Q1 2024 REX American Resources Corporation Earnings Call

Speaker 1: But not.

Speaker 2: Thank you for standing by. Welcome to the American resources fiscal 2021st quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone.

Speaker 2: If at any time during the conference you need to reach an operator, please press star zero. And now I'd like to turn the conversation over to Doug Bregman, Chief Financial Officer. Please go ahead. Good morning and thank you for joining Rex American Resources fiscal 2023 first quarter conference call.

Speaker 3: 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.

Speaker 3: conditions. Today's conference call contains forward-looking statements that involve risk and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 3: such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance.

Speaker 3: As such, actual results may vary materially from expectations.

Speaker 3: The risk and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filing with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q.

Speaker 3: Rex American Resources assumes no obligation to publicly update or revise any forward-looking statements.

Speaker 3: I have joining me on the call today Stuart Rose, Executive Chairman of the Board, and Zafar Rizvi, Chief Executive Officer.

Speaker 3: Sales for the first quarter increased by 9.5 percent as we experienced higher volume for ethanol, dried distiller grains, and corn oil.

Speaker 3: Ethanol sales for the corridor were based upon 71.5 million gallons this year versus 64.5 million last year.

Speaker 3: Higher volumes were partially offset by lower ethanol selling prices as the price per gallon went from 228 to 221.

Speaker 3: We report a gross profit of $15 million this year versus a gross profit of $11.9 million in the prior year.

Speaker 3: Meanwhile, the SG&A increased from the first quarter to the second quarter.

Speaker 3: increased for the first quarter from $5.2 million to $10.6 million. There was a tradeoff between these two line items between the years as we currently classify freight costs we pay to an outside vendor as SG&A expense. We incurred charges of $5.1 million for that.

Speaker 3: this year. In the prior year more contracts called for the buyer to pay these fees and it was netted out of the ethanol price.

Speaker 3: We had an income of $1.5 million from our unconsolidated equity investment in this year's first quarter, versus $2 million in the prior year.

Speaker 3: We reported interest and other income of $2.8 million versus $174,000 in the prior year as we benefited from higher interest rates on our cash and short-term investments.

Speaker 3: We report a tax provision of $2 million this year versus a provision of $1.8 million in the prior year.

Speaker 3: This led to net income attributable to direct shareholders of $5.2 million for both this year and the prior year first quarter. Net income for share attributable to direct shareholders was 30 cents for this year versus 29 cents in the prior year.

Speaker 3: Stuart, I'll now turn the call over to you.

Speaker 3: I'll turn the call over to you. Thank you, Doug.

Speaker 4: Going forward business improved at the end of the quarter and continues to improve. Currently we're running at a rate of earnings per share that is higher than the first quarter. And we hope that trend continues.

Speaker 4: a great improvement over the beginning of the first quarter. We have $270 million in consolidated cash and short-term investments. Our plans with that cash, first of all, our cash flow is a little bit lower than what we had before.

Speaker 4: Although we report a tax rate higher, we actually report a tax rate higher than what we paid due to tax credits that we've carried forward. So our cash flow continues to improve both by earnings and by a lower rate than the stated rate on the gap earnings per share.

Speaker 4: In terms of going forward, as Doug mentioned, we're benefiting right now from higher interest rates. We have the $270 million earning significantly more than previously, as you can see in the first quarter. We're also working hard, which so far we'll talk about on carbon capture.

Speaker 4: We also continue to have our buyback plan in place. We use this on dips.

Speaker 4: And it's been something that's helped stabilize the stock a little bit, I believe, when the stock has dropped. And the last thing, we continue to look for opportunities, not just in ethanol, but in carbon capture. And we have nothing other than what Zafar is going to talk about going on right now.

Speaker 4: But there could be, there's always a chance that something will come along. And we do have the cash right now to take advantage of it, should we see it. I'll now turn the call over to Zavar Rizvi, our Chief Executive Officer. **

Speaker 5: Thank you, Stuart. Good morning, everyone. As I mentioned in our previous call, at the early stage of the quarter, we were facing challenging operating environment.

Speaker 5: But later in the quarter we saw improvements which resulted in profitable first quarter. On the other hand, drought has created a strong corn basis, particularly at the Marion South Dakota location.

