Earnings Call Transcript - REX Q2 2024

Operator, Operator

Good morning, and welcome to the REX American Resources Second Quarter 2024 Conference Call. As a reminder, today's call is being recorded. And at this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 Q2 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 in the company's filing 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. During the second quarter, REX American Resources made excellent progress in the three goals for the remainder of the year that I laid out in our last call. As a reminder, these were to continue profitable operations, to complete the construction phase of our One Earth carbon capture and compression facility, and to complete the capacity expansion of our One Earth Energy ethanol production facility to 175 million gallons per year and move toward the planned further permitting of the facility to 200 million gallons. To the first goal, we were entirely successful. REX had very profitable operations relative to the prior year's comparable quarter. Our team produced strong gross margin in the second quarter, improved by 37% over the first quarter and by nearly 8% over second quarter 2023. Net income per share also improved more than 20% over the first quarter of 2024 and more than 35% over second quarter 2023. While we have our eyes on the future, we continue to emphasize our core business of ethanol production, which has allowed us to accomplish three goals, as well as produce consistent industry-leading results for our shareholders. The success of this core business has allowed us to grow without burdening the company with any debt. Our team executes at a high level every day, and I want to say thank you to them for their efforts this quarter. On the second goal, to complete construction, the capture and compression portion of our One Earth Energy CCS project in Gibson City, Illinois, we continue to make progress. Zafar will discuss this project in detail later in the call. Our third goal, to complete construction of the One Earth ethanol production capacity expansion to 175 million gallons per year to prepare for further permitting production levels of 200 million gallons per year is on track for the first quarter of 2025. This expansion will further improve our ability to realize strong returns. We are very excited about the expansion and what it means for our business. We are making progress on all of our goals and in preparing REX American to have success both now and over the long term. I'd now like to turn things over to our CEO, Zafar Rizvi, to give further updates on our One Earth Energy CCS and ethanol production capacity expansion projects.

Zafar Rizvi, CEO

Thanks, Stuart. Our carbon capture and sequestration project in Gibson City, Illinois continues to progress. You can see an updated picture of the carbon capture and compression portion of the facility in our second quarter investor presentation, which was posted to our website this morning. Due to regulatory action by the state of Illinois, which imposed a moratorium on the construction of CO2 pipelines in July, we have adjusted our construction schedule for the initial portion of the project. We believe this is the most prudent path from both operational and financial prospects. Operationally, completing the capture and compression facility later in the year will mean a shorter period between completion of the construction and testing of the portion of the facility, which will require utility interconnection that is planned to be completed by the end of the first quarter of 2025. From a budgetary perspective, taking a more measured approach to construction allows us to more closely monitor our spending without incurring potential extra costs to meet the accelerated deadline. Given the new permitting reality, we are confident that pursuing the several ongoing portions of this project in this way is the right path. While pipeline permitting in Illinois is being worked out, our Class VI injection well permit application with U.S. EPA is still in process. And we anticipate a draft permit being issued by the end of 2024. On the timeline currently estimated by the EPA itself, we would then anticipate final approval of the project in the second quarter of 2025. As a reminder, as of last quarter, REX had secured easements for enough subsurface area to allow us the capacity to sequester all of our carbon emissions from the One Earth Energy plant for the next 15 years, and also secured easements from our neighboring farmers for well number one and two, which will allow us to completely avoid the use of eminent domain in eventual construction of our carbon delivery pipeline. The expansion of our One Earth Energy ethanol facility to 175 million gallons per year of production is on track for completion in the first quarter of 2025. Final testing and commissioning depend on the completion of the electric interconnection from our local utility. After necessary emission certification from the increased production levels, we then expect to begin the planned further permitting of the One Earth ethanol 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 to 200 million gallons as no additional construction or capital spending is expected. This expansion and eventual 50 million gallons per year increase in production capacity added onto our current highly efficient and profitable facility we expect will enable us to expand our already standout profitability in our core ethanol business line. As of quarter-end, we have invested approximately $91 million into the One Earth carbon capture project and associated ethanol production capacity expansion. Spending for the carbon capture and sequestration project stood at $49.1 million as of the second quarter's end, while expenditure on the ethanol expansion stood at $41.7 million as of the same date. This is compared to a total combined budget amount of $165 million to $175 million for both the CCS project and ethanol production expansion at Gibson City. I would now like to hand the call to our CFO, Doug Bruggeman, to discuss our operational and financial results. Doug?

