REX American Resources Corp. (REX) Q4 2020 Earnings Call Transcript

REX American Resources Corp. (NYSE: REX) Q4 2020 earnings call dated Mar. 25, 2021

Corporate Participants:

Douglas L. Bruggeman — Chief Financial Officer, Treasurer & Principal Accounting Officer

Stuart Rose — Executive Chairman & Head of Corporate Development

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Analysts:

Jordan Levy — Truist Securities — Analyst

Christopher Sakai — Singular Research — Analyst

Presentation:

Operator

Greetings, and welcome to the REX American Resources Fiscal 2020 Fourth Quarter Conference Call. [Operator Instructions]

I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Douglas L. Bruggeman — Chief Financial Officer, Treasurer & Principal Accounting Officer

Good morning, and thank you for joining REX American Resources fiscal 2020 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 risk and uncertainties within the meanings 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 risk 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 Rose for his comments.

Sales for the quarter increased approximately 4.2%, primarily reflecting higher year-over-year production in the ethanol segment and increased distillers grain pricing. Sales were based upon 67.7 million gallons this year versus 65.9 million in the prior year fourth quarter. Gross profit for the ethanol and by-products segment increased for the fourth quarter from $8.1 million to $8.3 million, primarily due to improved distillers and corn oil pricing. The refined coal segment had a similar fourth quarter loss of $1.4 million for this year versus a $1.5 million for the prior year.

SG&A decreased for the fourth quarter from $5.6 million to $4.4 million, largely due to lower ethanol freight charges recorded in selling, general and administration due to certain contract terms. The company recorded income from its unconsolidated equity investment of $332,000 for the fourth quarter of this year versus $1 million in the prior year. We recognized a tax benefit of $1.8 million in this year’s fourth quarter versus a benefit of $3.4 million in the prior year’s fourth quarter. The refined coal segment contributed a benefit of $1.7 million this year versus $1.5 million in the prior year fourth quarter for the tax benefit. The above factors led to net income for the fourth quarter of fiscal 2020 of $3.5 million compared to $4.4 million in the prior year, while diluted earnings per share decreased from $0.70 to $0.59.

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

Stuart Rose — Executive Chairman & Head of Corporate Development

Thank you, Doug. Going forward, ethanol now is currently profitable, and we’re up against a period last — COVID-related closure period last year. In terms of corn and ethanol prices, they are both up as virtually all commodities are up, and crush spreads remained challenging. DDG is up with the price of corn. The new Biden administration appears to have appointees that are favorable to the ethanol industry. RIN pricing is still — RIN pricing, although up right now, we are still waiting to see how they will treat RIN pricing.

In terms of the COVID, the COVID news is with the opening up of different states, it should help drive RIN, which should improve demand for our product, especially versus last year. In terms of refined coal, remains profitable on an after-tax basis. We plan on ending that operations by year end this year. In terms of going forward with our cash, we have about $180 million in consolidated cash and equivalents, no debt, our plants are continuing to explore investing in carbon and carbon capture, we’ve made progress there and have spent a fair amount of time on working on that project. We also are looking — continue to look for a high quality ethanol plants. The ethanol plants we would hope to find if we — should we find ones to buy would be in our opinion something that is the best — has good technology, good locations, good people.

At this point, I will turn it over to Zafar Rizvi who will talk a little bit more about our carbon capture business and our ethanol business. Thank you.

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Thank you, Stuart. As I mentioned in the last three calls, 2020 started in a challenging environment due to the COVID-19 pandemic. We temporarily shutdown our plants during the first and part of the second quarter and we struggled to find corn for our NuGen facility. We saw a decrease in the fuel demand and that negatively impacted the ethanol industry.

During the third quarter, condition improved. We received a steady flow of corn at both of our majority-owned as well as a minority-owned locations. This resulted in improved crush margin and a very profitable third quarter. These improved conditions continued through the beginning of the fourth quarter. Later we began to see a decline in the crush margin in addition to the price of ethanol failed to keep up with increase in corn price. Farmers lost interest in selling their corn because they were receiving a direct payment from the federal government under the CARES Act.

When China stepped up its corn price — stepped up its corn purchases, that led to the higher corn prices. Behind these factors, we experienced political uncertainty and trade disputes. In addition, the EPA continue to consider and grant small refinery exemption from RFS compliance year. We expect the crush margin in the near future to continue to be under pressure, but we also expect it to improve once the threat of COVID-19 declines with the progress in vaccination and people began to drive more again.

March 9th report of the USDA showed that carry-out stayed at 1.5 billion bushels with export at 2.6 billion bushels. The estimated corn yield is 172 bushels per acre and ethanol plants are expected to consume approximately 5 billion bushels in 2021 crop year. Export of the distillers grains in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019. We saw considerable improvements in export during the last quarter of the year. January 2021, Mexico, South Korea and Indonesia were the top three importers in January 2021.