Speaker 5: We are pleased with the availability of corn in the Gibson City, Illinois area because of growth in domestic export from Illinois. The corn bases are beginning to stand.

Speaker 5: According to EIA May 24th report, ethanol stock and production has dropped during the last few weeks due to planned shutdowns of ethanol facilities and increase in blending because of higher consumption of gasoline.

Speaker 5: We have also seen natural gas price drop considerably, which has a positive impact on the financial results.

Speaker 5: As a result, all of these factors, if we continue to source corn at a reasonable price and we don't face any major logistic problems, we believe we will have better financial results in the second quarter than the first quarter of 2023, as Stuart mentioned earlier.

Speaker 5: The May 2023 USDA report was also very positive. It's expected to be 15.26 billion bushels and 181.5 bushels per acre.

Speaker 5: USDS report was also very positive. It's expected to be 15.26 billion bushels and 181.5 bushels per acre.

Speaker 5: If this happened and we will see that if this realized it could have very positive impact on future earnings but as we all know we have a long way to go yet.

Speaker 5: Ethnox was dropped this quarter, first quarter 2020-2023, worth 354 million gallons compared to 394 million gallons.

Speaker 5: Same period last year. DDG export through March 2023 were 2.4 million metric tons compared to 2.88 million metric tons. This is approximately 400,000 metric tons compared to the same period of 2022.

Speaker 5: Let me provide you an update on carbon sequestration project and sustainability report. We are very pleased to announce our inaugural sustainability report highlighting what we have accomplished while addressing the sustainability economy and our social responsibilities at large.

Speaker 5: expertise.

Speaker 5: At the one-hour square station location in Gibson City, we continue to complete the paperwork for different government permits and requirements of agency while we are waiting for EPA to approve Class 6 permit for carbon injection. This is highly technical, very time consuming project.

Speaker 5: and it depends on several local, state and federal agencies' approval.

Speaker 5: Those decisions are behind our control, which happens.

Speaker 5: meant we are moving forward a bit slower than we would like to. But we are however pleased about the big milestone we have reached so far.

Speaker 5: We submitted the Class 6 permit for three wells, ordered long lead equipment.

Speaker 5: expect to build a modular compressed compressor plant.

Speaker 5: will be delivered by the end of 2023 with construction around the modular unit will start in 2024.

Speaker 5: We are also in the process, as I mentioned previously, in evaluating whether to increase the ethanol capacity of 1 earth energy in the Gibson City, Illinois to 200 million gallons.

Speaker 5: year instead of 175 million as I mentioned in the previous call. The current capacity is approximately 150 million gallons a year. The Clean Fuel Production Credit Section 45Z, which is related to reduced fuel carbon intensity score.

Speaker 5: would provide as much as $1 a gallon depending on the carbon intensity of the ethanol produced and sold.

Speaker 5: that could continue to enhance the strong position of our company. We also continue to evaluate other projects that would improve energy efficiency and reduce carbon intensity.

Speaker 5: We believe completion of these projects will lead to a greater benefit under the Inflation Reduction Act passed by Congress.

Speaker 5: In summary, we are pleased to announce a profitable quarter, good progress on our carbon sequestration project, a plan to increase ethanol production at one earth energy to 200 million gallons to maximize 45-Z benefits, and a new gene facility signed a carbon off-take agreement with Summit Carbon.

Speaker 5: improves company performance for our shareholders.

Speaker 5: Once again, we could not achieve this milestone without the hard work and dedication of our colleagues. We are very appreciative of their efforts on achieving these positive results. I will give the floor back to Stuart Rohr for additional comments. Thanks Stuart.

Speaker 4: Thanks, In conclusion, we have great plans as shown by our numbers. We drastically outperform the other public companies in the industry as far as I know. Great locations, including a great carbon capture and possible location in Illinois, which will be our own project.

Speaker 4: and we also now have a partnership with Summit for our South Dakota plant. We have great opportunities going going forward but the most important thing and I talk about it all the time is we have the best people in ethanol and now we're leveraging those great people to take advantage of the opportunities in carbon capture.