Douglas Bruggeman, CFO

Thanks, Zafar. I'll begin with our operational results. REX ethanol sales volume during the second quarter of 2024 was 65.1 million gallons, a reduction of approximately 6% versus second quarter 2023 sales volume of 69.1 million gallons. Average selling price for our consolidated ethanol volumes was $1.79 per gallon for the second quarter, compared to $2.42 per gallon in the second quarter of 2023. Dry distillers grain sales volume during the second quarter of 2024 totaled 132,850 tons, a 6% decrease over second quarter 2023 volumes. Average selling price for DDGs was $164.45 per ton for the second quarter of 2024, compared to $226.48 per ton in the second quarter of 2023. Modified distiller grain sales volumes were 17,650 tons in the second quarter of 2024, compared with approximately 10,600 tons in the second quarter of 2023. Average selling price for modified distiller grain was $63.61 per ton for the second quarter. The average selling price for the modified distilled grain in the second quarter of 2023 was approximately $103. Corn oil sales volumes in the second quarter of 2024 were approximately 20.2 million pounds compared to 20.7 million pounds sold in the second quarter of 2023. The average selling price for REX's corn oil product was $0.43 per pound for the second quarter of 2024 compared to $0.55 per pound in the second quarter of 2023. Gross profit for the second quarter of 2024 was $19.8 million versus gross profit of approximately $18.4 million for the second quarter of 2023. The 8% increase in gross profit was achieved despite lower average selling prices for all products, which was more than offset by lower corn and natural gas input prices. Our selling, general and administrative expenses decreased to $6.4 million for the second quarter of 2024 versus $8.6 million in the second quarter of 2023. The decrease was primarily due to the expensing of executive stock grants in the prior year, which did not recur this year. Interest and other income totaled $4.4 million in the second quarter of 2024, compared with approximately $3.3 million for the second quarter of 2023. This reflects higher balances and better earnings on our cash and short-term investments. Income before taxes and non-controlling interest for the second quarter of 2024 was approximately $19.5 million, an increase of more than 21% over the second quarter of 2023. Net income attributable to REX shareholders for the second quarter was $12.4 million compared to $9.1 million in the second quarter of 2023. On a per share diluted basis for the second quarter 2024, this amounts to $0.70 per share of net income compared to $0.52 per share in the second quarter of 2023. We ended the second quarter with total cash, cash equivalents and short-term investments of $346 million, compared with $378.7 million as of January 31, 2024. The uses of cash during the first half were 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 the call back to Zafar.

Zafar Rizvi, CEO

Thank you, Doug. I would now like to give some color around how we see market progressing through the remainder of the year. For the third quarter, we are off to a strong start and we expect to see the same corn market drivers that were supportive to this point in the year continue to play out. With this, we expect to see the results of the third quarter exceed those of the second quarter of this year. Additionally, we believe the increase in ethanol per export, which on a volume basis, was 36.5% higher through June than at the same point last year, according to the USDA, has had a positive impact across the industry. As far as corn inputs at the current time, we are looking toward harvest and what is expected to be a bumper crop. For corn in the Midwest, crop conditions near our two consolidated plants are expected to be strong. We are anticipating this robust harvest coupled with the current corn in the farm inventories will lead to continued favorable corn input pricing. Above all, we have focused on profitability over product pricing or production numbers, as evidenced by our improved gross margin performance this quarter, despite lower ethanol pricing and volume sold. It is this focus and the people in our plants who live it every day that continue to make us the successful, profitable company we are. Now I would like to open things up to questions. Operator?

