REX American Resources Corporation (REX) Q4 2021 Earnings Call Transcript

REX American Resources Corporation  (NYSE: REX) Q4 2021 earnings call dated Mar. 23, 2022

Corporate Participants:

Douglas Bruggeman — Vice President-Finance, Chief Financial Officer and Treasurer

Stuart Rose — Executive Chairman of the Board

Zafar Rizvi — Chief Executive Officer and President

Analysts:

Bertrand Donnes — Truist Securities, Inc. — Analyst

Christopher Sakai — Singular Research — Analyst

Jarrod Edelen — South Dakota Investment Council — Analyst

Presentation:

Operator

Greetings and welcome to the REX American Resources Fiscal 2021 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 Bruggeman — Vice President-Finance, Chief Financial Officer and Treasurer

Good morning and thank you for joining REX American Resources fiscal 2021 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 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 review our financial performance and then turn the call over to Stuart for his comments.

Sales for the fourth quarter increased by 68% as we experienced higher pricing for ethanol, distiller grains, and corn oil. Ethanol sales for the quarter were based 69.9 million gallons this year versus 67.7 million last year. We reported a gross profit of USD38.7 million from continuing operations versus a gross profit of USD8.3 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 74%, dried distiller grain improved by 19%, and corn oil pricing improved by 122% for this year’s quarter over the prior year fourth quarter. Corn cost increased by 44%, and natural gas pricing increased by 80% for this year’s quarter.

SG&A increased for the fourth quarter to USD6 million from USD4.2 million in the prior year. This primarily represents increased incentive compensation based upon higher earnings in the current year. We had income of USD3.9 million from our unconsolidated equity investment in this year’s fourth quarter versus income of USD332,000 in the prior year, again representing strong fourth quarter industry fundamentals. Interest and other income decreased to approximately USD13,000 versus USD415,000 in the prior year, primarily reflecting lower interest rates. We expect to begin to see some improvement in this area in the current year as rates increase on short-term investments.

As mentioned last quarter, the refined coal operation is now classified as discontinued operations and its results and historical results are now reflected on one line on the income statement, including the tax benefits from this business. We reported USD159,000 net income attributable to REX common shareholders from discontinued operations in the fourth quarter as we ended operations on November 18th, 2021. We reported tax provision from continuing operations of USD10.7 million for the fourth quarter of this year versus a benefit of USD102,000 in the prior year. Tax provisions and rates will be impacted from time to time based upon levels of income, permanent tax items, and uncertain tax position adjustments.

These factors led the net income attributable to REX shareholders from continuing operations of USD21.3 million for this year’s fourth quarter versus USD3.3 million in the prior year. Our net income per share from continuing operations attributable to REX shareholders was USD3.58 for this year’s fourth quarter versus USD0.56 in the prior year. Total net income per share attributable to REX shareholders was USD3.61 for this year’s fourth quarter versus USD0.59 in the prior year.

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

Stuart Rose — Executive Chairman of the Board

Thank you, Doug. We had a very good fiscal 2021, but now business has become a little bit, I’d say, much tougher. We’re projecting for this quarter possible losses tied to higher corn and gas prices and ethanol prices not rising as fast, cutting into our crush margins. Corn could be an issue for the rest of the year, especially relating to Ukraine along with normal seasonal issues. RINS could be an issue next year. It’ll be up to the EPA to decide what that RIN level is. It won’t be legislative anymore. So a lot will depend on what happens with the EPA chief and that could affect this rear’s RINS as sometimes they allow the current year RINS to be spread out.

Another issue that we’re having is logistical issues. Inflation, labor shortages could be issues. So we have a number of things that we are worried about. On the positive side, our product is American made, we need more U.S. — we’re going to need more U.S. fuel as rest of the world does not seem to be too willing to help us as much as we would like in that area. And we are more green fuels than oil, and it could be used up to 15%. So we’re hopeful our blending rate could go up. We’re hopeful blending rate would go up to 15%, and that of course would increase demand.

We now have over USD250 million on a consolidated basis — USD250 million cash on a consolidated basis. In terms of uses of cash, we will be talking to you — Zafar will be talking to you about carbon capture. He will also talk to you more about our ethanol plants and what we expect to happen there. We also, in terms of spending the cash or looking for other ethanol plants that are successful, we have not found anything in our price range as of this time. There’s ancillary businesses in ethanol like high protein, number of different techniques to make that high protein. No one to date has shown great earnings, so we’re waiting to see who’s the most successful, before we decide whether or not to get into that business. But again, other people are looking at it.

We also are looking at other industries that might fit our skills, especially commodity-driven industries where we might be able to potentially turn them more green. We continue to buy back our stock on dips, and last year we bought some. If the stock dips significantly, we have the cash available to buy more. We have exited the refined coal business, but we still carry forward a large amount of tax credits which can be used to lower our taxes paid and increase our cash flow.

I’ll now turn the call over to Zafar who will talk more about the ethanol business and the carbon capture business. Zafar?

