REX American Resources Corporation (REX) CEO Zafar Rizvi On Q3 2021 Results - Earnings Call Transcript

REX American Resources Corporation (NYSE:REX) Q3 2021 Earnings Conference Call December 1, 2021 11:00 AM ET

Company Participants

Doug Bruggeman - Chief Financial Officer

Zafar Rizvi - Chief Executive Officer

Stuart Rose - Executive Chairman

Conference Call Participants

Jordan Levy - Truist Securities

Graham Price - Raymond James

Operator

Greetings, and welcome to the REX American Resources Fiscal 2021 Third Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]

I would now 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 2021 third 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 first review our financial performance and then turn the call over to Stuart for his comments. REX is very pleased to report on our strong third quarter results. As you will note in the press release, we have now discontinued the refined coal operations as we are no longer able to earn tax credits beginning on November 18, 2021 and have classified it as discontinued operations. We now have just one reportable segment of ethanol and by-products.

Sales for the quarter increased by 63% as we experienced higher pricing for ethanol, distillers grains, and corn oil. Ethanol sales for the quarter were based upon 69 million gallons this year versus 74.6 million last year. The reduced gallons were primarily due to limited corn supply at the beginning of the quarter, which abate once the current year corn harvest began. We reported gross profit of $25.2 million from continuing operations versus a gross profit of $18.9 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 76%, dried distillers grains improved by 43%, and corn oil pricing improved by 146% for this year's quarter over the prior year quarter. Corn cost increased by 97% and natural gas pricing increased by 119% for this year's quarter compared to the prior year.

SG&A increased for the third quarter to $6.3 million from $4.3 million in the prior year. This primarily represents increased incentive compensation based upon higher earnings in the current year and increased railcar lease costs. We had income of $349,000 from our unconsolidated equity investment in this year's third quarter versus income of $1.2 million in the prior year. Interest and other income decreased to approximately $35,000 from -- versus $537,000 in the prior year, primarily reflecting the lower interest rate environment.

As mentioned above, since refined coal operation is now classified as discontinued operations, its results -- and historical results now reflected on one line on the income statement including the tax benefits from this business. We reported $2 million of net income reportable to REX shareholders from discontinued operations for the third quarter. This also resulted in us reporting a tax provision of $4.3 million for the third quarter of this year versus a provision of $5 million in the prior year from our continuing operations. These factors led to net income attributable to REX shareholders from continuing operations of $13.3 million for this year's third quarter versus $9 million in the prior year, a 47% improvement.

Our net income per share from continuing operations attributable to REX shareholders was $2.23 for this year versus a $1.47 in the prior year. Total net income per share, attributable to REX shareholders, including the discontinued operations was $2.56 for the quarter versus $1.44 in the prior year.

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

Zafar Rizvi

Doug, is Stuart there with us?

Doug Bruggeman

Zafar, why don't you ahead and…

Stuart Rose

Sorry, I'm on. Going forward, we are currently running at a significantly higher rate of earnings per share in the quarter than the quarter that we're currently reporting. Crush spreads have risen greatly even with higher input prices of corn and natural gas. Zafar Rizvi will discuss this later in his section. Refined coal operations as Doug said ended November -- in the middle of November. After tax it was profitable, all the way up to the end tax credits that we have not used yet will carry forward for up to 20 years will help our cash flow significantly over the next few years, assuming we continue to make good earnings. The sequestration project is moving forward, carbon sequestration, Zafar Rizvi again will discuss that in his section.

Cash balance, right now has risen to $219 million, up significantly from year-end of $108.7 million. We currently -- based on current operations, we again expect that to rise over the next -- over the next couple of -- over this quarter. Uses include buybacks, we bought back 60 -- almost 67,000 shares in the quarter. We're working on our carbon capture project, which Zafar again will talk about. We continue to look for top quality ethanol plants. We tried, but we've nothing that's eminent at this time, we know -- we know of nothing that's top quality that is up for sale at a price we would consider buying it for. We are open to considering other alternative energy projects and carbon capture opportunities. So we'll see what happens in those areas. Again, our cash balance, as you can see on the balance sheet $219 million.

Zafar, will now discuss the operations.

Zafar Rizvi

Thank you, Stuart. Good morning, everyone. As I mentioned in our previous quarterly call. The operating environment in 2021 improved in the first and second quarter. We saw a decline in the crush margin in the beginning of the third quarter due to several factors. But then the operating environment began to change. An early harvest resulted in an increase in the availability of the corn, favorable ethanol, and corn oil prices helped to increase the crush margin. Due to availability of corn, we were able to increase the production at our plants, which resulted in a very profitable quarter as Doug and Stuart mentioned earlier. We continue to see favorable trend, as Stuart just mentioned in crush margin, which could result into another profitable quarter. Both of our majority owned plants currently are producing at near capacity, although logistic problems are continued to be very challenging and are beginning to get worse due to slowdown of the railroad and availability of DDG containers and trucks. We expect this trend may continue into the first quarter of next year, or maybe longer which could adversely affect production and net income.

