Earnings Call Transcript - REX Q4 2023

Operator, Operator

Good morning, and welcome to the REX American Resources Fourth Quarter and Full Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. And at this time, all participants are in a 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.

Doug Bruggeman, CFO

Good morning, and thank you for joining REX American Resources' Q4 and full fiscal year 2023 conference call. I have joining me on the call, Stuart Rose, Executive Chairman, and Zafar Rizvi, Chief Executive Officer. We'll 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 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 would now like to turn the call over to Stuart Rose.

Stuart Rose, Executive Chairman

Good morning, and thank you again to everyone for joining us. Fiscal 2023 was a great year for REX American. Our core business of ethanol and co-product production was strong, with 285.9 million gallons of ethanol sold, an increase of more than 7% over 2022. We kicked off construction of the One Earth Energy carbon capture and sequestration project at our Gibson City, Illinois location. We are also on track to complete the first phase of ethanol production capacity expansion at the One Earth Energy facility. On the financial front, 2023 saw the most profitable quarter in the company's history from a net income per share perspective during the third quarter. I'm also proud to announce that both the fourth quarter and full year 2023 were the second most profitable quarter and full year in REX's 39-year history as a public company. This is quite an achievement for our company. Across the board during 2023, the team at REX American consistently looked over the horizon, identified challenges, and proactively drove success throughout the year. I would like to thank everyone in our company for their hard work and dedication to making REX a successful and profitable company that it is. Our operational excellence has been the cornerstone of our success. The team is in the market every day monitoring and optimizing our contract positions to continue producing ethanol and co-products efficiently and profitably. Our commitment to innovation and sustainability has never been stronger, as evidenced by the ongoing construction and permitting process for our carbon capture project, which, if successful, will reduce REX's carbon footprint and produce net income benefits. We expect the One Earth Energy CCS project to add significantly to our financial results once it is approved and operational. This assumes we receive all necessary permits and approvals. As far as additional avenues of growth, we're always looking at facilities that come on the market. Though at present, we do not see opportunities that fit within our standards of quality and which make economic sense to our portfolio. I'm proud of the work we have done and excited about the direction of our company as we look to the next several years. I now turn things over to CEO, Zafar Rizvi, to discuss the One Earth project in greater detail.

Zafar Rizvi, CEO

Thanks, Stuart. Our carbon capture and sequestration project in Gibson City, Illinois, is not only a testament to our commitment to the environment but also to our strategic foresight in positioning the company for profitability well into the future. As we have discussed with you before, the One Earth Energy project, if all approvals are received and the facility is operational, should contribute to REX's bottom line through both 45Z and 45Q tax credits, which we plan to maximize with the related expansion of our Gibson City ethanol production facilities capacity to 200 million gallons per year. We expect these two projects together could add significantly to our bottom line. The addition of CCS to our ethanol facility also opens up other potential business lines, such as production of low-carbon ethanol for use in the alcohol-to-jet process for sustainable aviation fuel products, as well as the potential for us to sequester carbon for other producers in our Class VI injection wells. Both of these are additional business options we are exploring; however, the near-term focus is getting the facility up and running. To that point, we continue to make progress in construction of the CCS, and you can see a picture of the in-process project in our updated investor presentation, which is available on our website as of this morning. Currently, the team is focused on completing construction of the carbon capture portion of the facility, preparation for emergency response plans, and getting all of the required permitting completed. We continue to expect completion of construction of the carbon capture facility by the end of the second calendar quarter of 2024 and beginning of testing after additional power sources are in place. As far as permitting and approvals, we continue to monitor our Class VI injection permit application with the Environmental Protection Agency, our pipeline application with the Illinois Commerce Commission, and obtaining our special use zoning permit for the county. We are very keen to ensure complete compliance with all regulatory requirements and are committed to working closely with all appropriate agencies to get the One Earth Energy project approved and into service as fast and as safely as possible. As of year-end, we have invested approximately $38.6 million into the One Earth Carbon Capture project and associated ethanol production capacity expansion. This is compared to a total budget amount of $165 million to $175 million for both the CCS projects and ethanol production expansion at Gibson City. This investment underlines our belief in the project's potential and our commitment to sustainable energy solutions. I would now like to hand the call to our CFO, Doug Bruggeman, to discuss our operational and financial results.

