO

Not really. I think the railroad always increases their rates, as they basically have a monopoly on that track. So they always tend to raise their rates, and we haven't seen any recent changes due to recent derailments.

Chris Sakai, Analyst

Okay. Thanks. Can you talk about the permitting process so far for the CCS?

Zafar Rizvi, CEO

I'm sorry. Could you repeat your question, please?

Chris Sakai, Analyst

How is the permitting process going?

Zafar Rizvi, CEO

The permitting process: we have submitted the permit, which includes all the requested documents. Since that time, they've had a couple of questions, which we answered. They confirmed that they received all documents and it is currently under review. From here, we cannot control the timeline; it depends on the government agency and how long they will take. However, we expect that we should receive the permit sooner than others because we previously drilled our test well in this area and have received permits for that in the past. We hope to receive it soon, but now the timeline rests in the hands of the agency.

Chris Sakai, Analyst

Okay. Great. Thanks for your answers.

Zafar Rizvi, CEO

Thank you.

Operator, Operator

Our next question comes from Graham Price with Raymond James. Please proceed.

Graham Price, Analyst

Hi. Thanks for taking the questions. First off, I was just wondering about your thoughts around the M&A landscape as it relates to producing assets. How are valuations looking versus a year or two ago?

Stuart Rose, Executive Chairman

We haven’t seen anything that’s up for sale, to be honest. I can’t tell you how valuations are, but I would assume they are significantly higher than a year or two ago. For no other reason, everyone has some type of carbon cap—every public company needs to have some type of carbon capture plans, and they believe their companies are worth more. Our position is that the pipeline companies they are reliant on will either be significantly delayed or will not contribute to the bottom line at the levels some companies might expect. In the meantime, they are valuing their companies more than they did a year or two ago because of recent legislation that could offer significant profits through carbon capture initiatives.

Graham Price, Analyst

Okay. Got it. Understood. And then, for my follow-up, I had a more macro policy question. The EPA recently proposed allowing year-round E15 blending in the Midwest. Just wondering, do you think this will happen, and does that plan go far enough in your opinion?

Stuart Rose, Executive Chairman

Zafar, do you want to answer?

Zafar Rizvi, CEO

Yeah. It’s hard to say. Different states are trying to implement this. Iowa and several other states are trying to have all year-round exemptions from the EPA. I hope it allows for all year-round E15 in the Midwest because if it doesn’t, it discourages gas stations from selling it for only part of the year, leading to inefficiencies. But we cannot predict what Congress or the EPA will ultimately decide. There is already legislation trying to be introduced in Congress to allow year-round sales, and hopefully that happens.

Graham Price, Analyst

Got it. That’s clear. Thank you very much. I will pass it on.

Stuart Rose, Executive Chairman

Thank you.

Operator, Operator

Mr. Rose, there are no further questions at this time.

Stuart Rose, Executive Chairman

Okay. Well, we thank everyone for listening, and we look forward to talking after the end of this quarter and speaking to everyone again after the end of this quarter. Thank you. 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. Have a great day, everyone.