Speaker 4: And if things go right, hopefully we can do great things in Carbon Capture. Best business in the world is a business that can be socially responsible and also have great returns for our shareholders. And that's our goal. And we work towards that so far and his team works towards that every day. I'll now leave the floor open to questions.

Speaker 2: Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. Once again, that's 1-4 to register for a question. One brief moment for the first question. If you have a question, please press the 1 followed by the 4 on your telephone. If you have a question, please press the 1 followed by the 4 on your phone.

Speaker 2: And we have a question from Jordan Levy with Truis Securities. Please go ahead. We will judicial make sure people remain on?

Speaker 6: Hey morning guys, it's Mo, Amber Jordan. Thanks for taking my questions. Well congrats on the solid results.

Speaker 6: Yeah, so maybe pivot to pricing. Can you talk about how the corn pricing is tracking recently, and what is your visibility into the summer, fall season for pricing? Presumably it's better harvest a year. How should we think about that? Thanks.

I'm sorry, could you repeat that again? Sorry, I just didn't hear properly.

Oh, yeah, so can you talk about the corn pricing? How should we think about the pricing trending into the summer for Vermont? Thank you. Okay. I think, as you know, as I mentioned that the corn basis are continued to strengthen. And even in Illinois, which is they are exporting to other states absolutely should continue to Beautiful,

And on the other hand, we have seen that China canceled some of those orders and that's the reason price dropped. But the bases are still very strong. We have seen somewhere 65 to 90 cents plus basis.

Okay, great. Thanks.

Yeah, yes, appreciate the color. It's going to be tough. Corn is going to be tough, but Safar's done an excellent job in his team in managing to get the corn and still get the corn at a price where ethanol plants can be profitable. Especially if we get a good rainy season.

Last year was drought in South Dakota. If we can get a good rainy season, we can get back to normal basis. We can get back to paying normal over or under basis. But presently we're paying significantly over basis.

Any other questions?

We do have a question from Robert Maltby with Singular Research. Please go ahead, your line is open.

Hey guys, I'm a recorder. I'm subbing for Chris who can't be with us at the moment. We had an overflow from our conference. It's good to see someone interested in the small and micro-capped space of...

probably had about 500 investors on the call. So he's a bit tied up. And here I am. And he's given me some notes to follow up. Congrats on the quarter. It's good to see a small cap wide up the tape here and a day dominated in a market dominated by the big cap. So congrats on that. My questions are twofold one.

Could you elucidate a little bit more on the opportunity in the carbon capture as per earnings accretion, revenue growth over the longer term, and how much of a contributor will that be? The second part is, while you have my quick calculations, still about...

$15 a share in cash. And my question is,

If

At what point would you consider a large dividend or You know some type of a return of capital to shareholders of that cash Thank you, thanks. Thanks for the questions Robert um in turn first up first in terms of carbon capture

We have hopes, but there's no guarantees. The law allows for, I believe it's $85 a ton in direct pay from the government, and 45C could be a dollar a gallon. So our plant, the one plant that we're doing, independent of some that...

Well, after expansion produce about 200 million gallons, so you can do the arithmetic, but there's no guarantees of anything. This is a couple of years, maybe a year and a half, two years off at the earliest. So we don't want you to go crazy with your numbers or anything like that, but you can see there's great potential there. In terms of the cash and the...

We do and I think we're and you followed us a long time. We probably are the Kings of spending our cash and buying back stocks. I don't think and I know of no company on the New York Stock Exchange that has bought back a larger percent of their stock. And when you're a small small cap stock and you generate cash like we do.

usually have one of two choices to pay a dividend or buy back stock. It's always been my feeling buying back stock is a lot smarter because it reduces the earnings per share. It reduces, excuse me, the number of shares outstanding and drastically and has the potential, if we're making money, to drastically increase the earnings per share. Whereas a dividend, it just goes and it doesn't have that potential to increase earnings per share.

So that's our chosen method and that's what we have preferred to do with our cash.

Any other questions? We have a question from David Locke with Old Mammoth Investments. Please go ahead. I just have a question.

Any other questions? We have a question from David Locke with Old Mammoth Investments. Please go ahead, line's open. Hey guys, good morning. How are you? Good morning, how are you?