Doug Bruggeman, CFO

Thanks, Zafar. I'll begin with our operational results. REX's ethanol sales volume during fiscal year 2023 was 285.9 million gallons, an increase of 7.5% over fiscal year 2022 sales volumes of 265.8 million gallons. Average selling price for our consolidated ethanol volumes was approximately $2.22 per gallon for the full year. Dry distillers grain sales volume during fiscal 2023 totaled 652,000 tons, a 9% increase over fiscal 2022 volumes. Volumes during the fourth quarter were approximately 169,000 tons, an increase of 13.4% over fourth quarter 2022. Average selling price for DDG was approximately $213.55 per ton for the full year. Modified distillers grain sales volume was 54,000 tons in fiscal year 2023 compared with approximately 94,000 tons in fiscal year 2022. For the fourth quarter, MDG volumes totaled approximately 18,000 tons, an increase of 7.3% over the same period in 2022. Average selling price for modified distillers grain was approximately $103.54 per ton for the full year. Corn oil sales volume in fiscal year 2023 was approximately 87.5 million pounds compared to 77.8 million pounds sold in fiscal year 2022, an increase of approximately 12.5%. For the fourth quarter, corn oil sales totaled approximately 22 million pounds, an increase of 7% over fourth quarter 2022. Average selling price for REX corn oil products was approximately $0.60 per pound for the full year. Gross profit for fiscal year 2023 was $98.2 million versus gross profit of approximately $48.6 million for fiscal year 2022. The more than 100% increase in gross profit was due to improved production levels and lower corn and natural gas prices. Gross profit in Q4 2023 was $30.4 million compared to $13.3 million in Q4 2022. The increase was due to similar dynamics seen for the full year. Our SG&A expenses increased to $29.4 million for fiscal year 2023 versus $22.8 million in 2022. SG&A in the fourth quarter increased to approximately $7.4 million versus $5.1 million in the fourth quarter of 2022. In each case, the increase was primarily due to higher incentive compensation related to the company's performance. Interest and other income grew by approximately 21% in 2023, totaling $15.7 million compared with approximately $13 million for fiscal 2022. We reported interest and other income for the fourth quarter of approximately $4.8 million versus $2.6 million for the same period in 2022. Income before taxes and non-controlling interest for 2023 was approximately $98.5 million, a significant increase from $47.5 million in 2022. During the fourth quarter, we reported approximately $32.5 million in this metric versus $13.3 million during the same period the previous year. As Stuart mentioned at the beginning of the call, 2023 was the second-best year from a net income perspective in our company's history. Net income attributable to REX shareholders for the year was $60.9 million compared to $27.7 million in fiscal year 2022. For the fourth quarter 2023, this equaled $20.6 million compared with $8.2 million for the fourth quarter 2022. On a per share diluted basis for the full year, this amounts to $3.47 per share of net income in 2023 compared to $1.57 per share in 2022. And for the fourth quarter 2023, diluted net income per share was $1.16 compared to $0.47 per share for the same period in the previous year. We ended the year with total cash, cash equivalents, and short-term investments of $378.7 million compared with $280.9 million for fiscal year-end 2022. The cash build during 2023 was reflective of our conservative fiscal approach, anticipated capital expenditures related to the One Earth Energy CCS project, and ethanol production capacity expansion at our Gibson City location. Also, related to this conservative approach, REX American ended the year without any bank debt. I'd now like to turn the call back to Zafar.

Zafar Rizvi, CEO

Thanks, Doug. I would now like to give some insight into how we see the ethanol market progressing through the remainder of calendar 2024. Looking at the ethanol and co-product market, we anticipate continued changes in the commodity market. However, we have seen over the years, our incredibly capable team that is in the market every day, watching these markets, adjusting our positions, and implementing our forward contracting strategy, put us in a better position no matter the market conditions. As for the market for our most important inputs, corn and natural gas, so far during calendar year 2024, we are seeing pricing trend more in our favor than a year ago. This has resulted in ethanol profitability currently running slightly ahead of the same period a year ago. In closing, I want to thank our very dedicated employees whose hard work and innovation have driven our success. We are excited about the future and confident in our strategy to deliver value to our shareholders. Thank you for your continued support. Now, I would like to open the floor for questions. Operator?

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Jordan Levy with Truist Securities. Please go ahead with your question.

