REX American Resources Corporation (NYSE:REX) Q1 2023 Earnings Call Transcript May 25, 2023

REX American Resources Corporation beats earnings expectations. Reported EPS is $0.29, expectations were $0.08.

Operator: Greetings, and thank you for standing by. Welcome to the REX American Resources Fiscal 2023 First Quarter Conference Call. During your presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. And now I’d like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Doug Bruggeman: Good morning, and thank you for joining REX American Resources fiscal 2023 first 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. Sales for the first quarter increased by 9.5% as we experienced higher volume for ethanol, dried distiller grains and corn oil. Ethanol sales for the quarter were based upon 71.5 million gallons this year versus 64.5 million last year. Higher volumes were partially offset by lower ethanol selling prices as the price per gallon went from $2.28 to $2.21. We reported gross profit of $15 million this year versus a gross profit of $11.9 million in the prior year. Meanwhile, the SG&A increased from the first quarter — increased for the first quarter from $5.2 million to $10.6 million.

There was a trade-off between these two line items between the years as we currently classify freight cost repay to an outlined vendor as SG&A expense. We incurred charges of $5.1 million for that 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. We had income of $1.5 million from our unconsolidated equity investment in this year’s first quarter versus $2 million in the prior year. 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. We reported a tax provision of $2 million this year versus a provision of $1.8 million in the prior year. This led to net income attributable to REX shareholders of $5.2 million for both this year and the prior year first quarter.

Net income per share attributable to REX shareholders was $0.30 for this year versus $0.29 a prior year. Stuart, I’ll now turn the call over to you.

Stuart Rose: Thank you, Doug. Going forward, business improved at the end of the quarter and continues to improve. Currently, we’re running at a rate — debt of earnings per share that is higher than the first quarter, and we hope that trend continues. It’s been 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 — although we report a tax rate higher — we actually report a tax rate higher than our — than what we paid due to tax credits that we have carried forward, so our cash flow continues to improve both by earnings and by a lower rate than the stated rate on the GAAP earnings per share.

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 Zafar will talk about on carbon capture both at One Earth plant and what he has signed up or what our company has signed up with Summit. There’s no guarantees, but we are moving forward on this and have great hopes that it will be a great contributor to our company in the future. We also continue to have our buyback plan in place. We use this on dips, and it’s been something that’s helped stabilize the stock a little bit, I believe, when the stock is dropped. 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, but there could be — and there’s always a chance that something will come along, and we do have the cash right now to take advantage of, which you should see. I’ll now turn the call over to Zafar Rizvi, our Chief Executive Officer.

Zafar Rizvi: 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. But later in the quarter, we saw improvements which resulted in a profitable first quarter. On the other hand, drought has created a strong corn basis, particularly at the Marion South Dakota location. We are pleased with our availability of corn in the Gibson City, Illinois area because of growth in domestic export from Illinois the corn basis is beginning to sell. According to EIA May 24th report, ethanol stock and production has dropped during the last few weeks due to planned shut downs of ethanol facilities and increase in blending because of higher consumption of gasoline.

We have also seen natural gas price drop considerably, which has a positive impact on the financial results. As a result, all of these (ph) factors, we continue to source corn at — if we continue to source corn at a reasonable price and we don’t face any major logistical problems, we believe we will have better financial results in the second quarter than the first quarter of 2023, as Stuart mentioned earlier. The May 2023 as USDA report was also very positive. It is expected to be 15.26 billion bushels and 181.5 bushels per acre and if this happened, and we will see that if this realize, it could have very positive impact on future earnings, but as you — as we all know, we have a long way to go yet. Ethanol export was dropped this quarter.

First quarter 2023 were 354 million gallons compared to 394 million gallons, same period last year. DDG export through March 2023 were 2.4 million metric tons compared to 2.88 million metric tons, a decrease of approximately 400,000 metric tons, compared to the same period of 2022. Let me provide you an update on the carbon sequestration project and sustainability report. We are very pleased to announce our inaugural sustainability report highlighting what we have accomplished while addressing sustainability, economy, and our social responsibilities at large. We are delighted to partner with Summit Carbon Solutions part of the world’s largest carbon pipeline for the NuGen facility in South Dakota. Our goal to reduce greenhouse gas emission perfectly align with Summit Carbon Solutions expertise.