A couple of completely unrelated questions. The first one is, have you guys given any guidance for how much capital you are going to need? If not how might I inform you most importantly?

for the plant expansion and for the carbon capture project? I think as I mentioned previously, and just now in my prepared remarks, we are still evaluating the top. You know, we are trying to expand from 150 million to 200 million instead of 175 million.

And when you put those bids to the different people and getting information, then you realize that it would be better to do 175 million than 200 million. So we are still analyzing and budgeting those numbers. But at this time, I really cannot pin it on. Every other one of these groups can do whatever they want with it, however their

Okay. And then the second question is, do you guys have any opinion or thoughts on...

sustainable aviation fuel and if that's something that RECs could participate in or to what extent might that just soak up some demand for or soak up some of the supply of US ethanol production.

I think I can say that we are always looking for new cheese and we have done some research and we are in process of talking to some different companies and trying to find out more about SAF.

And that's one of the reasons that once this 45Z carbon sequestration thing is gone, where by that time the technology will be developed and we will have a 200 million gallon plant.

at one earth energy and then about 150 new gene. And as I understand from my research, it's approximately two gallon, for each two gallon of ethanol is one gallon of SAF you can produce. So we are trying to evaluate all those things and looking at the return on investment.

laser focused on carbon capture and we don't want to take our eye off the ball and there's a lot of money if we can do it. There's no guarantees, but if we can do it, there's a huge amount of potential income in that area. Whereas aviation fuel to date, we don't see anyone.

We are looking at it, we have interest in it, but like a lot of things we want to see.

see someone else make some money at it before we jump right into it. Right, but would you, do you think, would you agree that you guys could essentially passively participate in that market to the extent that it develops just because?

it should use a substantial amount of ethanol as a feedstock? We absolutely, sure, if someone's successful they're going to, a lot of these companies are not big ethanol players that are developing that are trying to develop aviation fuels, so they're going to need a source of ethanol.

We'll sell our ethanol to anyone at the highest price. We have every chance to benefit from that if someone is successful.

In fact, we're more likely, some people have contracts that sell their ethanol for other uses. Ours, we have very little and we don't have like your, we might go a month or two out, but we don't have contracts, so we'd be a perfect place for people to buy ethanol.

if they're successful and would be a perfect place to supply them their ethanol.

And then just on capital allocation, and you guys regularly talk on every call about how you're always looking around for plants that might be for sale, I'm assuming that

It's very much cheaper to expand capacity at existing plants than it is to buy somebody's existing plant at this point in terms of just increasing the overall footprint of your company? Yes. We've come close to buying plants before and have tried very hard to buy plants before.

But today, I don't know of any really good plants that can be bought at a reasonable price. And so I think what you're saying is exactly right. It's much cheaper in today's market to try to expand capacity, and that's what Zafar is doing.

Okay, and is there anybody out there that's thinking of building a greenfield plant or is everything just kind of 25 million gallons here, another 25 million gallons there? We know of no one, but there could be, so far do you know of anyone that's considering it at this time? We know of no one, but there could be, so far do you know of anybody that's considering it at this time?

I'm not really aware of that. I don't know of anyone and I don't. It's been a tough market over the years. So we think it's gonna, we've done way better than the industry.

But the industry has not done it. It hasn't been as good of an investment for everything else. For most of the other players, it's us. So I think most of the other players are doing what we're doing, is concentrating on other ways to make money out of the ethanol instead of opening new ethanol plants.

As I mentioned, we are looking at several other projects. Our goal is to somehow further reduce our CIS goal as low as practically possible. That also needs some investment. We would rather spend that money on those which will benefit.

be more beneficial for 45D and carbon sequestration and return on investment will be very quick. Okay, perfect. Hey, thanks for your time and good job with the quarter, gentlemen.

Thank you. Thanks for the call. And there are no further questions at this time. I'll turn the call back to Stuart Rose.

Thank you, and we'd like to thank everyone for being on the call, and we'll talk to you at the end of next quarter. Thank you very much. Bye. That does conclude the call for today. We thank you for your participation. As I say, please disconnect your line.

Thanks for watching!

F that, that pro.

cour the.

Act and serv.

I.

We.

The.

I.