Unidentified Analyst, Analyst

Hi, guys. It's Henry on for Jordan here. Congratulations first on another excellent quarter. Just to start with, on the regulatory side, are there any incremental updates or color you can give us on the discussions with the EPA and the Illinois Commerce Commission?

Stuart Rose, Executive Chairman

Zafar?

Zafar Rizvi, CEO

Sure. Let me give you some information on where we stand today. Our carbon facility is under construction. As you know, it's expected to be completed by the end of July or beginning of August. The permitting process for the Class VI permit is under review by the EPA, which we have no knowledge of when they will approve it, but it is under technical review. We also filed for the pipeline to the ICC and we are going through that process, expecting it to complete by the end of July or early August. We have also able to secure well number one and well number two and well number three with all the easements signed for all three wells. We also have 91% of the bore area at this time for well number one. We also have approximately 62% of the easement for the 6-mile pipeline, which will take us to well number one and two if completed. We also have a NuGen facility signed agreement with Summit from last year. Summit is also successfully getting some legislation passed in South Dakota. So, Jordan, basically coming back to you, that certainly this process is a long process with government agencies, and we have no knowledge when they will approve that.

Stuart Rose, Executive Chairman

Henry, I want to emphasize that achieving 91% is remarkable. Most others have less than that in their projects and resort to measures like eminent domain. We hope to avoid such actions. We have substantial support from our farmer partners to accomplish this project, which distinguishes us from many others who may be facing more challenges.

Unidentified Analyst, Analyst

Thank you, guys, for all that color. Just a quick follow-up, around capital allocation, I know you mentioned in the call, you haven't seen anything in the ethanol asset space that's worthy of purchasing at this point. I'm just wondering if there are other things you are thinking about or looking at for uses of cash outside of your current One Earth and Carbon Capture projects.

Stuart Rose, Executive Chairman

That's a good question. We have looked at a couple of plants, and so far, to date, we haven't found anything that meets our stringent standards. We're focused at the moment on this carbon capture, but there could be a lot of uses for our capital, for example. I mean, this is way in the future, just talk at this point, but let's say jet fuel. If CO2 can be emitted, there are a number of power plants nearby that emit a lot of CO2. We have carbon capture holes we're getting permitted now. There are chances to be partners with them. There are also plants. We also, when our stock drops, we are prolific buyback people, so there's always the opportunity to use the cash for that. So, we're excited about the future after carbon capture or our carbon capture combined with other people's carbon capture. There are so many things we can do in the future.

Zafar Rizvi, CEO

Yeah. And also, as you know, we're going to have approximately $165 million to $175 million for the CCS and expansion of the plants, which is expected to complete by the end of this year or early 2025. So, I think that will also take a lot of cash, which we have at this stage. And then it still leads us to future expansion or future purchase of any other properties available as Stuart mentioned.

Operator, Operator

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

Pavel Molchanov, Analyst

Thanks for taking the question. Good to connect as always. I've kind of posed this question before, and I thought I'd get your latest thoughts on this. You're extremely cash rich, to state the obvious for a company of your size, and there are ethanol assets that periodically come up for sale, maybe not as good as yours, but they are for sale. Is there any opportunity to add to your existing production asset base?

Stuart Rose, Executive Chairman

We are always looking, but at this time, we have nothing imminent. Ideally, we would want a large Fagen-ICM plant located near Illinois or in an area with carbon capture potential, as we could match our carbon capture earnings from these plants with our ethanol business over the next few years. That would be the ideal situation. We would consider less than ideal options if they are good plants. Any potential plant would need to be high quality, have a good corn supply, and preferably be a relatively new Fagen-ICM. We have specific criteria and have many plans in place right now that even if we don't find a plant with carbon capture, we still have great plans for the future.

Zafar Rizvi, CEO

And I add to that is also, Pavel, we are growing organically. So, as you can see, originally these plants were 100 million gallons, then we expanded to 125 million each, then 150 million gallons, and now we are expanding the One Earth Energy plants to 200 million gallons. So, we certainly believe that our plants are in the best location possible for the CCS projects, and they have produced much better than any other ethanol location. So, we are trying to ensure that we reinvest also in our locations and grow organically before we consider buying something that may not fit our criteria.

Stuart Rose, Executive Chairman

And to be honest, that's been less expensive than some of the transactions that have taken place when lesser plants have changed hands.