At the One Earth sequestration location in Gibson City, we continued to complete the paperwork for different government permits and requirements of the agency, while we are waiting for the EPA to approve Class VI permit for carbon injection. This is highly technical, very time consuming project and it depends on several local, state, and federal agencies’ approval. Those decisions are behind our control, which has 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. We submitted the Class VI permit for three wells order long lead equipment, expect to build a modular compressor plant, will be delivered by the end of 2023 with construction around the modular unit will start in 2024.

We also in the process, as I mentioned previously, in evaluating whether to increase the ethanol capacity of one-off energy in the Gibson City, Illinois, to 200 million gallons a year instead of 175 million, as I mentioned in the previous call. That current capacity is approximately 150 million gallons a year. The clean fuel production credit Section 45Z, which is related to reduce fuel carbon intensity score, could provide as much as dollar a gallon depending on the carbon intensity of the ethanol produced and sold. That could continue to enhance the strong position of our company. We also continue to evaluate other project that would improve energy efficiency and reduce carbon intensity. We believe completion of this project will lead to a greater benefit under the Inflation Reduction Act passed by Congress.

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 45Z benefit and the NuGen facility assigned a carbon offtake agreement with Summit Carbon Solutions. If we continue to make — continue to make progress, we will be ready to provide low carbon ethanol and byproducts with the social impact of reducing carbon in the atmosphere and the financial impact that empowered company that improved company performance for our shareholders. 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 achieve — achieving these positive results.

I will give the floor back to Stuart Rose for additional comments. Thanks, Stuart.

Stuart Rose: Thanks, Zafar. In conclusion, we have great plans. As shown by our numbers, we drastically outperformed the other public companies in the industry as far as I know. Great locations, including a great carbon capture possible location in Illinois, which will be our own project, and we also now have a partnership with Summit for our South Dakota plant. We have great opportunities going forward, but the most important thing and I talked 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. And if things go right, hopefully we can do great things in carbon capture, best business in the world as 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 Zafar and his team works towards that every day. I’ll now leave the floor open to questions.

Q&A Session

Operator: Thank you. And we have a question from Jordan Levy with Truist Securities. Please go ahead, your line is now open.

Unidentified Analyst: Hey, good morning, guys. It’s Mou on for Jordan. Thanks for taking my questions. Well, congrats on the solid results. Yes, 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 its better harvest year. How should we think about that? Thanks.

Stuart Rose: I’m sorry, could you repeat that again? I’m sorry, I just didn’t hear it properly.

Unidentified Analyst: Oh yes. So can you maybe talk about the corn pricing, how should we think about the pricing trending into the summer four months? Thank you.

Zafar Rizvi: Okay. I think as you know, as I mentioned that corn prices are continue to strengthen and even in Illinois, which is — they are exporting to other on Western States, including some Takeda and Kansas and other sides. So I think we probably — it’s going to increase the price as it seems to be, but if it’s — then on the other hand, we have seen the China canceled some of those orders and that’s the reason price dropped, but the basis are still very strong. We have seen somewhere $0.65 to $0.90 plus basis. Does that answer your question?

Unidentified Analyst: Okay. Thanks. Yes. Yes, appreciate the color.

Doug Bruggeman: It’s going to be tough — corn is going to be tough. But Zafar has done an excellent job and his team in managing to get the corn and still get it –get the corn at a price where ethanol plants can be profitable. Hopefully, if we get a good rainy season, and last year was drought in South Dakota. If we can get a good rainy season, we can get back to normal base and get back to paying normal over or under basis, but presently we’re paying significantly over basis. Any other questions?

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

Unidentified Analyst: Hey, guys. Great quarter. I’m Sami for Chris, who can’t be with us at the moment here. We had an overflow from our conference, that’s good to see so much interest in the small and micro-cap space of how we had about 500 investors on the call. So he’s a bit tied up and here I am, and here is he’s given me some notes to follow-up. Congrats on the quarter, it’s good to see small cap wide up the tape here, kind of, day dominated a market dominated by the big cap. So congrats on that. My questions are two-fold. One, could you elucidate a little bit more on the opportunity and the carbon capture as per earnings accretion, revenue growth over the longer term and how much of a contributor will that be? And the second part is well, you have — my quick calculations are still about $15 a share in cash. And my question is, if — at what point would you consider a large dividend or some type of a return of capital to shareholders of that cash? Thank you.

