Earnings Call Transcript - REX Q4 2021

Operator, Operator

Greetings, and welcome to the REX American Resources Fiscal 2021 Fourth 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.

Douglas Bruggeman, CFO

Good morning, and thank you for joining REX American Resources fiscal 2021 fourth quarter conference call. We'll get to our presentation and comments momentarily as well as your question-and-answer session. 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. I have joining me on the call today, Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer. I'll review our financial performance and then turn the call over to Stuart for his comments. Sales for the fourth quarter increased by 68% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 69.9 million gallons this year versus 67.7 million last year. We reported gross profit of $38.7 million from continuing operations versus a gross profit of $8.3 million in the prior year. For the current year quarter, improved selling prices were offset somewhat by higher corn and natural gas pricing. Ethanol pricing improved by 74%, dried distiller grain improved by 19% and corn oil pricing improved by 122% for this year's quarter over the prior year fourth quarter. Corn cost increased by 44% and natural gas pricing increased by 80% for this year's quarter. SG&A increased for the fourth quarter to $6 million from $4.2 million in the prior year. This primarily represents increased incentive compensation based on higher earnings in the current year. We had income of $3.9 million from our unconsolidated equity investment in this year's fourth quarter versus income of $332,000 in the prior year, again, representing strong fourth quarter industry fundamentals. Interest and other income decreased to approximately $13,000 versus $415,000 in the prior year, primarily reflecting lower interest rates. We expect to begin to see some improvement in this area in the current year as rates increase on short-term investments. As mentioned last quarter, the refined coal operation is now classified as discontinued operations, and its results and historical results are now reflected on one line on the income statement including the tax benefits from this business. We reported $159,000 of net income reportable to REX shareholders from discontinued operations in the fourth quarter as we ended operations on November 18, 2021. We reported a tax provision from continuing operations of $10.7 million for the fourth quarter of this year versus a benefit of $102,000 in the prior year. Tax provisions and rates will be impacted from time to time based on levels of income, permanent tax items and uncertain tax position adjustments. These factors led to net income attributable to REX shareholders from continuing operations of $21.3 million for this year's fourth quarter versus $3.3 million in the prior year. Our net income per share from continuing operations attributable to REX shareholders was $3.58 for this year's fourth quarter versus $0.56 in the prior year. Total net income per share attributable to REX shareholders was $3.61 for this year's fourth quarter versus $0.59 in the prior year. Stuart, I'll now turn the call over to you.

Stuart Rose, Executive Chairman

Thank you, Doug. We had a very good fiscal 2021, but now business has become a little bit, I'd say, much tougher. We're projecting for this quarter possible losses tied to higher corn and gas prices and ethanol prices not rising as fast coming into our crush margins. Corn could be an issue for the rest of the year, especially relating to Ukraine along with normal seasonal issues. RINs could be an issue next year. It will be up to the EPA to decide what that RIN level is. It won't be legislative anymore. So a lot will depend on what happens with the EPA chief. And that could affect this year's RINs. Sometimes they allow the current year RINs to be spread out. Another issue that we're having is logistical issues, inflation, and labor shortages could be issues. So we have a number of things that we are worried about. On the positive side, our product is American-made. We need more U.S. fuel as the rest of the world does not seem to be willing to help us as much as we would like in that area. And we are a greener fuel and oil, and it can be used up to 15%. So we're hopeful our blending rate could go up. We are hopeful our blending rate would go up to 15%, and that, of course, would increase demand. We now have over $250 million on a consolidated basis in cash. In terms of uses of cash, we will be talking to you. So far we've been talking to you about carbon capture. We'll also talk to you more about our ethanol plants and what we expect to happen there. We are also looking for other successful ethanol plants. We have not found anything in our price range at this time. There are ancillary businesses in ethanol like high protein and a number of different techniques to make that high protein. No one to date has shown great earnings. So we're waiting to see who's the most successful before we decide on entering that business. But again, other people are looking at it. We also are looking at other industries that might fit our skills, especially commodity-driven industries where we might be able to potentially turn them greener. We continue to buy back our stock on dips. Last year, we bought some at the significant dip. We have the cash available to buy more. We have exited the refined coal business, but we still carry forward a large amount of tax credits, which can be used to lower our taxes paid and increase our cash flow. I'll now turn the call over to Zafar who will talk more about the ethanol business and the carbon capture business. Zafar?