Let me give you a little bit progress of our carbon sequestration project. As you know, we are working with the University of Illinois to drill a carbon sequestration well. We have received a permit from the Illinois Department of Natural Resources to drill a test well, the site for the drilling has been prepared, Rigs and other materials and equipment have arrived at the site. We expect drilling will start today. We hope to convert the test well into Class VI well or in monitoring well. The first stage of preparing the Class VI permit application has been using existing information and the US EPA has been notified. The completion of the application process will continue -- will continue as we began to receive more information after the test well is completed in January 2022. It will require another several weeks of testing extensive modeling and computer stimulation to predict the behavior of CO2 when it is injected, it is a very slow process. These stimulation models will determine how much CO2 can be injected at the location, at what rate and its eventual distribution in the subsurface area.

2D seismic process -- processing is just finished and currently preliminary reports looks good at the proposed site. The process of 3D testing has started, permitting for 3D usually takes more than -- more time than 2D as there is a more land involved. 3D require us to enter in the fields and run linear grades across the property after receiving permission from the landlord -- land owners. Our FEED study of the capture of CO2 and the design of the facilities are underway. The design of the capture CO2 facility is expected to be completed soon. As I have mentioned in the previous calls, this project is still at a very preliminary stage and we cannot predict yet that we will be successful.

In summary, we are pleased to announce once again a very profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues to achieve these results. I'll get back -- I'll give the floor back to Stuart Rose for additional comments. Thanks, Stuart.

Stuart Rose

Thank you. Thanks, Zafar. In conclusion, we had a very, very good quarter as we both mentioned, we're in the midst of an even better quarter, a significantly better quarter as crush spreads have risen. We have continued to outperform the industry significantly. We have good plants, good locations and as Zafar mentioned, we believe we have the best people in the industry and the most capable people in the industry. That's really what sets us apart from what the average plan is currently doing.

I'll now leave the floor open to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Jordan Levy with Truist Securities. Please proceed.

Jordan Levy

Good morning, Stuart, Zafar, Doug.

Stuart Rose

Hi, Jordan.

Jordan Levy

I'm curious if you all could -- thanks for all the commentary and nice quarter. I wanted to start out on more of a macro front and see if I could get your thoughts on the activity we've seen as it relates to the significant move higher in ethanol prices. We've seen recently and especially relative to gasoline prices that have come down more in the last couple of weeks. And what do you think is really driving this dynamic right now? And then going forward, how do you see crush margin set up heading into '22?

Stuart Rose

Zafar?

Zafar Rizvi

I think that there is several factors, but we see that originally the price of ethanol was going up. The most important is, I think the factor was involved in logistic, there is lot of ethanol was not able to reach to East and then also in the Chicago market and due to transportation and logistics problems and demand was still there and supply was not able to reach at the location where the people needed most and that's helped to increase the ethanol price. And as you have seen that yesterday and today it's also a little bit ethanol price dropped since that time. But logistic problems, as I've mentioned is still really continuously problem happening and due to that reason, just today's report shows that production has dropped, but stock is still high and because a lot of people were not able to ship their railcars or other by transportation that was causing the price of ethanol was also going up.

I think as far as I'm concerned, looking at 2022, I think as you know we are in a commodity market and previously I mentioned in my call that we were beginning to see a decline in the crush margin at the end of -- at the call for the third quarter, but the things change so rapidly. And you can see that we end up in a much better ethanol profit margin for the third quarter than we anticipated. So it's very hard to say really what happened in 2020 and going forward. It depends on several factors including the COVID, supply and demand and ethanol corn pricing and then supply of blending credit and all those things. So it's very hard to predict anything on commodity market.

Stuart Rose

One other thing I want to add Jordan is our people have done really well in getting the goods out. We're one of the few companies that actually concentrates on ethanol and not this other stuff that other people are looking at because of that I think we -- our eye is on the ball for these type of time and Zafar especially and working with getting -- I mean he works really hard and our people worked really hard at delivering which is a big part, which right now is a big part of the whole, the whole ethanol business. So again this is something doing these. We're able to separate ourselves during these times by just being on the ball by concentrating on the main product.

