Earnings Call Transcript - REX Q1 2024

Operator, Operator

Good morning, and welcome to the REX American Resources Fiscal First Quarter 2024 Conference Call. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Doug Bruggeman, Chief Financial Officer of REX American. Please go ahead.

Douglas Bruggeman, CFO

Good morning, and thank you for joining REX American Resources Q1 2024 Conference Call. We'll get to our presentation and comments momentarily as well as your questions. 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. 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'd now like to turn the call over to our Executive Chairman, Stuart Rose.

Stuart Rose, Executive Chairman

Good morning, and thank you again to everyone for joining us. First quarter saw a continuation of the strong results of REX American over its history. Once again, our core business of ethanol and co-product production was strong, with 74.5 million gallons of ethanol sold, an increase of approximately 4% over the first quarter of 2023. Construction of the One Earth Energy carbon capture facility continues to pace at our Gibson City, Illinois location. We're also on track to complete the ethanol production capacity expansion at the One Earth Energy facility with the initial plan to run at 175 million gallons per year and then apply for an EPA permit to increase production to 200 million gallons per year. To match our operational achievements, our financial results were among the best in our history, with first quarter 2024 being the second most profitable first quarter in the company's history from a net income per share perspective. This was made possible due to lower natural gas and corn input prices and the excellent execution of our team despite a weaker pricing environment for both ethanol and co-products. For the balance of the year, we have three goals: First, continue our streak of profitable operations, which has now reached 15 quarters in a row; second, complete the construction phase of our One Earth Energy carbon capture and compression facility; and lastly, to complete the capacity expansion of our One Earth Energy ethanol production facility to 175 million gallons per year and move towards the planned further permitting of the facility to 200 million gallons. Focusing on these three core priorities while remaining nimble and adjusting as appropriate to market and business conditions will keep us in a good position, both now and in the future. I'd now like to turn things over to our CEO, Zafar Rizvi, to provide a further update on our One Earth project.

Zafar Rizvi, CEO

Thank you, Stuart. As Stuart said, our carbon capture and sequestration project in Gibson City, Illinois, is progressing. With the construction of the capture and compression facility still on track, you can see updated pictures of the progress at this facility in the first quarter investor presentation, which was posted to our website this morning. We continue to expect that construction on the carbon capture and compression facility will be completed in July. At that point, the facility will be ready for testing. However, given extended calendars for electric utility connections across the country, which also impacts Central Illinois, we have been made aware that power connection to the facility is not likely until the fourth quarter of 2024 at the earliest. We will provide updates on this as appropriate. At the same time, we are seeing activity on the approval and permitting front for the pipeline and sequestration portion of the project. We plan to reply by weeks to several questions we received in April from the EPA regarding our Class 6 well permit application, and we continue to anticipate approval of the permit by Q1 of next year. We have lately been encouraged by the progress of the EPA on other Class 6 well applications. For the first sequestration well, we are also pleased to report that we have now squared the easement for enough of the subsurface area to allow us the capacity to sequester all of our carbon emissions from the One Earth Energy plant for at least the next 15 years. Additionally, regarding the agreement we discussed on our last call, we have now secured from our farmer neighbors 100% of the land necessary for the proposed carbon delivery pipeline, which would serve injection well #1 and #2. This is an incredible significant achievement as it means we are able to avoid the use of eminent domain for control of the pipeline road. This was always our preferred outcome and one which we are happy to have achieved through discussion with our neighbors. The expansion of our One Earth Energy ethanol facility to 175 million gallons per year of production is progressing well. Construction is ongoing, and we anticipate completion of the initial expansion in the fourth quarter. After necessary testing and permitting, we then expect to begin the further permitting of the facility to allow it to produce 200 million gallons per year. This additional permitting is the only step necessary to allow for the expanded capacity as no additional construction or capital spending is expected. As of quarter end, we have invested approximately $78.1 million into the One Earth carbon capture project and associated ethanol production capacity expansion, compared to a total budget amount of $165 million to $175 million for both the CCS project and ethanol production expansion at Gibson City. I will now like to hand the call to our CFO, Doug Bruggeman, to discuss our operational and financial results.