Zafar Rizvi, CEO

Thank you, Stuart. Good morning. As I mentioned in our previous quarterly calls, the operating environment in the fourth quarter improved, and we are very pleased with the results of the fourth quarter and the fiscal year. Since last month, as Stuart mentioned, it has become very challenging due to several reasons, including an increase in ethanol production and stock, challenging logistic problems, and an increase in the price of corn greater than the ethanol price, which are negatively affecting the crush margin. As a result, the first quarter of 2022 may not be profitable. If this trend continues into the second quarter or possibly longer, it could adversely affect production and net income. We also plan to shut down for regular maintenance and safety checkups during the month of April. We are also evaluating several other projects, which could help to increase production, efficiency, energy savings as well as reduced water consumption and further enhanced safety. Some of these projects are capital-intensive and require much analysis before any can be implemented. All of these projects are in a very early stage and may not materialize. Let me share the progress of our carbon sequestration project. As I mentioned in several previous calls, we are working with the University of Illinois in drilling a carbon sequestration well. The first well at One Earth Energy was successfully drilled to a depth of around 7,100 feet, in which almost 2,000 feet of Mount Simon stone was encountered. The geological model has been established and is being used as a basis for simulation to predict the movement of the CO2 injection into the subsurface. Additionally, we will be performing additional testing at the well itself over the next several months. These simulation models will help to make progress on the completion of the Class 6 permit application, which we have started. The completion of the application process will continue as we begin to receive more information from simulation models to predict the behavior of the CO2 when it is injected. These simulations are currently at a very primary stage, and a lot more work is required, but the data show that all the CO2 produced by the One Earth Energy facility can be injected and stored at the potential site. We will continue to evaluate further as we make progress. This is a highly technical and time-consuming project, and it will take time to make material progress. The 3-D seismic testing was completed in the middle of February, almost 16,000 nodes were placed at different points, and 160 million points of data have been collected and are being analyzed. Our FEED study of the capture of CO2 and the design of the facility is complete; the bidding process will start after the completion of engineering. As I have mentioned in previous calls, this project is still at a very primary stage. It requires a lot of time-consuming modeling and analysis. We cannot yet predict the result of the simulation models and whether we will be successful or not. In summary, as Stuart mentioned, we are very pleased to announce once again a profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues on achieving these results. I'll give the floor back to Stuart Rose for additional comments. Stuart?

Stuart Rose, Executive Chairman

Thank you, Zafar. In conclusion, we had a great 2021, but we are very cautious about 2022. However, we believe and continue to believe we have great plants, great locations, and most importantly, great people. We believe that with this combination, as we have done in the past, we'll continue to greatly outperform the bulk of our competitors well into the future. I'll now leave the floor open for questions.

Operator, Operator

We have a question from Bertrand Donnes with Truist.

Bertrand Donnes, Analyst

On the carbon capture topic. Right now, obviously, the focus is on the test wells and the reservoir modeling. Are there anything you might consider working on simultaneously like initial infrastructure planning or maybe talking about third parties that might accelerate the timeline if the tests are successful?

Zafar Rizvi, CEO

We are collaborating with several individuals for the project. As I mentioned earlier, the facility's design has been completed, and the engineering work is currently underway. Once the engineering is finished, we can begin the bidding process. However, it is important to ensure that the well is completed first. We are in the process of applying for the Class 6 permit, which involves extensive modeling, simulations, and other necessary elements. Without this data, we cannot finalize the permit. Therefore, while we are working on completing that permit, we are also advancing the facilities. Our team is engaged with multiple partners to accelerate the project, but there are times when we can only proceed further once we gather more data.

Bertrand Donnes, Analyst

That makes total sense. And then maybe jumping topics. In the prepared remarks, I think you mentioned that you're not seeing anything in your price range for ethanol facilities. But could you just talk about what you're seeing in the M&A market, given the volatility in crush spreads? Are sellers pulling away? Or is the bid-ask just too wide?