Zafar Rizvi — Chief Executive Officer and President

Thank you, Stuart. Good morning. As I mentioned in our previous quarterly calls, the operating environment in the fourth quarter improved, and we are very pleased with the results of the fourth quarter and the fiscal year. Since last month, as Stuart mentioned, it has become very challenging due to several reasons, including an increase in ethanol production and stock, challenging logistic problems, and an increase in the price of corn greater than the ethanol price, which are negatively affecting the crush margin. As a result, the first quarter of 2022 may not be profitable. If this trend continue into the second quarter or maybe longer, which could adversely affect production and net income, we also plan to shut down for the regular maintenance and safety checkups during the month of April. We are also — as Stuart mentioned again earlier, we are also evaluating several other projects which could help to increase production, efficiency, energy saving, as well as reduce water consumption, and further enhance safety. Some of these projects are capital intensive and require much analysis before any can be implemented. All of these projects are in a very early stage and may not materialize.

Let me share progress of our carbon sequestration project. As I mentioned in the several previous calls, we are working with the University of Illinois in drilling a carbon sequestration well. The first well at One Earth Energy was successfully drilled to a depth of around 7,100 feet in which almost 2,000 feet of Mt. Simon stone was encountered. The geological model has been established and is being used as a basis for simulation to predict the movement of the CO2 injection into the subsurface. Additionally, we will be performing additional testing at the valley itself over the next several months. These simulation models will help to make progress on the completion of the class VI permit application which we have started. The completion of the application process will continue as we begin to receive more information from simulation models to predict the behavior of the CO2 when it is injected. These simulations are currently at a very preliminary stage, and a lot of more work is required, but the data indicate all the CO2 produced by the One Earth Energy facility can be injected and stored at the potential site. We will continue to evaluate further as we make progress. This is a highly technical and time-consuming project, and it will take time to make material progress.

The 3D seismic testing was completed in the middle of February. Almost 16,000 nodes were placed at different points, 160 million points of data have been collected and being analyzed. A FEED study of the capture of CO2 and the design of the facility is completed — are completed. The bidding process will start after the completion of engineering. As I have mentioned in previous calls, this project is still at very preliminary stage. It requires lot of time-consuming modeling and analysis. We cannot yet predict the result of the simulation models and where they will be — whether we will be successful or not.

In summary, as Stuart mentioned, we are very pleased to announce once again a profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues on achieving these results.

I’ll give the floor back to Stuart Rose for additional comments. Stuart?

Stuart Rose — Executive Chairman of the Board

Thank you, Zafar. In conclusion, we had a great 2021, but we are very cautious on 2022. But we believe and continue to believe we have great plants, great locations, and most importantly, great people. And we believe with this combination, as we’ve done in the past, we’ll continue to greatly outperform our competitors — the bulk of our competitors well into the future. I’ll now leave the forum open for questions.

Questions and Answers:

Operator

[Operator Instructions] [Operator Instructions] We have a question from Bertrand Donnes with Truist. Please proceed.

Bertrand Donnes — Truist Securities, Inc. — Analyst

Good morning, guys.

Stuart Rose — Executive Chairman of the Board

Hello, hi. Morning.

Bertrand Donnes — Truist Securities, Inc. — Analyst

On the carbon capture topic, right now obviously the focus is on the test wells and the reservoir modeling. Are there any things you might consider working on simultaneously, like initial infrastructure planning or maybe talking about third parties that might accelerate the timeline if the tests are successful?

Zafar Rizvi — Chief Executive Officer and President

We are working with several different people for the — as I mentioned previously, the design of the facility is completed and engineering work is now in process of completing, and then we will be able to put the — after the engineering for the biddings, and then we will start that. But I think we want to make sure is that the well is completed, and now we are in a process of filing a C VI [Phonetic] permit, and all those things when you start to do these things, there is required lot of modeling, simulations, and other things, because without that data information, we cannot complete the EPA permit, C VI [Phonetic] permit. So that permit, while we are trying to complete that permit, on the same time, we are working on the facilities. And I think we have a team which is working with several different people, and then we will like to accel the project, but I think there is — sometimes nothing we can do unless we have more data.

Bertrand Donnes — Truist Securities, Inc. — Analyst

That makes total sense. And then maybe jumping topics. In the prepared remarks I think you mentioned that you’re not seeing anything in your price range for ethanol facilities. But could you just talk about what you’re seeing in the M&A market given the volatility in crush spreads? Are sellers pulling away? Are they looking — are bid/ask just too wide?

Stuart Rose — Executive Chairman of the Board

I haven’t seen any plants for sale this year that weren’t for sale previous. I haven’t seen — during the fourth quarter I think prices probably went up significantly because the really good plants had a really good fourth quarter, but I’ve not seen those prices — I haven’t seen anything, to be honest, come on the market since last year. And we did make a run at plants last year and came very close and thought we — anyway but we did not get them. So maybe something will come this year. But as of now, I’ve not seen anything that would fit what we’re looking for in our price range.