Jordan Levy

Absolutely. I appreciate the color and certainly shows into your results. Maybe just a quick follow-up on the carbon capture side of things, I don't want to get too far ahead of it. Knowing whether this project is, but just wanted to step back and think big picture and get your thoughts on assuming this all goes in the direction that you wanted to go, what is the larger scale sort of investment of a larger-scale business line and carbon capture look like to you all?

Stuart Rose

Zafar?

Zafar Rizvi

Yes, I think the project, which we have -- starting at [indiscernible] we estimate, close to $35 million to $50 million will cost probably for one alternatives close to that number. But as our ultimate goal is to have this area, which have a hub for carbon sequestration and we can bring to up from other people carbon also for sequestration but it's all depends really that how this test well will be able to define that how much carbon sequestration, we can do in that particular area, which we are located. We are ready, it looks very promising and we have great results. At this time, but I think once that well start digging and that will define exactly how much more carbon we can bring in that area, but -- so preliminary somewhere $35 million to $50 million. And then if this is successful, then we probably will spend more money to have more well around on that area. We have plenty land at this time and we are also trying to get more subsurface area options to use that land.

Stuart Rose

Jordan, taking the optimistic case -- taking the optimistic case on this, which I want you to understand that's the optimistic case, we have $219 million in cash right now. Our earnings -- our earnings are looking good this quarter. The cash and it generates a significant cash flow especially because we have tax credits. There is the potential to maybe do and again I'm taking the optimistic case, but to store if everything went perfect and we're able to get going and then get the approvals and get the -- and there's a lot of ifs in there, but there is a potential to store a couple of million -- a couple -- up to 2 million tons a year of CO2 in the ground or that would be our ultimate goal if everything works right and again in keeping going on the optimistic case in the bill right now on the health side that just passed, they're talking $80 a ton. So I don't need -- and Zafar went over and there'll be significantly more [indiscernible] in other people and significantly expense, but we have the cash flow for it, but you can figure out the numbers at $80 a ton, we're actually able to do 2 million tons in the ground and again a million ifs in this and we're very -- we're not the type of company that blows our horn and says this will happen, but we are working really hard to try and make it happen. That's our goals.

Zafar Rizvi

And also I think I will add to that. We also we have no debt. So we have $200 million cash and no debt and -- go ahead Stuart?

Stuart Rose

I was going to say the $200 million is on a consolidated basis, but virtually all of that is available for this project.

Jordan Levy

Correct. That's great insight. I appreciate the comments, guys. I'm looking forward to hearing more as this moves on.

Operator

And our next question comes from the line of Graham Price with Raymond James. Please proceed with your question.

Graham Price

Hi. Good and thanks for taking my question. The first one I had was on M&A. In your prepared remarks, you mentioned that you could potentially consider other types of alternative energy projects or assets. So just wanted to get little more detail on what that could look like?

Stuart Rose

Well, there is so many things in this House Bill that related to carbon capture. For example, they're talking to large number, if you can pull carbon out of the year. No one has been able to do that. But if that we're going to, if you can pull out carbon out of the air, you're still going to need a place to put the carbon. And so there is just a small example of what could be -- and what could be done. There's people in the industry and we look at them doing other things that may be successful, may not be successful, but they are not currently making money, but the plan to make money, if they do make money in the industry, we could -- we could license their product, they're anxious to license their product. So there's things out there. Many things that are potential for us, but to us, the biggest potential and the biggest and we're pretty we're already our ethanol plant carbon is already considered deployments CO2 coming from a plant, it's sitting right in our backyard at one of our plants. So that's what we're working towards. It's being -- that's the biggest thing we're working towards.

Graham Price

Got it. Understood. And then for my follow up, I guess now that we're in December. It's pretty safe to say that the EPA's RVO [ph] targets won't be coming out here until after the end of the year given and such a strange situation. What are your views on the legal status of RINs for 2021?

Stuart Rose

Zafar?

Zafar Rizvi

I think as you know that they extended the -- they have touched [indiscernible] they extended 2020 and '21 to the compliance year. So I think as you can see that from last few -- from last few days events price continue to drop and it's now traded yesterday at $1.07, $1.08. So we -- really, it's hard to say what EPA is going to do, but at least they are not giving more exemptions and they may have extended, I rather let them extend it than to give them an exemption. So that's, so I really don't know, what but I think I can add to it.

Graham Price

Got it. Understood. That's it from me. Thank you for taking my questions.

Stuart Rose

Any other questions? There is no other questions, I thank you -- here is another, go ahead. Any other questions?

Operator

No. Pardon me, sir. We have no further questions at this time.

Stuart Rose

Okay. Well, we thank everyone for listening to our call and we'll look forward to the call at the end of next -- actually at the end of the fiscal year. Thank you so much. Bye.

Zafar Rizvi

Thanks, everybody. Bye.

Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.