Ethanol export during 2020 totaled of 1.3 billion gallons compared to 1.46 billion gallons of 2019. January 2021 export totaled 164.7 million gallons compared to 151.3 million gallons in January. India, China and Canada were the top three importers. So we saw that India suddenly is on the top of the list compared to generally either — normally the Brazil or Canada. So we see some improvements coming out from India also.

Let me give you some progress in the carbon sequestration project. As I discussed in our previous calls, we are working with the University of Illinois to drill a carbon sequestration test well to determine suitability for an injection well at our One Earth Energy facility. The University of Illinois is in the progress of evaluating a permit application determined 2D seismic survey to select a test well location and contracting a front end engineering and design, FEED study of the CO2 capture system. The data will be analyzed to make sure the location is suitable for test characterization well.

The university expect to start drilling a test well. Once the drilling permit is granted and the design is completed, we expect to start drilling the characterization well in early September. It would take approximately six weeks to drill and another several weeks of testing. It will require extensive modeling and computer stimulation to predict the behavior of the CO2 when it is injected. These stimulation models will determine how much CO2 can be injected at the location and what rate, and it is eventual distribution in the sub-surface area. This project is still at a preliminary stage and we cannot predict yet that we will be successful. Our target is to achieve net zero emission. In summary, we are pleased to announce a profitable quarter and year in spite of a very difficult environment for the ethanol industry and other businesses last year. We are very appreciative and thankful for the hard work of our colleagues during this pandemic to achieve these results.

And I will give back the floor to Stuart Rose for his further comments. Thanks, Stuart.

Stuart Rose — Executive Chairman & Head of Corporate Development

Thank you, Zafar. In conclusion, the economy is starting to open up. We have great plans, great people, great locations. We have high hopes that when the economy does open up that our business will improve as demand improves. Most importantly and the biggest thing that we have going forward is our people. They’ve stuck with us through thick and thin. And they are what we feel makes a difference and what separates us from the rest of the industry and who will continue to allow us to outperform the industry.

Thank you. I’ll now leave it open to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jordan Levy with Truist Securities. Please go ahead.

Jordan Levy — Truist Securities — Analyst

Good morning, all, and nice quarter against the pretty challenging backdrop on the macro front. Maybe if we could just start on the carbon capture side, you kind of — you guys provided an update on the Illinois program. Maybe could you just talk to the potential you see, we’ve seen some private companies and whatnot announced projects around large scale carbon capture pipelines and sequestration facilities. Could you just talk to how you’re viewing that market potential outside of the University of Illinois project and that’s something that’s of interest?

Stuart Rose — Executive Chairman & Head of Corporate Development

Zafar?

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Yeah. I think, as you know, that there is some going something also is happening in North Dakota, Wyoming and some other area, but we are working with the university almost over a year. And we have the land and we know exactly where we will be drilling, and we are evaluating all those things. So we seems to be ahead of most of other people who are at the stage.

It takes approximately two — from start to end, it takes about two to three years before you’re really able to drill your — before you drill your first well with this characterization well. Then you test it to make sure how much it can handle the CO2 in that area. And then you have to get the permit, which is V6 permit, and then you have to have before you start injecting. So it certainly is a long process. I can certainly can see some of those, as you mentioned, pipelines are building. But I think — we think we have to have a storage first. And if we don’t have a storage, that pipeline can bring the CO2 and where exactly we are going to store that. So we — our thinking is, we should have a storage well and then we’ll take the next step about the pipeline. So that’s the direction we are going compared to other people who are really discussing the pipeline only.

Jordan Levy — Truist Securities — Analyst

Sure.

Stuart Rose — Executive Chairman & Head of Corporate Development

And Zafar, we think people are going backwards on this. They’re doing the pipeline, which — that’s nice to have a pipeline, but you could always struck CO2 in if you don’t have a hole to put it in, which we think is the most important thing. It doesn’t really mean anything. So we are working on the hole first. And assuming we can get that done, then we’ll work on the pipeline and deal with that and deal with the delivery. But if you don’t have a hole, in our opinion, you really — if you don’t have a place to store the product, you’re really not even a ground — you’re not even in the ballgame in our opinion.

Jordan Levy — Truist Securities — Analyst

Yeah, yeah.

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Because the permitting process alone from EPA while after you drill that and you really realize that this is the proper location and from characterization well then injection well then you — first you get the permission from the state and then need to take a permission from EPA, U.S. EPA, that takes about six months to 12 — six to 12 months. So I think that’s why it is important to start the well first so that way by the time we have well ready, the pipeline can come and bring it that too. And as I’ve mentioned previously that we have some non-binding agreement with some of the ethanol facilities in Illinois who are willing to also supply the carbon to us. So we are looking at that way to make sure we have storage facility first before we go to the pipeline side.