Douglas Bruggeman, CFO

Thanks, Zafar. I'll begin with our operational results. REX ethanol sales volume during the first quarter of 2024 were 74.5 million gallons, an increase of approximately 4% over the first quarter 2023 sales volumes of 71.5 million gallons. Average selling price for our consolidated ethanol volumes was approximately $1.60 per gallon for the first quarter. Dry Distillers Grain sales volume during the first quarter of 2024 totaled 163,500 tons, a slight increase over first quarter 2023 volumes. Average selling price for DDG was approximately $187.64 per ton for the first quarter. Modified Distillers Grain sales volumes were 14,500 tons in the first quarter of 2024 compared with approximately 12,000 tons in the first quarter of 2023. Average selling price for Modified Distillers Grain was approximately $82.52 per ton for the first quarter. Corn oil sales volume in the first quarter of 2024 were approximately 21 million pounds compared to 20.6 million pounds sold in the first quarter 2023. The average selling price for REX's corn oil product was approximately $0.47 per pound for the first quarter of 2024. Looking forward to the second quarter, it is important to note that we expect impacts to both maintenance expense as well as our sales of our products given regular planned maintenance at our consolidated NuGen and One Earth facilities. Gross profit for the first quarter of 2024 was $14.5 million versus gross profit of approximately $10.2 million for the first quarter of 2023. The 42% increase in gross profit was achieved despite lower average selling prices for all our products, which were offset by lower corn and natural gas input prices. Our selling, general and administrative expenses increased to $6.1 million for the first quarter of 2024 versus $5.8 million in the first quarter of 2023. The increase was primarily due to higher incentive compensation related to the company's improved performance. Interest and other income totaled $5.9 million in the first quarter of 2024 compared with approximately $2.8 million for the first quarter of 2023. This reflects better earnings on our cash and short-term investments and $1.2 million of patronage income at our NuGen facility. Income before taxes and noncontrolling interest for the first quarter of 2024 was approximately $16 million, an increase of more than 83% over the first quarter of 2023. As Stuart mentioned at the beginning of the call, first quarter 2024 was the second best first quarter from a net income perspective in our company's history. Net income attributable to REX shareholders for the first quarter was $10.2 million compared to $5.2 million in the first quarter of 2023. On a per share diluted basis for the first quarter of 2024, this amounts to $0.58 per share of net income compared to $0.30 per share in the first quarter of 2023. We ended the first quarter with total cash, cash equivalents, and short-term investments of $351.8 million compared with $378.7 million as of January 31, 2024. The usage of cash during the first quarter was primarily related to our ongoing construction projects at the One Earth Energy facility. REX American also ended the quarter without any bank debt. I'd now like to turn things back to Zafar.

Zafar Rizvi, CEO

Thanks, Doug. I would now like to give some color around how we see the market progressing through the second quarter and the remainder of the calendar 2024. Looking at the ethanol and co-product market, we saw a decline in the cash spread as well as product pricing in the first quarter as compared to the third and fourth quarter of last year, which is a normal occurrence. Again, we were able to achieve positive results despite less than ideal conditions because of our incredible team. In the second quarter, we have begun to see a pricing recovery; however, not to previous levels. For the second quarter, we continue to see positive margins and earnings. Though as Doug mentioned, we will see effects of planned plant maintenance during the second quarter of the year. This will impact production and increase associated expenses for the NuGen and One Earth Energy plants. Finally, I want to point out that last week, we posted our second ESG report to our website, highlighting the work we are already doing in reducing our environmental impacts. I would encourage everyone listening to take a look. Now I would like to open things up to questions. Operator?

Operator, Operator

Our first question comes from Jordan Levy with Truist Securities.

Henry Roberts, Analyst

It's Henry on for Jordan here. Congrats on the quarter. I think just to start with a quick follow-up on the timeline for the EPA well approval. So you guys are now kind of in the cumulative portion of the tech review based on the latest data from the EPA. When that phase is completed, should we be thinking about a 6- to 7-month runway to get through the remaining phases and get the final approval in the first quarter?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Yes. Jordan, as we mentioned, we received recently approximately 25 to 26 questions from the EPA, which are due by this Friday. So we plan to answer those questions by this Friday. Those were basically technical review questions related to the software and other questions on how to operate, because EPA apparently was not very familiar with that software. We will be submitting this by this Friday. And after that, the technical review will continue. We expect that not later than the first quarter of 2025, and it could be earlier, depending on how the technical review proceeds. So we're expecting that the latest will be the first quarter of 2025.

Stuart Rose, Executive Chairman

To answer your question also a little bit further, we still would need to work on pipeline approval and local permits, but there's a number of different local permits that we need to receive before we're in operation. So at this time, I don't think we can give you an exact date. Just because the EPA gives us approval, that doesn't mean we have the other approvals. And at this time, I don't think we're in a position to give you the exact date of when we expect to open. We expect our plant to be finished at the plant level and to be able to capture our CO2 gas as soon as the power is running, which should be by the end of the year. But in terms of putting it in the ground, I don't think we're ready to give you a date at this time.