Operator, Operator

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

Jordan Levy, Analyst

Morning all, and thanks for all the updates. I just wanted to talk first on the carbon capture sequestration side of things. You guys did a good job calling out in the press release kind of the various external forces that you have to think through when you're going through this process, but maybe just help us think about in the event and in the time frame that assuming you do get the permit approval that you need, can you just talk to the timeline around the build out of the pipeline and then any remaining necessary equipment at that point?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Yes, the EPA permit is anticipated to be issued in the second quarter of 2025. In the meantime, construction is progressing well. The carbon sequestration facility is expected to be operational by the end of this year, depending on the utility interconnection needed for both the CCS and the ethanol facility. After we complete construction of the One Earth Energy ethanol facility and receive the necessary utility, we will focus on restarting the ethanol operations as soon as possible. One Earth Energy has been consistently profitable over the past 15 years, and we expect that the updated facility will enhance our profitability going forward. We will also continue our construction efforts and aim to obtain various permits, including the ICC permit. Once we have the EPA permit, we plan to begin the construction of the well, likely aiming for an operational timeline around August or September next year, though this is contingent on receiving all required permits. For now, we are waiting on those approvals.

Stuart Rose, Executive Chairman

Jordan, to further answer your question, the biggest delay is in receiving permits. We call it a pipeline, but it's really just a three to four mile connector, the pipe itself. But we have to wait for Illinois to give us a permit on that, which is not easy, but building the pipeline and the whole facility are not nearly as time-consuming as waiting for these permits. I think that was your question; once we get the permits, how long will it take? That will not be nearly as long as waiting for the permits. Zafar gave you a pretty good time schedule of that.

Jordan Levy, Analyst

Yes. Absolutely. I appreciate all those details and certainly you all have done an impressive job of how much you've been able to get done on your own. And now just waiting on the pipelines. And maybe just a clarifying question once you on the...

Stuart Rose, Executive Chairman

The pipeline is not the only factor; we are also waiting on the EPA, which is a significant aspect.

Zafar Rizvi, CEO

Yes. EPA permits - exactly.

Stuart Rose, Executive Chairman

And a lot of local permits too. There's a lot of permits involved there.

Zafar Rizvi, CEO

But I think the main thing which I really wanted to emphasize is that the ethanol facility itself does not need any pipeline. We are in full swing on the construction of the ethanol facilities from 150 million to 175 million and then move toward 200 million gallons facility. That should be completed by the first quarter of 2025 depending on utility providing the electric connections. Once that facility is completed, we will be able to produce ethanol at that kind of rate. And also, as you know, our core business is very important to us and we have produced great results from it. One Earth Energy is the star student of all our facilities, and we hope that will continue to produce that profit as it has for the last 15 years.

Stuart Rose, Executive Chairman

One other thing that Zafar is not mentioning, Jordan, is that we hope the construction to expand our plants will also lower our CI score. While we have not been provided with specific guidance from the federal government on how to measure the CI score, we anticipate that the construction will contribute to lowering it.

Jordan Levy, Analyst

Yes, that's actually a good segue to my follow-up question, which is just going to be Stuart, Zafar, your thoughts going into the election with kind of some of the main guidance items still outstanding for as it relates to CCUS and ethanol. Just wanted to get your high-level thoughts there.

Stuart Rose, Executive Chairman

In my opinion, it's bipartisan. CC, carbon capture was a bipartisan issue. I don't think that one party or the other will affect the current law. What happens if there are some proposals out there to extend certain things and that may be affected by one party or the other. I think it's a good thing the Democrats nominated a Minnesota person for Vice President. He certainly is from a farm state, from an ethanol state and understands the issue. But otherwise, I don't think that it really one party or the other is really taking a firm stand on expanding the CCS tax credit amounts that are out there.

Jordan Levy, Analyst

Absolutely. Thank you all so much, and nice job with the continued strong results.

Stuart Rose, Executive Chairman

Thank you, Jordan.

Operator, Operator

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Pavel Molchanov, Analyst

Thank you for your question. Given the slowdown in carbon capture construction, you will likely accumulate even more cash on your balance sheet in addition to the substantial amount you already possess. What is your plan for allocating the $350 million in cash that you currently have, as well as the additional cash you expect to generate?

Stuart Rose, Executive Chairman

First priority is the carbon capture and expansion of the Gibson City plant. Second priority is possibly looking at expansion of our South Dakota plant. That's a possibility, especially if we can lower our carbon capture score and get some tax credits. That would be a possibility. We're always looking for acquisitions. We've looked at a couple this year. They weren't for us, but you never know what's going to come up. We would consider stuff related to the tax credits and related to energy outside of ethanol, but nothing's come along that we think is better than ethanol. So we stuck to our field. The last thing that we've been really good at over the years, and you never know where the stock market is. We didn't buy shares this quarter. But over the years, we're probably the buyback kings in percentage of shares bought back. We know what we're doing here. We buy on dips, which is important. We don't just buy to lower the share count. We don't buy at the stock highs. We buy low to protect our shareholders when the stock's down. That's been a very successful strategy for us. We still have buyback authorization, but we did not use it in the last quarter.