Zafar Rizvi: Thanks. Thanks for the questions, Robert. First in terms of carbon capture, we have hoped, but there’s no guarantees allows for, I believe it’s $85 a ton in direct pay from the government and 45Z could be $1 a gallon. So our plant, the one plant that we’re doing independent of summit will, 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 that we do and I think — we — and you followed us a long time. We probably are the kings of spending our cash and buying back stock.

So I don’t think again, 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 — a small cap stock and you generate cash like we do, usually have one of two choices to pay a dividend or buyback stock. It’s always been my feeling buying back stock is a lot smarter because it reduces the earnings per share, or 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 the 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 question?

Operator: We have a question from David Locke with Old Mammoth Investments. Please go ahead, your line is open.

David Locke: Hey, guys. Good morning. How are you?

Zafar Rizvi: Good morning.

Doug Bruggeman: Good. Thank you.

David Locke: So couple completely unrelated questions. The first one is, have you guys given any guidance for how much capital you’re going to need for the plant expansion and for the carbon capture project?

Zafar Rizvi: I think as I mentioned previously and just now in my prepared remarks, we are still evaluating that we are trying to expand from $150 million to $200 million instead of $175 million and when you put those beds to the different people and getting Information. And then you realize that it will be better to do $175 million to $200 million. So we are still analyzing and budgeting those numbers. But at this time, I really cannot pin it on.

David Locke: Okay. And then the second question is — can you — do you guys have any opinion or thoughts on sustainable aviation fuel and if that’s something that REX could participate in or to what extent might that just soak up some demand for soak up some of the supply of U.S. ethanol production?

Doug Bruggeman: I think I can say that we are always looking for new Zs, 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 we — that’s one of the also reason that once this 45Z are carbon sequestration things gone way 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 NuGen. 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 and analyze also how much investment will be needed to convert those, so at this stage, we have no immediate plans, but we are certainly doing a lot of research on it.

David Locke: Okay and then…

Doug Bruggeman: I can tell you is we’re 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 is no guarantees, but if we can do it, there is huge amount of potential income in that area, whereas aviation fuel to-date no — we don’t see any one, we are looking at it, we have interest in it, but like a lot of things we want to see someone else make some money at it before we jump right into it.

David Locke: Right. But would you — do you think would you agree that you guys could essentially sort of passively participate in that market to the extent that it developed, just because it should use a substantial amount of ethanol as a feedstock?

Doug Bruggeman: We’re absolutely, sure. If someone successful, they’re going to — these, a lot of these companies are not big ethanol players that are developing — that are trying to develop aviation fuel, so they’re going to need source of ethanol will sell us our ethanol to anyone at the highest price, we have every chance to benefit from that, if someone is successful.

David Locke: Yes.

Doug Bruggeman: And just — we’re more — we’re more likely some people have contracts to sell their ethanol for other uses ours. We have very little and we don’t have like year kind — 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 are successful on that, it would be a perfect place to supply them near .

David Locke: 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?

Doug Bruggeman: 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. 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.

David Locke: 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 and other 25 million gallons there?

Stuart Rose: We know of no one, but there could be. Zafar, do you know if anyone that’s considering it at this time?

Zafar Rizvi: I’m not really aware of that.

Doug Bruggeman: I don’t know, if anyone — and I don’t. So it’s been a tough market over the years, so we think it’s going to — we’ve done way better than the industry, but the industry has not done it — it hasn’t been as good of investment for everything else for most of the other players as 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. That does not mean we will never look at opening new ethanol plants. But to-date, we don’t — we have no plans, and I don’t know if anyone else.

Zafar Rizvi: Yes. And also I think we are concentrating to make sure that we reduce our CI score, which is, as I mentioned, we are looking at several other projects. So our goal is to somehow further reduce our CI score as low as practically possible. And that also need some investment and we rather spend our money on those, which will benefit — be more beneficial for 45Z and carbon sequestration and return on investment will be very quick.

David Locke: Okay, perfect. Hey, thanks for your time, and good job with the quarter, gentlemen.

Doug Bruggeman: Thank you. Thanks. Thanks for the call.

Operator: And there are no further questions at this time. I will turn the call back to Stuart Rose.

Stuart Rose: Thank you. 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.

Operator: That does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.