Bertrand Donnes — Truist Securities, Inc. — Analyst

That makes perfect sense. Thanks for the update, guys.

Stuart Rose — Executive Chairman of the Board

Thank you.

Operator

Our next question comes from Chris Sakai with Singular Research. Please proceed.

Christopher Sakai — Singular Research — Analyst

Yes, hi. Good morning. Just I had a question on if you experienced any weather-related issues in this quarter and recently.

Zafar Rizvi — Chief Executive Officer and President

I think the more is about logistic — is the performance of the railroad, and as you probably heard that even Canadian Pacific has a strike and that’s also affecting. And previously also shortage of labor for the railroad companies and they cannot find drivers to make it — sometimes the drivers bring that rail and power out there and then he goes and then that next person who’s supposed to be there he does not show up. So that’s mostly related with that. Yeah. But I think weather is some effect but it’s not the major effect. Major effect is continuously about the railroad performance.

Christopher Sakai — Singular Research — Analyst

Okay, great.

Zafar Rizvi — Chief Executive Officer and President

Go ahead.

Christopher Sakai — Singular Research — Analyst

Okay. And you mentioned about a tight labor market. I just wanted to get an idea about what you’re seeing at REX, and are you having to increase wages because of that.

Zafar Rizvi — Chief Executive Officer and President

I think our company — we always has very competitive wages, and we always paid — we always take care of our employees, and we also has bonuses systems and other systems to continues to have their incentives. As we make money, they certainly make more money and they have also — I can assure you, none of them is minimum pay or all those kind of numbers. So we have very competitive wages, and we all always review every year their salaries and other things to make sure they are above the market value.

Christopher Sakai — Singular Research — Analyst

Okay, great. Thanks.

Operator

Our next question comes from Jarrod Edelen with South Dakota Investment Office. Please proceed.

Jarrod Edelen — South Dakota Investment Council — Analyst

Hi, guys. Thanks. I have a couple questions. The first related to the — clearly the crush margin has contracted as corn has run up. But it looks like also the byproducts that you guys sell, corn oil and distillers grains, prices are very strong. Can you just talk about the margin impact that those have? And do they make the overall picture look pretty good or at least okay right now?

Zafar Rizvi — Chief Executive Officer and President

I think let me say that certainly there is recently we have seen increase in DDG value also, which is previously it was close to 90% to 95% of the corn value and recently we have seen close to 100% to 106% of the corn value. certainly we have seen ethanol — not ethanol, corn oil value has increased, as Doug mentioned also in his prepared remarks. As far as ethanol margin, as you can see, today’s corn is trading USD7.63 and ethanol is trading close to USD2.48. So you can see that how much — there is not enough crush margins.

I think the other concern we certainly have is moving forward, as Stuart mentioned, that as you know Ukraine produced close to 1.6 billion bushels a year, and they export about 1 billion bushel a year they export. And we are concerned in that if the export completely stopped from Ukraine and then the world moved to direction to U.S., then it could be some problem of shortage of corn. Our monthly usages for U.S. is 1.245 billion bushels a year, and we’re expecting our ending stock will be close to 1.044 billion. And then if we roughly take it out 300,000 to 400,000 million exported more, then our stock will continuously will going to drop and it may not meet the usages which is approximately 1.2 billion bushels a month.

So those are some concerns and that’s why you can see the market is reacting. And although there is inverse [Phonetic] in the future, but presently there is — that’s the other problem is the market there’s no carry in the cone at this time but there is a fear of shortage of corn if Ukraine’s situation did not improve.

Jarrod Edelen — South Dakota Investment Council — Analyst

Great. Thank you for that. Secondly, it appears the global refined products market has tightened significantly in the last month. And can you just touch on any opportunities you guys have had to capture better margins exporting ethanol?

Zafar Rizvi — Chief Executive Officer and President

I think if you look at the export really last year, export was dropped compared to — last year export was 1.2 billion compared to year before approximately 1.3 billion, and January export was 123 million compared to in 2020 it was, let me make sure, yeah, in January export was 124 million gallon and that was less than last year. So we can see that export is consistently dropping even in month of January compared to last year in January. Last year in January it was 165 million and this year it is 123 million. But we have seen recently, Brazil has lifted their tariff which is 18%. If that goes away, then maybe we’ll see more export activities.

Jarrod Edelen — South Dakota Investment Council — Analyst

Great, thank you.

Operator

Our next question comes from Mary Rose [Phonetic] with Infusion Partners. Please proceed.

Stuart Rose — Executive Chairman of the Board

Hello. I think — operator, move on.

Operator

Mr. Rose, there are no further questions at this time.

Stuart Rose — Executive Chairman of the Board

Okay. Anyway we’d like to thank everyone for listening today. I appreciate it very, very much, and we will look forward to reporting next quarter. Thank you again for listening to the call. Bye, everyone.

Zafar Rizvi — Chief Executive Officer and President

Thank you. Bye-bye.

Operator

[Operator Closing Remarks]