Henry Roberts, Analyst

Got it. Makes sense. And then just a quick follow-up for me. Going back to the One Earth facility, the expansion plan for it to come online at the end of the year to 175 million gallons. Can you just provide any color on the timeline for the permit submission to 200? How long do you expect that to take once the permit is submitted?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Yes. The process essentially works as follows: we currently hold a permit for 175 million gallons of production. However, since our production facility is working on increasing output from 150 million to 175 million, we will need to conduct some stack testing related to greenhouse gases once the facility is finished. After we complete the testing and meet the necessary qualifications, we will be able to apply for a permit for 200 million gallons from the EPA. This is a step-by-step process, as I have discussed in previous calls, and we are adhering to that approach. The facility will be capable of producing 200 million gallons, but once we finish the 175 million-gallon phase, we will simply need to apply for the 200 million-gallon permit.

Operator, Operator

Our next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov, Analyst

Whenever you get the EPA approval, recognizing the timetable is uncertain, do you have a sense of how long it will take before injection gets to the kind of run rate nameplate capacity, so to speak, that you're anticipating?

Stuart Rose, Executive Chairman

Zafar.

Zafar Rizvi, CEO

The process basically works as we have ordered all the necessary equipment and other essentials for the well. These will be available once we receive approval from the EPA. It typically takes around 2 to 3 months to begin drilling the well and then to complete it to a depth of 7,000 feet. Overall, this process may take approximately 3 to 4 months after that point. Additionally, we also need approvals for pipelines, which could cause further delays. Therefore, there are no guarantees at this time. However, if we receive all our approvals, the timeline I mentioned is accurate.

Pavel Molchanov, Analyst

Right. And in the meantime, while you're waiting on the regulatory roadmap, what is the status of your dialogue with prospective CO2 injectors for the plant, in other words, other than your own facility?

Zafar Rizvi, CEO

The honest answer is that we are really trying to laser focus on what exactly is happening at our facility because that's the most important project we have. Once we are in production, then certainly we can think about where other emitters are available in that area. We have been having conversations with the University of Illinois about various units, but that's a long way to go yet. Our main focus is the completion of our facility at this time.

Pavel Molchanov, Analyst

Maybe I'll just squeeze in a question on the ethanol side of the business. We keep seeing EPA headlines about year-round E15. It seems like it's been going on forever now. What are your latest thoughts on that?

Zafar Rizvi, CEO

I think we have seen some improvement in demand. There's a lot of conversations going on, but at the same time, we have not really seen tremendous improvements in demand at this time. This is also the driving season, so we will see what happens in the next couple of months.

Stuart Rose, Executive Chairman

Also keep in mind, just because there is E15 approved, that doesn't mean there are E15 pumps. That is still a big issue that the pumps are not out there even if it was approved for year-round sales.

Operator, Operator

Our next question comes from B.J. Cook with Singular Research.

B.J. Cook, Analyst

This is B.J. Cook in for Chris Sakai. Just a couple of questions. One builds on the last caller's point. There will be a point where the expansion and One Earth project is complete and up and running. How do you expect that to affect the industry capacity in total? Is there the demand to absorb the additional capacity?

Zafar Rizvi, CEO

I think while production is planned to be up to 200 million gallons, all these plants are in different locations and have different supply sizes. For One Earth Energy, mostly our plant's supply is directed South or East. It probably depends on which railroads the plants are located on, but I don't really know how much that will affect overall supply of the ethanol facilities.

B.J. Cook, Analyst

Okay. I appreciate that. Just one more. Great quarter with unconsolidated affiliates as well. I just wanted to make sure, are similar factors affecting those investments too? Or are there some unique factors at play there?

Zafar Rizvi, CEO

I'm sorry, I didn't understand your question. Will you please repeat that?

B.J. Cook, Analyst

Okay. Other income?

Zafar Rizvi, CEO

Oh, interest and other income?

Douglas Bruggeman, CFO

Yes, we have increased interest rates on our cash and cash equivalents. Additionally, we experienced a rare occurrence of $1.2 million in patronage income at NuGen. This is not a recurring event and should not be relied upon in the future.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Rose for any final comments.

Stuart Rose, Executive Chairman

Again, we outperformed most of our public peers last quarter, and we did it with what we consider great plants, great locations, but most importantly, we feel we have the best people in the industry, and that's what separates us. Hopefully, we'll continue to do this, and we look forward to talking to everyone next quarter. Thank you very much. Bye.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.