Pavel Molchanov, Analyst

What's the latest on your thinking about sustainable aviation fuel?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

We believe that for sustainable aviation fuel, we need to produce low carbon fuel. Carbon sequestration will be necessary for that location, but there are currently no clear guidelines for the 45Z tax credit. Once those guidelines are established, we can explore it further. For now, we need to focus on reducing our carbon intensity score in order to qualify for the 45Z tax credit before progressing toward sustainable aviation fuel.

Pavel Molchanov, Analyst

Got it. Thank you very much.

Stuart Rose, Executive Chairman

Thanks, Pavel. Thank you.

Operator, Operator

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

Chris Sakai, Analyst

Hi. I have a question on capital expenditures. How are you doing compared to your budgeted amount for capital expenditures?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

I think we are right on track.

Chris Sakai, Analyst

Are you seeing any possible need to spend more?

Zafar Rizvi, CEO

No, not at this time. But as you know, it depends on inflation factors in the future. But at this time, we do not see any major increase. The main things we have seen is delay in receiving a lot of equipment and components of electric components that is causing some delay in the completion of these facilities. But we are overall right on budget.

Chris Sakai, Analyst

Okay, thanks. And then have you seen any weather-related issues over the last quarter?

Zafar Rizvi, CEO

No, we have not seen any major weather-related issues. There were some issues in the South Dakota area where there was heavy rain and some railroad track washed out for a few days, but not a major problem.

Stuart Rose, Executive Chairman

We are expecting very good crops this year.

Zafar Rizvi, CEO

Correct. Yes, the crops are expected to be very good, not only in Illinois, which is expected to be bumper crops, but the same time, South Dakota is at 73% to excellent to good crops, which is also near-record crops for that area.

Chris Sakai, Analyst

Okay, great. Thanks.

Stuart Rose, Executive Chairman

Thank you, Chris.

Operator, Operator

Thank you. Our next question comes from the line of Jordan Levy with Truist Securities. Please proceed with your question.

Jordan Levy, Analyst

Hi, guys. Just a follow up for me. Zafar, I think you mentioned or Stuart, maybe it was you on Pavel's question, the potential for a NuGen expansion at some point in the future. Maybe just talk to what you need to see whether it relates to Summit or something else there in order to warrant that investment.

Stuart Rose, Executive Chairman

At this time, Summit, the investment would not be because of the Summit pipeline. It may be later, but at this time, South Dakota has, in my opinion, some eminent domain issues. If we were to invest in the next year, it would not. Being in the Summit pipeline will be an advantage, we hope, someday. But we would just do it because it would be more efficient to have a larger plant. If the corn supports it, we would consider it. The biggest issue is always corn, whether a bigger plant would raise the corn prices. We have to be very careful on that. The third thing is, we do not have the 45Z regulations, but if we can lower our CI score below 50, there are some tax credits involved. If we do invest to expand that plant, we will make sure to bring our CI score down at the same time. Again, we don't know the regulations. They've not come out with what defines your CI score. But that would be the bigger goal; to bring it down and maybe get it below 50 without the pipeline. When the pipeline comes in, if it starts capturing our CI too, we would qualify for 45Q or 45Z.

Jordan Levy, Analyst

Thank you, Stuart.

Operator, Operator

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Stuart Rose for closing remarks.

Stuart Rose, Executive Chairman

All right. I'd like to thank everyone for listening again. Corn crops are good right now. As Zafar said, we're running at a rate currently better than the second quarter. Things seem to be moving along with our carbon capture project. We have great plants, great locations, but the biggest thing that we have and the reason we're ahead of most people in carbon capture and doing better than virtually everyone in ethanol is we feel we have the best people in the industry, and that includes our CEO, and it includes the people that work for them all the way down the line. We have very, very good people. And that really separates us. Again, thank you for listening, and we'll talk to everyone next quarter. Bye.

Operator, Operator

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