Pavel Molchanov, Analyst

Earlier this year, the first facility in the world to convert ethanol or alcohol to jet fuel opened in Georgia, which is the LanzaJet project. I am interested to know if you would consider implementing this type of conversion project to produce sustainable aviation fuel at any of your existing ethanol sites or potentially in future acquisitions.

Zafar Rizvi, CEO

I attended the SAF Conference earlier this week, where I learned about the market dynamics and projections. The market is expected to reach around 30 billion gallons. One consistent takeaway is that there is only one type of aviation fuel used by everyone. The demand currently stands at about 7 million barrels a day. Major airlines like American, United, and Southwest were present at the conference. We are exploring how REX could get involved in this sector, but our main focus is on getting the One Earth plant operational, which includes permitting, construction, and operations. We are looking at options for carbon capture and sequestration, but right now, our priority is making our first ethanol plant successful, as well as the CCS project. While there is significant market potential for the future, we believe it may take two to four years to transition. Currently, after what I learned at the SAF Conference, only 50 million gallons are being produced, which is not enough to meet market demand, but it is anticipated to grow to about 30 billion gallons by 2032. So, while the future looks promising, the current market demand is insufficient.

Pavel Molchanov, Analyst

All right. Appreciate the...

Stuart Rose, Executive Chairman

One of the keys to our success, Pavel, is not being the pioneer but having the best technology and waiting to see who has the best technology out there. We’re not rushing into it. Instead, we’ll let someone else take the lead and face the challenges, and we’ll enter the market as soon as there is evidence that it can be a profitable business.

Pavel Molchanov, Analyst

Thanks very much.

Stuart Rose, Executive Chairman

Any other questions?

Operator, Operator

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

BJ Cook, Analyst

Hey, guys, thanks for taking my call. Just quick, do you have any new information or update on the capacity expansion in Gibson City?

Zafar Rizvi, CEO

I'm sorry, I didn't hear your question. Could you repeat that again, please?

BJ Cook, Analyst

Yeah, sorry. Is there any new information or update on the capacity expansion at Gibson City?

Zafar Rizvi, CEO

I mentioned earlier that we are expanding the plant. The ethanol facility will have a capacity of 200 million gallons, and construction is currently underway. We anticipate that the ethanol facility will be finished by the end of this year. The construction of the CCS project building is nearly complete, with equipment arriving daily, and we expect the CCS facility to be ready by the end of July or early August. However, we still need to obtain the pipeline permit and the EPA Class VI permit before we can begin any carbon sequestration activities. Those are the main permits we are waiting on, but overall, the progress on the facility is going very well.

Doug Bruggeman, CFO

This is Doug. Let me add. When we expand that facility, the construction will take us to 200 million gallons. The initial plans are to run at 175 million gallons. Once we achieve that and get further EPA approval, then we can go to 200 million gallons.

BJ Cook, Analyst

Fantastic. Thanks. How are you guys looking at capacity utilization? It's kind of a moving target, I get it, but for the remainder of the year, do you guys expect to run it up?

Stuart Rose, Executive Chairman

The question was capacity utilization. We are assuming that we get a decent corn crop. We plan on running pretty much at full capacity. The only time we've ever cut back is for maintenance. There will be times when we cut back just because we're dealing with the CCS where we can't quite run as much as we usually do, but basically, we'll be at full capacity. We'll go all out, and we always go all out when it's a profitable market.

Zafar Rizvi, CEO

Yeah. We have not really any plans for a slowdown. Our slowdown is processes, sometimes it's maintenance, unexpected some kind of shutdown. We try to use the full capacity practically possible because we are based in Illinois in a corn belt area, and South Dakota crops were great last year and are expected to be the same this year. So, we have no plan to really slow down at this stage.

BJ Cook, Analyst

Okay. Thank you very much.

Stuart Rose, Executive Chairman

Thank you.

Operator, Operator

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

Okay. I'd like to thank everyone for listening. As you have heard, we have great plants, terrific growth prospects, and the key to everything is the execution of our employees. We feel we have the best employees in the industry, the best people working for us. We think that's what really makes a difference between REX and everyone else in our industry. We just want to thank them and we also want to thank you for listening to the call. We appreciate it very much. Talk to you next quarter. Bye.

Operator, Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.