Jordan Levy — Truist Securities — Analyst

No, I think that makes a lot of sense. Stuart, maybe a question for you and Zafar as well. I talked about — as you know, as is natural, you guys are always kind of looking at the potential ethanol plants that you could expand to and depending on the quality of the plant and that sort of thing. Could you just discuss how you see that market today versus maybe a year ago? And historically, we’ve seen some deals go across recently, some sales, some purchases on the ethanol facility side. But just curious, how you’re viewing that market?

Stuart Rose — Executive Chairman & Head of Corporate Development

There are plants for sale right now. A lot of our competitors seem to be emphasizing other products. So there are definitely plants for sale. For us to buy one, we’d have to find something that fits our mode of operation, which is they have the best plants, good locations, good corn supply. I mean, those are fewer to find, but they potentially are out there. We’ll see what happens. It’s an interesting time because we’re probably the company that most seriously takes — that takes the ethanol industry most seriously. And we think the ethanol industry, especially if it can become close towards zero carbon industry has a huge future ahead of it. And that’s our opinion other people in the industry seem to be backing away. So we’re pretty excited about possibilities there, but you never know what will happen.

Jordan Levy — Truist Securities — Analyst

And maybe just one more, Zafar, maybe for you. You talked about the crop yields and how they’re shaping up this year now that lot more corn planted this year than last year with the increase in demand. Can you just talk to the specific regions you all supply from and how you’re seeing that shape out? I know it’s early days and I’m not sure if you can get a sense of that yet, but just curious if that’s something you can comment on?

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Yeah. I think, as you know, the plant is the — the corn last year was planted about 90 million acres, I think they are — I just saw the report actually from future average that were sold that it’s going to be — probably going to be flat, close to 93.6 million corn acres will be planted, that’s about 3.1% more than last year. As you know, the insurance value is close to I think $4.65 approximately somewhere. So I think we will see that certainly due to insurance value and also corn prices staying above $5 at this time and will be more acres will be planted this year even compared to last year. But certainly, we have also seen farmers has enough money and they are really keeping that in the storage and not bringing out there in selling. So we have seen the both things.

And if you remember, last year this time also was very difficult to find the corn and then suddenly after the COVID, the planting season started, the corn was available everywhere and we can buy very cheap. So I think there is suddenly we see farmers are selling not as we like to see, but we see that this year it will be more acreage will be planted than last year, and hopefully depending on weather will be a good crop.

Jordan Levy — Truist Securities — Analyst

Great. Thanks so much for the details, guys.

Stuart Rose — Executive Chairman & Head of Corporate Development

Thank you, Jordan.

Operator

[Operator Instructions] Our next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

Christopher Sakai — Singular Research — Analyst

Hi, everyone. Good morning. Just I had a question on any — if you guys had any sort of weather-related production delays this last quarter? And if so, for how long?

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

There were some delays in area, I think it was slow down as some of those plants are all around actually in South Dakota, North Dakota and somewhere in Iowa also, but that was for about maybe three to four days were slowdown. But it was not more than — because that was the supply — due to the supply of natural gas. But overall, it was not any delay.

Christopher Sakai — Singular Research — Analyst

Okay, great. And as the economies reopen globally, where do you see the — I guess, the biggest country?

Stuart Rose — Executive Chairman & Head of Corporate Development

Biggest country of ethanol export you mean?

Christopher Sakai — Singular Research — Analyst

Yes, yes.

Stuart Rose — Executive Chairman & Head of Corporate Development

I think as you can see recently, as I mentioned in prepared remarks, India will suddenly almost in January is 53.2 million gallon India jumped in. And we see always before Brazil and Canada, India was even last year in January was only 13.3 million gallons. So you can see from 33 million to 53 million. I think we see a lot of potential in India. And we have seen in China lately. China in January alone 22.7 million gallons they purchased. And we also see Canada, our neighbor. I think as you can see, they are pushing their carbon credit and even the Supreme Court just stayed the order that what Canadian government is doing to charge the carbon tax, and that will stay.

So I think that all of these things we’re going to see that certainly Canada, China, India and Brazil, Brazil is slowdown because due to some of those tariffs. Hopefully Biden administration work with Brazil and remove those tariffs. I think we’ll certainly see that growing in those area.

Christopher Sakai — Singular Research — Analyst

Okay.

Stuart Rose — Executive Chairman & Head of Corporate Development

Even some of the Arab — oil producing companies are buying it to make sure — due to the environmental reason.

Christopher Sakai — Singular Research — Analyst

Okay. All right, great. Thanks.

Stuart Rose — Executive Chairman & Head of Corporate Development

Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Stuart Rose — Executive Chairman & Head of Corporate Development

We thank everyone for listening to our call and we look forward to talking to you after the end of next quarter. Thank you very much.

Zafar A. Rizvi — President, Chief Executive Officer, Chief Operating Officer & Director

Bye.

Douglas L. Bruggeman — Chief Financial Officer, Treasurer & Principal Accounting Officer

Thanks. Bye.

Operator

[Operator Closing Remarks]