Stuart Rose, Executive Chairman

I haven't seen any plans for sale this year that weren't for sale previously. During the fourth quarter, I think prices probably went up significantly because the really good plants had a very strong fourth quarter. But I'm not seeing those prices. Honestly, I haven't seen anything come on the market since last year. We did make a run at plants last year and got very close, but we did not get them. So maybe something will come this year. But as of now, I have not seen anything that would fit what we're looking for in our price range.

Operator, Operator

If there are no further questions, we'll move on. If not...

Stuart Rose, Executive Chairman

I'm sorry, sir, we do have a few more questions.

Operator, Operator

Our next question comes from Chris Sakai with Singular Research.

Chris Sakai, Analyst

Yes. Just I had a question on if you're experiencing weather-related issues in this quarter and recently?

Zafar Rizvi, CEO

I think the main issue is related to logistics, specifically the performance of the railroad. As you probably heard, even Canadian Pacific has had a strike, which is affecting operations. Previously, there was also a shortage of labor for the railroad companies, and they cannot find drivers to manage operations. Sometimes the drivers bring in the rail cars and then the next person who is supposed to take over does not show up. So that's mainly related to that. Yes. But I think weather has some effect, but it's not the major effect. The major effect is continuously about the railroad performance.

Chris Sakai, Analyst

Okay. And you mentioned a tight labor market. I just wanted to get an idea about what you're seeing at REX, and are you having to increase wages because of that?

Zafar Rizvi, CEO

I think our company, we always offer very competitive wages, and we always take care of our employees. We also have bonus systems and other mechanisms to provide incentives. As we make money, they certainly make more money too. I can assure you, none of our staff receives minimum pay or similar numbers. We have very competitive wages and always review salaries and other things annually to ensure they are above market value.

Operator, Operator

Our next question comes from Jarrod Edelen with South Dakota Investment Office.

Jarrod Edelen, Analyst

I have a couple of questions. The first is about the crush margin, which has decreased as corn prices have risen. However, it seems that the byproducts you sell, such as corn oil and distillers grains, are performing well price-wise. Could you discuss the impact these byproducts have on your margins? Are they making the overall situation look good or at least satisfactory right now?

Zafar Rizvi, CEO

Let me say that, certainly, there has been an increase in DDG value, which was previously close to 90% to 95% of the corn value. Recently, it has been close to 100% to 106% of the corn value. We have seen ethanol prices increase as Doug mentioned in his prepared remarks. Currently, today's corn is trading at $7.63, while ethanol is trading close to $2.48. So, you can see how much there is not enough crush margins. The other concern we certainly have is the situation surrounding Ukraine, which produces close to 1.6 billion bushels a year. They export about 1 billion bushels, and we are concerned that if the export completely stops from Ukraine then the world will likely look to the U.S. for supply and that could lead to a shortage of corn. Our monthly usage for the U.S. is 1,000,245,000 bushels a year. We're expecting our ending stock to be close to 1,000,044,000. If we take out 300,000 to 400,000 million exported, our stock will continuously drop, and it may not meet the usage, which is approximately 1.2 billion bushels a month. These are some concerns, hence the market's reaction. Even though there is an inverse in the future, there is a fear of a shortage of corn if the situation in Ukraine does not improve.

Jarrod Edelen, Analyst

Great. And secondly, it appears the global refined products market has tightened significantly in the last month. Can you just touch on any opportunities you guys have had to capture better margins exporting ethanol?

Zafar Rizvi, CEO

If you look at the export numbers, last year, exports dropped. Compared to last year, exports were 1.2 billion compared to the year before at approximately 1.3 billion. January's export was 123 million, compared to the previous year's 165 million for January. We have seen recently that Brazil has lifted their tariff, which was at 18%. If that goes away, then maybe we'll see more export activities.

Operator, Operator

Our next question comes from Infusion Partners.

Stuart Rose, Executive Chairman

Operator, move on.

Operator, Operator

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

Stuart Rose, Executive Chairman

Okay. Anyway, we'd like to thank everyone for listening today. I appreciate it very much, and we look forward to reporting next quarter. Thank you again for listening to the call. Goodbye, everyone.

Zafar Rizvi, CEO

Thank you. Goodbye.

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.